My assets have been halved from their peak. How should I settle my mentality?

Screenshots of the highest earnings in history won’t pay your bills.

Author:Cred

Compiled by: Shenchao TechFlow

Your portfolio’s peak or historical highest net worth does not represent true wealth.

Even your current portfolio or profits and losses (especially unrealized portions) cannot be taken for granted.

The core point is:It doesn’t matter how much money you make, it’s how much you can keep.

As I mentioned in a previous article, most people (whether it’s active choice or passive outcome) fall into one of two situations: either making less but keeping more, or making more but keeping less.

What you have to avoid is a bad middle state——Make less and keep lessThis is the biggest failure.

Huge unrealized gains and losses and assets that have returned to square one do not bring any real value.

Screenshots of the highest earnings in history won’t pay your bills.

When faced with these numbers, you need to be wary of some hidden but dangerous traps.

Many people mistakenly assume that the growth rate of their investment portfolio will remain linear or even continue to accelerate.

However, the cool truth is that the main force driving your wealth growth is oftenOverall market situation, not your personal trading capabilities.

Although the claim that everyone is a genius in a bull market is a bit one-sided, when people evaluate their own performance, they often ignore the huge impact of market anomalies on outcomes.

It is worth recognizing for persevering and making money under these favorable conditions, but at the same time maintaining humility and recognizing that these conditions are temporary and not permanent.

The first trap is:Mistake the current market environment for the new normal and assume that your trading results will remain the same level indefinitely and your portfolio will grow at the same rate.

In fact, this assumption is almost impossible.Why is this assumption wrong?

First, current market conditions will not last forever. If you still respond with the same trading style, you may make less or even lose money.

Secondly, the trading strategy will fail. Even if market conditions remain unchanged for a long time (almost impossible), the effectiveness of your trading strategy will gradually diminish.

Third, as your portfolio grows, it will be difficult for you to get the same high multiple returns on larger funds. The larger the scale, the more limited the flexibility and ability to seize opportunities.

Fourth, significantly increasing the size of a position in a short period of time may interfere with your psychology and thus affect trade execution. If your total assets were $50,000 a few weeks ago and now it’s just a floating loss on a loss-making trade, your mentality may collapse. This psychological adaptation takes time and cannot be accomplished overnight.

These factors suggest: Don’t assume that your trading profits and losses and current market conditions will last forever.

This erroneous assumption often leads to two major problems:

First, traders will think that trading strategies that work early will always work.However, the market environment and strategy applicability will change, and many strategies cannot be scaled to a larger scale.

Traders continue to increase positions significantly as market volatility increases without realistic testing of their strategies, which often leads to serious consequences.

All it takes is a little too high leverage, a little more market shock, and a touch of panic, which will cause traders to suffer huge losses when the market reverses, and even cause a fatal blow to the investment portfolio.

To make matters worse, this situation is often accompanied by conceit and stubbornness. For example, this strategy has made me $N before. Why should I change it?” rdquo; This mentality.

Although I have mentioned this issue many times, you may be surprised at how easy it is for people to hypnotize themselves into thinking they are trading geniuses when you make a lot of money in a short period of time.

In this case, people often ignore the importance of the market environment and are unwilling to admit that they are just lucky, but mistakenly attribute all gains to so-called newly discovered trading capabilities.

By the time you finally realize that the main driver of earnings is the market, not your own capabilities, it is often too late.

The second common mistake is lifestyle inflation, but it is rarely mentioned.

Many traders will recklessly speculate how much money they will make in the next month, quarter or even year based on short-term portfolio growth and earnings.

Social media, such as Twitter, exacerbates the mentality of people showing off more expensive watches, more luxurious sports cars, more extravagant life in Dubai, and enviable screenshots of PnL. This content makes you feel that your achievements are never good enough.

As a result, many traders will significantly upgrade their lifestyles and start consuming wealth they don’t actually have. This behavior is often based on blind optimism about short-term gains and unreasonably extrapolates them into the future.

