TRADING GAMES

Learning to Play the Cash Machine


Movement


There is no end to the cycle, only a continuation. Recognizing where we are in the cycle gives the effect of looking into the future because the same thing happens every time. History is important because it repeats itself.

Consider looking at a stretched out slinky from the side compared to looking through it down the middle. Looking at it head on we see the shape of a single cycle within the pattern but from the side it looks like a line in a wave pattern moving up and down continuously.

Image Image
Image

From the side angle it is easy to see two recognizable points which mark the completion of one cycle. One point is the half life and the second is the completion. There is no beginning or end though because there is a beginning and end at every point of the line, infinitely. No matter what angle you look at it from its side you will still see the same up-down modulating wave pattern.

Why does this matter? There is no start or finish in the universe, only cycles that continue infinitely which are made up of cycles and so one. Like a slinky made of smaller and smaller slinkies. We like to think in terms of beginning and end, start and finish because it is difficult to see the cycle pattern from within the cycle but the reality around us is that all things are happening this way. 

By recognizing the cycles we're in and around we can take creative liberties to optimize for opportunities and make iterations each time around to improve in some way. Trading is just this, it's the practice of recognizing market cycles and patterns and exploiting them to make a profit.



Fractals

Image

In a simplified form the market is a price line modulating up and down continuously as it moves through space, just like the slinky. That's about as far as the slinky can take us though. What makes a market confusing is that cycles are composed of cycles and there are varying degrees of cycles happening within each other at the same time. (The Elliot Wave Principal is a brilliant theory of how layered cycles play out and can be identified in the market) Viewing a market at different timeframes helps understand this. For example, if you look at the daily time frame (left) next to the hourly time frame (right) of the same period you'll see that one wave up on the daily is made of a series of smaller impulse and retracement waves on the hourly.


If we zoom into one of the hourly waves we'd see the same thing. Taking the image above I zoomed into one of the middle impulse waves to show the 4 hour chart next to the 15 minute (below). The market is an onion of cycles all layered on top of each other happening at the same time. The top of a smaller cycle can occur in the middle of a larger one.

Image


The Game

Trading is a game and requires an effective strategy to win just like any other game. My goal here is to master a particular strategy. I'll measure mastery by repeatedly 2x-ing my account. After I've done this I'll have a case study and documentation to share with others who want to learn how to consistently make money trading. I'll outline the strategy as I go. My posts will consist of trades I make with analysis of my mistakes when I loose and what I did right when I win. I am a member of Eric Choe's trading group and most of my strategy is derived directly from Choe's teaching. He is the guru and I am the student. For more info about Eric Choe visit his website at: www.CryptoChoe.com




Ground Rules

Risk Management

Practice makes perfect. We get good at games by playing the same level over an over again testing and refining strategies until we win. When we loose, most games allow us to re-spawn and start over. Having a checkpoint system that you can spawn back to when you loose is very important in trading. By limiting the risk of any one trade we can ensure that a loss is never the final loss that will take us out of the game completely.  Risk management is a strategy in and of itself and can take many forms. Adam Khoo gives the most concise general explanation I've heard in the video below.



The chart below shows how consistent risk management allows one to break even with as much as a 60% loose rate. This is the equivalent of re-spawning to the last checkpoint. Accepting small losses is a part of learning any game and trading is no different.

Win RateLoose RateR&RRewardRisk# of TradesTotal Gain
60%40%1.5:11.50%-1.00%5025.00%
50%50%1.5:11.50%-1.00%5012.50%
40%60%1.5:11.50%-1.00%500.00%
60%40%2:12.00%-1.00%5040.00%
50%50%2:12.00%-1.00%5025.00%
40%60%2:12.00%-1.00%5010.00%
50%50%2.5:12.50%-1.00%5037.50%
50%50%2.5:12.50%-1.00%5037.50%
40%60%2.5:12.50%-1.00%5020.00%
60%40%3:13.00%-1.00%5070.00%
50%50%3:13.00%-1.00%5050.00%
40%60%3:13.00%-1.00%5030.00%
60%40%4:14.00%-1.00%50100.00%
50%50%4:14.00%-1.00%5075.00%
40%60%4:14.00%-1.00%5050.00%

I use a position sizing calculator to determine position size based on my over all trading account. For example if my account is $1,000 and I want to make a trade with 1% risk to my account I can risk $10. That $10 translates to whatever the the % change from my entry position is.  For example if I buy $200 of ETH at $200 my stop loss is at $190 or -5% because at that price my loss totals 1% of my total account.




Simulators and Small Accounts


We play games because winning is fun. How many games have you played with your friends that had no physical reward but was still just as fun and intense as if there had been? Look at it as a game to win before you look at it as a way to make money.

By trading on a very small account for the first 5 months I was able to learn and practice without risking significant loss. This create a realistic simulation of the emotional experience which is another element of challenge when practicing a new skill. Trading fees are very low in crypo so $100 is enough to get started. I traded with a $500 account and made hundreds of small trades before increasing it. I've increased my account incrementally as I feel more and more confident in my abilities.




Choosing a Market

Why Crypto?

