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Education

Case Study for Mismanaging a Disciplined Trade Strategy

COINBASE:BTCUSD   Bitcoin / U.S. Dollar
In the most recent BTCUSD             dip I made a series of mistakes that put me in a slightly nervous position overall, but still generally favorable.

Over a series of trades I managed to find myself in a position with an average buy price of $7486.13. Trading profitably on the dips I reduced this average buy price to $7348.21.

Throughout this series of trades I had multiple opportunities to take profit and this discussion will focus on trading psychology and process failure.

Early in my trading session I had managed to identify successfully entry levels that were reasonably close to where I could make a "dip" profit. Generally my target is around 2%.

Given the big dip from $9.2k to below $8k and given the duration and recovery of that dip from $10k I felt confident that the market was oversold and all of the order book charts indicated an overall strong buying to selling ratio.

My price target was just below $8.5k and on the first move up it hit $8.4k and I felt like there would be an orderly move over time.

What I learned with this recent price action was that trading bots and whales/funds that control them have disproportionate leverage over price action. Not being fully aware of their techniques, I decided against adjusting my price target and I was "too greedy" and completely missed my profit opportunity after being presented double my normal target over two periods.

Now having missed that opportunity I was forced to double down knowing that the next price move would likely be much bigger and deeper.

Trading for profit on the way down I was able to recoup some of poor positioning but again, I did not quite understand the techniques of these algo bots until near the end when I was able to make an adjustment to how I choose price targets to better compensate for whale/shark algo bots.

Setting price targets for exiting my position and reducing my risk came down to three possible outcomes:

1) Sell ALL at a higher price that would make profit but also leave me no room for error if I missed at $7800. This price level would have still been poor risk/reward overall so this exit strategy seemed like a mistake.

2) Sell ~half (47%) of my position at a profit at $7400 and then sell the other half at $8000 for "break even" on that part of the trade. This seemed like a prudent risk management strategy as I would have funds to take additional profit if the market moved back down while leaving in place a position that could become profitable over a longer duration.

3) Sell ALL at the higher price target that would give me a much bigger target but leave me open to poor risk management again. This was definitely the worst option.

So I chose 2) which worked ok in that the first trade target was hit as expected.

Then, while watching the order book I started to worry because there were big sell walls below $7500. I thought about how stressful it would be to ride that position back through another big dip and because of fatigue also overly focused on this possibility rather than going back to my pre-defined strategy of hodling for $8k on half and trading with the other half.

Clearly, stress causes one to adopt a risk averse mental state. And this kind of risk aversion usually leads to the panic selling and "weak hands" phenomenon of selling at exactly the WRONG time, i.e. when you should be thinking about buying.

So when I saw the price being challenged at $7k to $7.1k with very clear algo bot action pushing the price in both directions with very light buy order positioning I became a pawn in this algo bot action and decided to exit early and go take a nap rather than have to sit through another big dip with half of my fund at risk.

Rather than see any huge sell wall the sell-side volume relented and the price nearly hit my price target of $7.9k. If I had been more disciplined I could have set a contingency (less greedy) target below $8k but I changed my plan using no particular reasoning whatsoever other than fear of these algo bots.
Comment: In retrospect I should have had a "panic button" contingency pre-defined. This would allow me to take more off the table but still leave room for profit if I messed up.

I could have set my "panic" price as $7200 so that if after hitting my first target at $7.4k the price dipped to below $7.2k then I could sell 50% at any price above $7k or as close to $7.1k as possible. This would have relieved the stress of riding out a dip in an oversized position while still given me room to make some profit.

If I missed my "panic" price level and it dipped lower then I would continue to hold the position. This would have given me a disciplined, rationally generated plan of action rather than allow me to "wing it."

In general, these concrete contingencies should be mandatory for all trades. So plan A would be this and if plan A entry doesn't happen then plan B entry would be this, etc. Making decisions under stress more or less results in a coin flip for the outcome which will over time generate zero profit.

Under a "panic button" scenario I would have exited another 25% or so of my trading fund and not had as much pressure for the other 25% to hit the near term price goal.
Comment: Note that my trading fund is about 50-60% of my crypto trading portfolio. So even though I messed up here I still made gains in my crypto to crypto fund.
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