My assets have been cut from the peak. How should I calm my mind?

Author: Cred

Compiled by: TechFlow

Your portfolio peak or historically highest net worth does not represent real wealth.

Even your current portfolio or profit or loss (especially unrealized parts) cannot be taken for granted.

The core point is: how much money you make doesn’t matter, the key lies in how much you can keep.

As I mentioned in my previous post, most people (whether it is an active choice or a passive result) get stuck in one of two situations: either earn less but keep more or earn more but keep less.

What you have to avoid is a bad intermediate state - earning less and keeping less , which is the biggest failure.

Unrealized huge profits and losses and assets returning to the origin do not bring any real value.

Screenshots of the highest earnings in history cannot pay your bill.

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

Many people mistakenly believe that the growth rate of portfolios will remain linear and may even continue to accelerate.

However, the calm fact is that the main force driving your wealth growth is often the overall market , not your personal trading ability.

Although the statement that "everyone is a genius in a bull market" is somewhat one-sided, when people evaluate their performance, they often ignore the huge impact of abnormal market conditions on the results.

Persisting in these favorable conditions and making money is worthy of recognition, but at the same time, you must also be humble and realize that these conditions are only temporary and not permanent.

The first trap is: mistakenly consider the current market environment as the "new normal" and assume that your trading results will remain the same level indefinitely, and the portfolio will grow at the same rate.

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

First of all, the current market conditions will not last forever. If you still deal with the same trading method, 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 weaken.

Third, as the 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 the opportunity.

Fourth, significantly increasing the size of your position in a short period of time may interfere with your psychological state and thus affect trading execution. If your total assets were $50,000 a few weeks ago, and now this is just the floating loss amount of a loss transaction, your mindset may collapse. This kind of psychological adaptation takes time and cannot be achieved overnight.

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

This false assumption usually leads to two major problems:

First, traders will think that early effective trading strategies will always work. However, the market environment and strategy applicability will change, and many strategies cannot be expanded 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.

Just a little too high leverage, a little more market impact, and a little panic will cause traders to suffer huge losses when the market reversal, and even cause a fatal blow to the portfolio.

Worse, this situation is often accompanied by conceit and stubbornness, such as the mentality of "I made $N before this strategy, why did I change it?"

Although I have mentioned this question many times, you may be surprised at how easy it is for people to hypnotize themselves and think of themselves as a "trading genius" 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 reluctant to admit that they are just lucky, but mistakenly attribute all gains to the so-called "newly discovered trading ability."

By the time you finally realize that the main factor that really drives profits is the market, not your own abilities, it is usually too late.

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

Many traders will slightly speculate on how much money they can make in the next month, quarter or even one year based on their portfolio growth and returns in the short term.

Social media, such as Twitter, has exacerbated this mentality - there are always people showing off more expensive watches, more luxurious sports cars, more luxurious Dubai life, and enviable PnL screenshots. These contents make you feel that your achievements are never good enough.

As a result, many traders will significantly upgrade their lifestyle and start spending wealth they don’t actually have. This behavior is often based on blind optimism of short-term returns and is unreasonably extrapolated to the future.

However, when the market cools down, you may already be trapped in it, and a drastic reduction in lifestyles not only hurts self-esteem, but also seems unrealistic in many cases.

Summary : Current market conditions may put your thinking in a dangerous state:

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

• Don't assume that your strategy will always bring linear growth, both in terms of time and size of funds.

• Don't assume that you can still manage your trading in the same way (both from an execution or psychological level) after a significant increase in position.

• Don't assume that you have fully grasped the market rules and can stay profitable forever.

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

Suppose you are a person who makes mistakes and is prone to self-confidence, and your previous success is more due to luck. Use this humble attitude to examine yourself, your trading strategies, and especially your conceit.

A common mistake that many traders make is to regard the dollar value of their portfolio as real wealth that has been obtained.

But that's not the case.

Normally, until your income is deposited into a bank account in fiat currency and taxes are reserved, all profits are just "paper wealth" and cannot be considered real income.

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

This is by no means an alarmist, but a very realistic question.

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

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

The funds you can ultimately retain and use in reality are the smallest nesting dolls.

Between the two, there are many shrinking nesting dolls, representing various factors that may lead to shrinking funds.

From large nesting dolls to small nesting dolls, wealth will gradually shrink, and the rest will be the part that truly belongs to you.

