So you're looking at your portfolio and you're doing one of two things right now:
- If you sold your crypto and went into safe haven's in 2018, then you're probably licking your chops and screaming "C'MON STOP PLAYING WITH CRYPTO, MR MARKET JUST F**KING KILL THIS THING ALREADY SO IT CAN GO BACK UP!!!"
- If you didn't sell, e.g. your strategy is HODLing, then you're hiding under your desk in your underwear with the blinds closed and you're seeing demons on the ceiling and when you close your eyes.
No matter which camp you're in, I want to give you some words of wisdom that I wish someone had given me when I started trading over a decade and a half ago...
Not every trade that loses money is bad
Consider that thought above.... Its very simple and I know some of you are rolling your eyes right now going "cool saying bro, but I know for a fact the only good trades are ones that make money... THIS IS THE JUNGLE, BITCH, you eat what you kill!!!"
Not debating those last two points. This is indeed the jungle, and you eat what you kill. But that doesn't take anything away from the fact that I'm currently dropping golden nuggets of wisdom on your head.
I will repeat it again: not every trade that loses money is bad
How do we determine which losses are good and which are really bad??
When you lose money learning, you're making an investment in your future trading ability. A loss which causes you to become bigger than you were before is like paying tuition for college. Yes it sucks that you have less money right now than you had before you made the trade. But just like college increases your future income, losses that you learn from increase your future trading payouts.
Losing money when you're doing something that works most of the time is not bad either. You're never going to make money everyday; even a good trading strategy will lose from time to time. What you need to make sure of when you lose is whether or not 1) the loss makes sense and 2) the loss was reasonable in size.
For number 1, what I mean by "making sense" is that you should know what kind of price moves / trading environment your strategy likes, and more importantly, which one's it doesn't like. If a normally profitable strategy loses money when its supposed to (e.g. my strategy performs poorly in high volatility) then there's nothing wrong. If a strategy starts losing money when its not supposed to, or loses money when its supposed to be making money, then the reason should be investigated thoroughly.
For number 2, take a look at the size of the loss. Does it fit within historical parameters? Is it smaller than you thought it might be? If your strategy is functioning properly and a loss is within the normal ranges, then the loss isn't really a bad thing, its just the cost of doing business in trading. If the loss is way over historical thresholds, however, you definitely want to investigate.
Losing money when you're reducing risk during a crisis, while painful, also is a good thing. Living to fight another day is a good thing. Sure, your backtest might say you can make 500% if you're fully invested, but can you really handle that 50% drawdown when you're fully invested??? Sometimes its better to keep some cash reserves. If you literally cannot sleep, sometimes its good to reduce the size of your position; this is calling the sleeping point.
On the other hand...
Not every winning trade is good
A winning trade which is not repeatable is not a good trade. You will forever be chasing the phantom of what "worked" on a trade that will never come again. Good strategies identify trades which you will encounter and be able to profit from again and again and again...
Taking too much risk to make too little, is not a good trade. Risking $100 to make $1 might make sense if the probability of loss is 1 in a million, but its f**king bat-shit crazy if its 50/50. Make sure you know the probabilities of your trading strategy, as well as the reward (how much you will make if you are right) is worth the risk (how much you will lose if you are wrong).
Trading without a systematic strategy, even if you're making money, is a recipe for disaster. Your profits are temporary and will evaporate quicker the more trades you make. Someone without an edge should make as few trades as possible in order to maximize their luck, the more trades someone with no edge makes the more the law of large numbers will take over and their pnl with drift down down down...
Understanding when a loss or a win is truly a loss or a win is critical to long term success in trading, crypto or otherwise