However, when the market cools down, you may be stuck in it, and drastic lifestyle reductions will not only hurt self-esteem, but also seem impractical in many cases.

summaryCurrent market conditions may put your thinking in danger:

• Don’t assume that these conditions will last forever.

• Don’t assume that your strategy will always produce linear growth, whether in terms of time or size of capital.

• Don’t assume that you can still manage transactions in the same way, whether from an execution or psychological level, after a significant increase in your position.

• Don’t assume that you have fully mastered the rules of the market and will remain profitable forever.

• Don’t use current market conditions as a reference for your future income.

Suppose you are a person who makes mistakes, easily conceited, and your previous success is more due to luck. Use this humble attitude to examine yourself, your trading strategies, and especially your ego.

A common mistake many traders make is to view the dollar value of their portfolio as the actual wealth they already have.

But this is not the case.

Normally, until your earnings are deposited in a bank account in legal tender and taxes are set aside, all profits are just paper wealth and cannot be counted as real income.

This may sound old-fashioned and boring, but I have seen too many traders (which happens in almost every market cycle) fall back into break-even from tens of millions or even hundreds of millions of dollars in assets, or even fall into legal bankruptcy.

This is by no means an alarmist, but a very real issue.

I like to use Russian dolls to visualize the relationship between portfolio balances and actual funds available.

Unrealized profit and loss (PnL) is like the biggest doll, it is the most superficial number you see.

The funds you can ultimately really keep and use in reality are the smallest dolls.

In between, there are also many shrinking dolls, representing various factors that may lead to the shrinking of funds.

From big dolls to small dolls, wealth will gradually shrink until the end is what truly belongs to you.

(Of course, you can also use the onion level analogy, but Russian nesting dolls may be more intuitive.)

When we look at our portfolio balances or unrealized gains and losses, especially when those assets are still fluctuating in the market and fluctuate with directional bets (varying degrees of liquidity), we need to apply some kind of discount rate to those numbers.

In other words, you need to realize thatThe probability that the amount in the portfolio will eventually go completely into the bank account and be at 100% discretion is almost zero.

This is not only because of the volatility of the market itself, but also because in most countries and regions, tax obligations themselves account for a large portion of the benefits. Even if you sell at the highest point, you must give a portion of the profits to the country.

In addition to tax factors, there are more practical discount mechanisms that need to be taken into account in your portfolio.

As mentioned in the first part of this article, you need to set aside some tolerance space for your almost inevitable mistakes. The following is one of the main issues:

1. timing

The probability of completely clearing your position at the highest point of the market is almost negligible.

In other words, it’s hard to truly achieve peak returns on your portfolio.

In reality, outcomes typically fluctuate over a range from premature panic selling, locking in most gains, to going through a full up-down cycle, returning to the starting point, and everything in between.

Ideally, you can get as close to the former as possible, but this in itself is a very difficult thing. You need to remain humble and accept the fact that you may make mistakes.

Remember that the most important goal is to keep as much money as possible, not to prove your judgment. There is no place for conceit.

Even those experienced top traders in 2021 will mostly choose to gradually reduce risk when BTC’s historical high fell below $60,000 and the trend begins to appear unstable, and by then it is already about 15% from the peak.

At the time, the operation might have seemed to have missed the top, but given the subsequent sharp decline in the market, it was actually a very successful deal.

For reference, this pullback of BTC alone reached about 15%, which is still an early withdrawal. Some major altcoins have even tripled or tripled during this period.

Even if your overall grasp of market timing is good, such a pullback is still very significant.

If the timing is wrong (and in fact you are likely to be wrong), the loss will be even greater.

To summarize, you need to accept one fact:You are unlikely to sell at the highest point of the market (hopefully this is an accepted premise).Therefore, you must calmly face the fact that due to timing issues, your portfolio will inevitably give back some of the gains to the market relative to its peak.

2. The pitfall of bargain hunting

The market environment will allow people to form fixed trading habits.