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

When we look at our portfolio balance or unrealized profits and losses, especially when these assets are still volatile in the market and fluctuate with directional bets (various liquidity levels), we need to apply some of these numbers. A kind of "discount rate".

In other words, you need to realize that the probability that the amount in the portfolio ends up fully entering the bank account and can be 100% freely 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 part of the benefits. Even if you sell at the highest point, you must hand over some of the profits to the country.

In addition to the tax factor, there are some 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 reserve some fault tolerance space for your almost inevitable mistakes. Here are one of the main issues:

1. Timing issue

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

In other words, it's hard to really achieve peak returns on your portfolio.

In reality, the results usually float within a range—from "selling prematurely intimidatingly, locking in most gains" to "experience a complete cycle of ups and downs, back to the starting point", and between Various situations.

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

Remember, the most important goal is to keep as much money as possible, rather than prove your judgment. Being self-conceited has no place to stand.

Even those experienced top traders in 2021 mostly choose to gradually reduce risks when BTC’s all-time highs fell below $60,000 and the trend began to appear unstable, and at this time there is already about 15% gap from the highest point. Now.

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

For reference, this retracement of BTC alone reached about 15%, which is still a "early exit". Some major altcoins fell even twice or tripled during this period.

Even if you have a good grasp of the market timing overall, such a drawdown is still very significant.

If you make a mistake in the timing (and in fact you are likely to make a mistake), the loss will be even greater.

To sum up, you need to accept the fact that you are unlikely to sell at the highest point of the market (hopefully this is a recognized premise). Therefore, you must face it calmly that due to timing issues, your portfolio will inevitably give up part of the market's profits relative to the peak.

2. The trap of buying on dips

The market environment will make people develop fixed trading habits.

Especially when these habits have made you profitable (especially recently made money), it is very difficult to get rid of these habits quickly.

In a previous article, we discussed BitMEX and Bear Post-Traumatic Stress Syndrome (PTSD). In bear markets, traders are often trained to trade mean regression within a short time frame and reverse operations on almost every other situation.

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

Specifically, if the market rewards you for buying on dips on almost every time frame and allows you to form the belief that "every drop is a discount and will eventually rebound", then after the market hits the top When it's the first time you're down, you're likely to choose to continue buying.

Or at least, with the “humble and self-reflective” attitude we advocate, you should admit that you may not be able to identify the top of the market and buy when the market falls.

If you are sharp enough, you may find that this decline is different from before and does not recover as quickly as before.

There are data points that can help determine this situation (such as the clearance of an open position (OI) – if the liquidation is very large, it usually means that the trend may be reversing, but we will discuss this in more detail later).

However, it is not easy to judge these signals at the moment.

The difficulty is that even if the market has peaked, it may still experience some seemingly "golden opportunity" declines, as it is usually accompanied by a strong initial rebound.

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

At that time, the price showed a huge lower shadow and a strong rebound from the low to the mid-range $40,000 range, but there was no continued trend at all and no new highs after that.

Subsequently, a similarly strong rebound occurred at the low of the $35,000 range, but it also did not continue the trend and did not hit a new high.

Although these rebounds seem attractive, they are actually "illusions" after the market hits the top. If not identified in time, you may be induced to continue buying during these rebounds, which will eventually lead to greater losses.

Two things that happen at the same time often put traders in trouble: 1) The price has a strong initial rebound from the obvious technical support level; 2) There is no trend that continues after the rebound.

If you are sharp enough, you may seize these rebound opportunities and treat them as medium-term trading while actively reducing risks (such as reducing exposure to medium-long tail assets or high-risk speculative assets in portfolios). This operation is close to the "best practice" of trading rebound after the market peaks.

But if you are unlucky or lack experience, you may keep increasing positions during the decline, expecting these rebounds to hit new highs as they did before (but the reality is, they won’t). Ultimately, when the market completely collapses, you may give up almost all of your previous profits.

These rebounds are often the "bait" sold by the market, which will make traders complacent and even continue to increase positions. But this behavior is a huge hidden danger to your portfolio because it will put you at greater risk after the market peaks.

Especially during the period after the market peaked and before the real collapse, many traders would reintroduce their cash reserves, profits and even realized returns into the market, but the net exposure was further increased.

This situation may seem ridiculous, but it is very common.

