Winners are made in bear markets - lessons from a veteran trader with 25+ years of experience
How to cope with the stress of a crash, learn from mistakes and (hopefully) become a better trader. Or, you know, you could just hodl!
This is a guest post. Leopold Quell is an equity fund manager with more than two decades of experience a focus on the big picture and a passion for trading. You can follow him on Twitter.
Chances are you are a Bitcoin holder. A hurting Bitcoin holder looking for some reassurance that this crash is just some weird test of courage you must pass before we see a great recovery.
This reassurance I cannot give you. I do not know when your wallet will shine again.
But I might have something better.
This post is sponsored by…
21bitcoin - The easy way to buy, sell, save and send Bitcoin.
21bitcoin is a Bitcoin-only app, not an exchange. No distraction, individual savings plan, very low fees, first class personal support, and a German bank account. Based in the Austrian Alps, available throughout Europe. Download now.
Let me try to guide you taking the first step to become a better investor so next time the market goes against you (and let’s be crystal clear, there will be a next time) the pain will be less intense and easier to handle because you will feel more like the captain of your portfolio and less like a passenger in these volatile markets.
I will raise a couple of questions at the beginning. These questions are not judgmental in any way. Therefore, please answer them honestly, for your own sake. Those questions refer to your BTC holdings but also to other liquid assets you might hold.
Let me also say that this article is first and foremost for long-term investors who have a tendency to try to time the market in the short-term.
Do you hold BTC for the long term?
Are you prepared to buy and sell tactically (short-term) whenever you see an opportunity in BTC (or maybe in other liquid assets you hold)?
How did that short-term trading work out for you in terms of net profits during the last months and years?
You’re probably overestimating your trading success
I ask these questions because maybe you are not (only) hurting so much because BTC is down a lot. Could it be that you exacerbated the pain by that seemingly harmless trading you do? Trading is understandably very tempting and people do it for many reasons. The most obvious one is to make some extra profit.
You might say to yourself: Why not try to skip some of those violent short-term dips and buy back at lower levels to increase the position?
This sounds perfectly reasonable but the likelihood that you added value to your portfolio by trading is low. On average you probably bought close to temporary tops and/or sold close to temporary bottoms. During the bull market you did not even notice that so much because you do not keep a trading logbook and the overall value of your portfolio went up nicely nonetheless.
But now in the dark and frosty days of the bear market it is harder not to admit that you are not as good at trading as you had thought. Does that resonate with you? If not, you can essentially stop reading now.
Because either you already know what you are doing when it comes to trading or you are a true hodler who did not trade at all in the first place. In case what I described does in fact ring a bell. I invite you to read on.
Your emotions are valid
Let’s start with your current state of mind. At what stage of coping with this BTC crash are you? Disbelief and denial? Anger and finger pointing? Doubt in your own capabilities to manage money altogether, mixed with thoughts how to win it all back as quickly as possible? Whatever it might be - let me assure you all these emotions and impulses are valid and natural. Dealing with a crash of this magnitude is challenging and needs to be talked about more.
Actually, I think the most common feeling when you find yourself badly on the wrong side of the market is shame. I feel this is especially true for men. Often, they would not even tell their partner about the true devastated state of their once proud and shiny portfolio. Here I may remind you that you are not your portfolio. Meaning in times when your net worth is going up don't congratulate yourself too much and in more dire times like now do not berate yourself either.
Plan your work and work your plan
Instead start analyzing your past trades. If you have not kept a trading logbook, try to reestablish your motives and reasons to enter the positions from your memory. That way you will start to understand how, when and why you traded. Timing the market is hard. Therefore, you need a plan, a strategy that fits you. Prepare yourself accordingly.
If you fail doing that, other traders who are better prepared will take trading profits from you. The good news is that if you put in the effort, you can become good at trading. And more than that. The best aspect is that in the process you will learn lots about yourself and better understand your own behavior. Not just when it comes to decision-making in the market but as a person in general.
Want some more pseudoscientific claims from me that are solely based on my own experience as a trader with 25+ years of experience? Writing your thoughts down on paper is key to your success as an investor and even more as a trader. That is at least exactly what made a reasonable trader out of me and what helped and still helps me to overcome phases of underperformance.
I even recommend to put writing down your thoughts at the very center of your investment and trading strategy. Even when at first sight this is hardly related to a specific trade or the markets as I think it is the way to (re)balance yourself mentally and emotionally, it will help you to fully comprehend what you should do (and avoid) in the market and why.
You’re not you when you’re hungry, greedy (or fearful)
In a way these last paragraphs can be boiled down to the following: never trade impulsively. Only trade when you have a plan. Therefore, start a trading logbook of your own. Document in written form all the reasons why you are entering a position before(!) actually entering it. A trade consists not only of the entry though. The exit gets often somewhat ignored but it is equally important.
I therefore recommend to plan when you are going to sell/exit as well. Make sure you not only plan for the wished outcome of so and so much profit. Also think of a Plan B if the trade goes against you. Taking a loss can feel painful in the short-term but it prevents you from holding on to a losing position for too long and going under with it. Do all of that planning before you enter the trade. Why? Because as soon as you hold a position you will be biased regarding your current position. That makes decision making on the go more prone to error.
This (the trading logbook) and the before described principle only to trade when you are emotionally balanced are the key points of my advice. If you follow them you will see that your performance will improve noticeably.
You know what else helps? Talking to a trusted person. It does not come as a surprise that top investment firms often employ psychologists to help their traders reduce anxiety in phases when they underperform and to avoid overconfidence in phases when they outperform.
True hodlers do not feel that trading itch
You might say becoming a better trader takes a lot of effort. Maybe giving up trading entirely is the easier solution? Go full hodl-mode and save yourself the headache of trading. Leave your BTC position alone.
We all know the memes that convey this idea. And although simple as they are there is a lot of truth in the hodl argument if you are very optimistic about the long-term success of BTC (as I am by the way). I guess you could agree to that solution in your current state of mind when the recent loss still feels like an open wound. But I tell you that the trading itch will most probably come back.
Not tomorrow or next week– let the next bull market come and let the current pain die away, and you will fall back into your old habits. The reason is true hodlers are rare and you are most probably not one of them. True hodlers are blessed in a way. They may be emotionally committed to BTC and its vision/mission. At the same time they are almost indifferent to the current value of their BTC portfolio measured in USD or EUR or any other fiat currency.
This indifference has one big advantage: the probability that they will trade out of short-term reasons is extremely low. They simply never feel that itch. But you do and therefore I think it is better to become a more capable occasional trader than to pretend to be someone you are not. Why though is that trading itch so powerful in the first place? Trading is not only attractive because you can make some extra profit. It simply feels great if you outsmart the market. To tell you friends and colleagues that you hold BTC is cool (during the bull market).
But how much cooler is the same story when you can add that you played the market like Paul Tudor Jones.
Everybody is a hero in a bull market. Long term winners though are made during times of apparent defeat. Therefore, seize the bear market to become a better investor/trader. I wish you the best of luck!
This is a guest post. Leopold Quell is an equity fund manager with more than two decades of experience a focus on the big picture and a passion for trading. You can follow him on Twitter.
This post is sponsored by…
21bitcoin - The easy way to buy, sell, save and send Bitcoin.
21bitcoin is a Bitcoin-only app, not an exchange. No distraction, individual savings plan, very low fees, first class personal support, and a German bank account. Based in the Austrian Alps, available throughout Europe. Download now.