Especially if these habits have made you profitable (especially if you have recently made money), it can be very difficult to get rid of them quickly.

In a previous article, we discussed BitMEX and bear market post-traumatic stress syndrome (PTSD). In bear markets, traders are often trained to trade mean regression over a short time frame and reverse almost every other situation.

The impact of a bull market on trading habits is at least as profound, or even stronger, because you actually make more money in a bull market. In this environment, you may fall into a similar trap.

Specifically, if the market rewards you for buying on dips in almost every time frame and gives you the belief that every decline is a discount and will eventually rebound, then you will likely choose to keep buying for the first time since the market peaked.

Or at least, in line with the kind of humility and introspection we advocate, you should admit that you may not be able to identify the top of the market and instead buy it for a discount opportunity when the market falls.

If you are sharp enough, you may find that this decline is different from the past and has not recovered as quickly as before.

There are some data points that can help determine this situation (for example, the extent of clearing open interest (OI) if the liquidation is very large, usually means that the trend may be reversing, but we will discuss this in detail later).

However, judging these signals is not easy now.

The difficulty is that even if the market has peaked, it can still see some decline that looks like a golden opportunity, as it is usually accompanied by a strong initial rebound.

Take the fake historical high of BTC in November 2021 as an example:

At that time, the price showed a huge lower shadow line and a strong rebound from the low to the middle of the $40,000 range, but it did not continue the trend at all and did not reach a new high.

Prices subsequently rebounded similarly strongly at range lows of $35,000, but again did not continue the trend or hit new highs.

Although these rebounds may seem tempting, they are actually illusions after the market has peaked. If you don’t identify it in time, you may be tempted to continue buying during these rallies, ultimately leading to greater losses.

Two things happen at the same time that often put traders in trouble: 1) a strong initial rebound in prices from clear technical support; and 2) a rebound without any trend continuing.

If you are sharp enough, you may seize these rebound opportunities and treat them as medium-term transactions while proactively reducing risk (such as reducing exposure to long-tail assets or high-risk speculative assets in your portfolio). This approach is close to best practice for trading rebounds after the market peaks.

But if you are unlucky or inexperience, you may keep adding to your positions as you fall, hoping that these rallies will hit new highs like before (but the reality is, they won’t). Eventually, when the market collapses completely, you may give up almost all of your previous profits.

These rallies are often bait for the market to throw, making traders complacent or even continue to add to their positions. But this behavior is a huge risk for your portfolio because it puts you on greater risk after market peaks.

Especially in the period after the market peaked and before the real crash, many traders would put their cash reserves, profits and even realized gains back into the market, only to further increase their net exposure.

This may seem ridiculous, but it is very common.

What’s more, these discounts are actually cumulative:

• Step 1, you don’t sell at the top of the market (discount #1);

• Then, you buy on dips during the decline, consuming your cash reserves or increasing exposure, but the market continues to fall (discount #2);

• In the end, you either choose to hold these loss-making assets for a long time or you have to endure the pain and cut off (discount #2.5).

This is not some fictional plot, but a real experience of many traders. This pattern is all too familiar to me. I believe that for those investors who have experienced a full market cycle, this behavioral pattern must be familiar and even you may have operated it yourself.

To sum up, you need to discount the peak return of your portfolio further, because not only are you likely to miss the opportunity to sell at the top, there is also a high risk of being induced to buy during the first market pullback, leading to greater losses.

3. excessive transaction allocation stage

At the top stage, the market often enters the allocation period, that is, prices no longer rise unilaterally, but begin to fluctuate and consolidate.

Depending on the market cycle, trading instruments and time frame, this shock may manifest as a brief sideways consolidation, but for investors who are accustomed to rushing in and trading when they see green candles in low time frames, this period may seem long and painful.

At this stage, there are two common risks:One is to buy on dips, but the price continues to fall (or at least does not hit a new high); the other is to traders who are accustomed to trend markets frequently operate in volatile markets and are eventually repeatedly slapped in the face, resulting in heavy losses.