More importantly, these "discounts" are actually accumulated:

• First step, you didn’t sell at the top of the market (discount #1);

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

• Ultimately, you either choose to hold these loss-making assets for a long time or have to endure the pain of cutting your losses (discount #2.5).

This is not a fictional plot, but a real experience of many traders. To me, this pattern is so familiar. I believe that this behavior pattern must be familiar to investors who have experienced a complete market cycle - you may even have operated it like this yourself.

In summary, you need to further discount the portfolio’s peak returns because not only are you likely to miss the opportunity to sell at the top, but there is also a great risk of being induced to buy when the market first pullback, so resulting in greater losses.

3. Overtrade allocation phase

The market often enters a "distribution period" at the top stage, that is, the price no longer rises unilaterally, but begins to fluctuate and consolidate.

Depending on the market cycle, trading instrument and time frame, this fluctuation may manifest as a brief sideways consolidation, but for investors who are used to rushing into trading when they see green candles within a low time frame, this period Time may seem long and tormenting.

At this stage, there are two common risks: one is to buy on dips, but the price continues to fall (or at least not hit a new high); the other is to traders who are used to trending markets, in fluctuating markets Frequent operations were eventually slapped in the face repeatedly, causing heavy losses.

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

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

Whether it is because you buy on dips but encounter a pullback that is too small, 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 impact

Remember how it felt 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 the market—we tend to turn a blind eye when it is sufficient, but when it disappears, the problem immediately appears.

If you are trading larger positions, or if your portfolio contains many low-market and low-liquid assets, then you need to pay special attention to two issues:

1. When you are anxious to sell, it may have an impact on the market;

2. If you choose to sell at an inappropriate time (such as smashing the market sell orders into a market with almost no buying orders during a market sell-off wave), this impact may be further amplified.

Slips will directly erode your profits, so your portfolio will have an "invisible discount" relative to peak returns in the event of insufficient liquidity.

If you are trading mainly BTC, ETH or SOL, which are more liquid, this problem may not be too serious. But if you are trading mainly SGD, Meme or other high-risk assets, this issue is very critical.

In the crypto market, there are almost no real "help-haven assets". When the market crashes, the price fluctuations of all assets tend to tend to synchronize (correlation is close to 1), and few assets survive the price plunge. And emerging, less liquid assets are usually hit hardest, which not only leads to poor transaction execution but may also lead to greater losses.

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

"It has fallen so much, why do I still want to sell it now?"

Or, “It has fallen so much, I might as well wait for the rebound before selling.”

However, in most cases, there is no rebound to sell at all. Even if there is a rebound, many traders overestimate their ability to withstand retracement and grasp the opportunity for the mean to regress.

The main problem here is self-esteem - selling late will make you feel stupid because you didn't sell it earlier. So, you simply don’t sell and you will lose more in the end.

In summary, if your portfolio contains assets that are less liquid or more speculative, then your expectations of portfolio peaks need to be more conservative and appropriately lower the "discount rate" of psychological expectations.

5. Revenge plot

This is a classic trading psychological trap.

After you have gone through the several stages mentioned in the article (success or not varies from person to person), you will find that there is an unignorable gap between the current account balance and the previous peak.

This gap is big enough to make you feel regretful and self-blame; but it doesn't seem too big, making you feel that you can make up for the losses by just a few beautiful operations.

This is the beginning of the revenge deal—the foreshadowing of a huge failure caused by mistakes.

The characteristics of revenge transactions are very obvious:

It is often an act driven by self-esteem, irrational and hopeless.

In this state, your thinking will become chaotic, completely oriented towards short-term results, and ignore the long-term trading process.

Almost everyone has experienced a revenge deal, and its ending is often disastrous—in most cases, this behavior will only put you in a deeper quagmire of losses.

The most terrifying thing is that the risk of a revenge transaction is extremely high: just one emotional operation can easily erase the results of your efforts for months or even years.

6. Conclusion

The purpose of this article is to help you get rid of your obsession with the peak of your portfolio so that it won’t dominate your trading decisions.

If you are too obsessed with that peak number and see it as your only goal, it can end up with devastating consequences.

The suggestion here is to look at portfolio peaks in a more rational way, view them as a dynamic, discounted reference value rather than an absolute goal.

This perspective is closer to reality:

• You will reduce unnecessary panic;

• You will keep more funds;

• You won't ruin your efforts for months or even years just by chasing a number that never really exists.

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