When it comes to crypto trading and investing, there are more opinions and investment theses than there are cryptocurrencies. And there are A LOT of cryptocurrencies. In a world in which everyone claims to be an expert, the only certainty is that no one is an expert.
From the Fat Protocol Thesis to the rise of DeFi, we have seen some narratives fail outright, while others remain to be proven or disproven.
Regardless of one’s overall thesis, time has shown that certain practices and approaches work, and others do not…
We shouldn’t need to write about this approach, but unfortunately there are still far too many people who believe in trusting their intuition when it comes to timing the markets. “Trust your gut,” may be sound advice if you’re trying to figure out if you’re gluten-intolerant, but if you’re relying on a gut feeling to decide when to buy or sell, it’s likely you’ll fall prey to any number of the biases to which humans are susceptible. You might get lucky once or twice, but unless you have a super-gut, thus far undocumented by science, chances are you’ll get REKT eventually.
The Technical Analysis Approach
Love it or hate it, Technical Analysis is a staple of crypto trading. But even its most loyal adherents recognize that TA is merely a tool in one’s arsenal for making predictions and understanding trends. And unfortunately there are far too many charlatans and amateurs out there who are billing themselves as experts. More often than not, new traders fall prey to bad, TA-based predictions, or worse, after a minimal amount of study and practice, they believe that they can use TA like the experts who have 20+ years of trading experience. But this is not the case.
TA is not a crystal ball or a copy of tomorrow’s newspaper that you somehow got your hands on today. TA is at best, a weather forecast. Meteorologists do often get it right, but how many times have you checked the weather on TV or online, only to look outside and see that it’s raining when it’s supposed to be sunny with blue skies?
In the absence of fundamentals, technical indicators matter most. Technicals can speak to how traders and investors will react to certain prices, but while most people who post TA charts may have good assumptions, often they will fail to properly act on them. Or worse, when assumptions prove wrong, they will fail to close the trade and get out while there’s still time.
The Quantitative Approach
Quantitative Analysis makes use of complex mathematical and statistical models in order to understand the markets and the behavior of market participants. Like TA, QA is merely a tool in the arsenal. Financial markets crank out new data points every day (24 hours a day in the case of crypto markets), and this allows quants to build out highly detailed models from which to understand trends and derive predictions. But models can only go so far, and good quants understand that no model can predict the future with 100% accuracy. Quantitative models deal in probabilities, not certainties.
When individuals or companies utilize quantitative analysis to try to time the markets, this can lead to catastrophic failure and loss of funds. Tantra Labs’ quantitative analyst and researcher, Kagen Atkinson writes:
In many cases, this stems from mistakenly overfitting their analysis to a small historical window of time, such as 1–2 years. This is the biggest oversight in TA, not using enough data. Second, going after too high of sharpe ratio will not generalize to bitcoin over the long term.
Any quant worth his or her sats, also knows that fund management is a key aspect to successful trading. If your model predicts that price will go up and you go long on a position only to see the market go against you, that kind of mistake will only get you rekt if you bet the farm. The best traders in the game aren’t always right. But they are right more often than they are wrong.
Published at Mon, 23 Mar 2020 21:58:50 +0000