Disruption

I like disruptive ideas that challenge institutionally controlled industries and crypto currencies are disrupting the most institutionally entrenched system our world has known, the financial industry. Our financial system is ripe for disruption for all the classic reasons and crypto seems to be the new kid on the block that doesn't want to go away. As with all disruptors, there is a large upside potential if it survives to the mass adoption stage and crypto is knocking on that door. The cycle of disruption is complete when the disruptor becomes the incumbent, when the revolutionary becomes the dictator and the cycle repeats. I like that institutions and banks are buying crypto in bulk because it allows for this cycle to play out in the expected way.

Current Cycle Position

I think that crypto is at the beginning of a new bull cycle. I'll talk about retracement levels another time but for now it'll due to note that when a market retraces 88% from it's previous hight it it can either rebound or fall to it's death at 100%. Crypto's total market cap seems to have reversed just at this level and has seen an unprecedented increase in volume to boot. It is common for new industries to have deep retracements because so much of the value is in the speculation of its potential value.

Adoption in Volume

Volume is another important factor because it's a measure of 'how many' along side 'how much'. If only a few people value something highly then that object can easily loose it's value when those people are gone but if a lot of people collectively agree on a value it becomes more robust and less volatile. I use volume in this way as an indicator of adoption. Bitcoin is a decentralized currency valuable anywhere in the world. Adoption on the global scale would be significant. 


CRYPTO TOTAL MARKET CAP - WEEKLY

Image


Strategy

High Confluence Areas for High Probability Trades

There are many fundamental factors to that influence price but this strategy is derived from price action alone with an assumption that the long term fundamentals are sound. It's important to understand what lens the other players are viewing price through because the more people there are who believe there will be a reaction at a particular level the stronger the reaction will be. This is why high confluence areas have strong reactions. Everyone is looking at the same data, the same lines and the same levels. We can identify high confluence areas using a variety of technical indicators, fibonacci retracement or extension levels, Elliott Wave and channel theory to determine what prices to buy and sell at for high probability trades.

Fibonacci Levels

The Fibonacci sequence is a recognizable pattern found at all levels of the known universe. We could go down a rabbit whole discussing the significance of fibonacci but for trading purposes there are some key levels that price reacts to with significance. The highest probability retracement level to get a reaction off of is at 61.8% I've found this to be the most reliable fibonacci level when it is touched and to be more significant the higher the time frame. 

There were a few confluent factors in the attempted trade below but my primary reason for this trade was that there was a clean structure on the daily level that was in a retracement. It saw a 25% bounce off the .381-R, two 10% bounces off the .50-R and and within 24 hours of touching the .618-r has had a 30% bounce. Unfortunately the price front ran the .618-R by 1.3% and reversed .9% above my my order so I get the reward for being right with no capitol gains. One way to avoid this in the future is to divide up my order and ladder across a range of the .618 so I'm more likely to fill at least part of my position and not miss out completely if it reverses early.


LINK/USDT - DAILY

Image

Moving Averages

Moving averages are dynamic support and resistance levels that move with price. There are 4 key moving averages in this strategy: 20 EMA, 40 EMA, 55 EMA and the 200 MA.

All three of the EMA's crossing above the 200 MA on the 4 hour and ideally on the daily as well indicates the start of an uptrend. When this is confirmed the protocol for entry is to buy on the 4 hour EMA's at the times when the stochastic RSI is reset to the bottom. Extra confluence factors include key fibonacci levels, historical S&R levels and channel boundaries or medians.


BTT/USDT - 4HR

Image

The chart below is a daily view of the chart above. With the trend breaking down on the 4hr timeframe. I'm zooming out to the daily to play the same strategy in confluence with the .618 of the daily structure. It is also interesting to note how similar this chart looks to the previous .618-r example of LINK/USDT


BTT/USDT - DAILY

Image

Be Dispassionate About Market Direction

What is the Case for the Counter Trade?

I was once assigned to write a persuasive essay in school, after everyone had picked their topic the teacher announced that we'd be required to defend the opposing side of the topic we had chosen. In the moment I was frustrated because I was emotionally attached to the topic. It is important to be dispassionate about market direction (I've yet to master this). Emotions can put blinders on a sound case for the counter trade.

As soon as I enter a trade I'm biased to find reasons that the market will play in my favor and it becomes more difficult to look at the market objectively. I try to look at the inverse chart and understand the opposing case before moving forward with a trade.

Another thought to note on this topic is a warning about becoming emotionally attached to a belief that a certain security or coin (in this case) will go up in value. One can easily ignore other more active coins and opportunities waiting for the one that he/she has decided already is the best. Trading is a constant check of the ego which loves to be right.


The Right Entry Feels Wrong

Gauging Sentiment

All of these topics are notes that I want to remind myself of continually. Remembering that the market is made up of an onion of impulse and retracement cycles, it's important not to panic when a sub-cycle goes into a retracement. It is part of the process and in fact a key element to coming out ahead in this game. Other people's panic and fear is what creates opportunity for a lower price. When sentiment is panic, fear and overall defensive the market will sell off. When there are more people wanting to sell than buy the price starts to move down and when the decline is sharp it is self perpetuating until the sellers become exhausted. This can be identified with momentum indicators, price/RSI divergence, double bottoms and other price action patterns which I'll go into another time. The most common retracement pattern I've noticed is an ABC or ABC-X-ABC. 

F O M O

Fear Of Missing Out