Especially at the end of the market cycle, asset prices are rising sharply every day, and the only opportunity to enter may be through an extremely aggressive low-time-frame trend following strategy. If you continue to use these strategies as the market enters an allocation period or moves sideways, losses are almost inevitable.

In fact, this strategy failure itself is an important signal of market changes. If your low-time-frame trend-following system has been performing well, but suddenly starts to fail fully and goes beyond the normal range of fluctuations, it is likely that the market environment has changed.

Whether it’s because you buy on dips and encounter a small correction, or because you blindly chase a trend that no longer exists, the result is often the same: When your bull market strategy fails, you are likely to suffer losses.

4. market shocks

Remember what it felt like when your nose was completely blocked?

At that time, you may regret why you didn’t cherish it when you could breathe normally.

Liquidity plays a similar role in markets. When it is abundant, we tend to ignore it, but when it disappears, problems emerge immediately.

If you are trading large positions, or if your portfolio contains many low-market value, illiquid assets, there are two issues you need to pay special attention to:

1. The impact you may have on the market when you are eager to sell;

2. If you choose to sell at an inappropriate time (such as by dumping a market sell order into a market where there are few buying orders during a market selling wave), the impact may be further amplified.

Slippers can directly eat into your profits, so in the case of insufficient liquidity, your portfolio has an invisible discount relative to peak returns.

If you mainly trade highly liquid assets such as BTC, ETH or SOL, this problem may not be too serious. But if you mainly trade new currencies, Meme or other risky assets, this issue is critical.

In the crypto market, there are almost no real safe-haven assets. When a market crashes, the price movements of all assets tend to synchronize (correlation close to 1), and few assets are spared the price collapse. Emerging, less liquid assets are often hit hardest, which not only leads to poor execution of transactions, but also potentially greater losses.

In addition, there is a psychological trap in this situation:

“It has dropped so much, why should I sell it now?” rdquo;

Or, it has fallen so much that I might as well wait for it to rebound before selling.& rdquo;

However, in most cases, there is no rebound at all to sell. Even if a rebound does occur, many traders overestimate their ability to withstand retracements and seize the opportunity to return to the mean.

The main problem here is that self-esteem sells late and makes you feel stupid because you didn’t sell sooner. So, you simply don’t sell it and end up losing more.

To sum up, if your portfolio contains assets that are less liquid or highly speculative, then your expectations for the peak of your portfolio need to be more conservative and appropriately reduce the discount rate of psychological expectations.

5. revenge plot

This is a classic psychological trading trap.

When you go through the stages mentioned earlier in the article (success varies from person to person), you will find that there is a gap between the current account balance and the previous peak that cannot be ignored.

This gap is big enough to make you feel remorse and self-blame, but it doesn’t seem too big and makes you feel that it only takes a few beautiful operations to make up for the loss.

This was the beginning of revenge trading, setting the stage for a huge failure caused by the superposition of mistakes.

The characteristics of revenge trading are very obvious:

It is often an irrational and desperate behavior driven by self-esteem.

In this state, your thinking becomes confused, completely oriented towards short-term results and neglects the long-term trading process.

Almost everyone has experienced revenge trading, and its outcomes are often catastrophic. In the vast majority of cases, this behavior will only send you deeper into the quagmire of losses.

The scariest thing is that revenge trading is extremely risky: just one emotional operation can easily erase months or even years of hard work.

6. conclusion

The purpose of this article is to help you get rid of your obsession with portfolio peaks so that they don’t dominate your trading decisions.

If you cling to that peak number too much and regard it as your only goal, it could end up with devastating consequences.

The suggestions made here are:View portfolio peaks in a more rational way, as a dynamic reference value that needs to be discounted rather than an absolute goal.

This perspective is closer to reality:

• You will reduce unnecessary panic;

• You will keep more money;

• You won’t ruin months or even years of your efforts by chasing a number that never really existed.

Remember that the core of trading is to remain rational, not to be controlled by emotions.

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