Investing vs trading with proper risk

management

Table of contents
Investing .................................................................................................................................................. 2
Basics & applied dollar cost averaging ................................................................................................ 2
Riding the macro-trend & confidence. ................................................................................................ 3
Trading ..................................................................................................................................................... 4
The basics ............................................................................................................................................ 4
Scalping................................................................................................................................................ 5
Trading plan and risk management: .................................................................................................... 5
Understanding the statistics of the trade you’re about to enter. ....................................................... 5
Risk to reward ratio ............................................................................................................................. 6
Absolute numbers & understanding losses......................................................................................... 6
Enter & exit the trades with strategy .................................................................................................. 7

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Investing with P.N. & Friends
Investing
Basics & applied dollar cost averaging
Investing and trading are two different things, Pablo said 2 months ago BTC might drop to mid-20’s
or low 20’s -> these are points where you want to pick up crypto and hold onto them for (relatively)
LONG TERM -> aka investing. A concept that I can’t stretch enough for investing is DCA (Dollar cost
averaging), This basically means you stack your orders downwards.

Let us take a look of the board Pablo

called on his live and lets use BTC as
example. If we were to limit buy
batches of BTC at these levels
28.5,26.3 & 24.9 -> The average entry
would be 26.5, which is HUGE
potential profits for long-term. This
strategy is super useful for not missing
the boat. Waiting for the true bottom
is a very hard and super high-risk play,
there’s a good chance u miss it.

Conclusion: Investing is creating a position that is beneficial for long term, it could take
weeks/months and historically even years to get such opportunities -> patience is key. Here’s an
example:

In ’17 it took a whole year to get to the lows

where we eventually had great investment
opportunities. For investing there is no such
thing as a get rich quick scheme, time in the
market outweighs trying to time the market.

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Riding the macro-trend & confidence.

For investment we want a clear macro-trend, if we look for longs, we want signs that point towards a
macro-bullish trend. You’d look for evidence in TA and from a macro economic standpoint. When the
market shows you those signs THAT’S WHEN YOU STEP IN. If you go in before that it’s like going to
the casino and play red or green.

If we apply this at the current BTC market: Currently (9-7) we’re chilling at ~33.5K, although from a
DCA standpoint this is still a great investment opportunity (we are -50% from the highs in April) there
is no confidence yet of a macro bullish move up. The market went sideways from the moment we
had our flash crash in May. In this range we got tons of mixed signals which leaves us with insecurity
about another potential leg down or leg up.
Let’s say worst case scenario 28.5 was indeed the low and we go only up from here -> it’s fine to
trade a little bit of %gain for confidence. Our last previous bullish leg from September 20 to April 21
was 600%.

Similarly, we got out at around 60K BTC because the macro bullish signs didn’t give enough
confidence anymore and showed weakness. Even without shorting BTC here but just being wary and
understanding potential weakness you pretty much x2d your buying power from 60 to 30K. This why
you’ll hear big traders say: sometimes not trading is the best trade.

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Trading
The basics
(INTRADAY) Trading is the act of flipping crypto or stocks on a short time frame. So, in investing you’d
look for long-term trend which you can ride, that is not the case in trading. Trading often consists of
analyzing potential short-term swings that can be longed or short. So even if we are in a long-term
downtrend you can still play little retraces. For example:

These are all potential medium-term trades that could’ve been made in the trading range. These
trades are medium range timeframe, they had a day or more in-between buying and selling points
usually. Note: This only looks easy in hindsight. You have to imagine the situation like this:

This is how the situation looked like at the time, BTC basically free fell from 43K to 30K in +- 10 hours.
If you were trying to catch this bottom it’s like catching a falling knife. Big price moves like these are
risky to trade and even more so on leverage -> longs and shorts can easily get liquidated. Example:
you see BTC dropping from 43 to 35K in 4hours and you FOMO (fear of missing out) a short with 20x
leverage, as you can see in the first graph, 10-12 hours later the price was back up at 40K again -> this
would result in a massive loss -> again we see how important s/l’s can be in such situations. This is
why you hear investors say don’t attempt to catch a falling knife -> it might fall through and cut you.
So let it bottom first and then look for trades. Later on, a trading range formed between 30 and ~40K
which gave a much better indication of buy and sell points. I know plenty of traders that just bought
in the low 30’s and sold in the high 30’s as swing trades.

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Scalping
Then we also have very short-term trades, we call these scalps. When doing this you zoom in on the chart and
analyze it on very short-time frame -> this is way less reliable than playing higher timeframes and way more
susceptible for sudden fluctuations (which could lead to high losses). Successful scalping/trading is all about
having a high understanding of the market, discipline & risk-management. Most traders that attempt will fail
and get discouraged because they lose $$ at the beginning.

Trading plan and risk management:

For now we won’t get into creating our own trading plan yet, as I mentioned before this requires
broad understanding of market cycles, technical analysis & other macro-economic factors. Those
topics will be discussed in future data releases but it’s just too much to do in one go. For now, we’ll
leave that to Pablo and Samurai (day trader of the VIP section), their experience, results and
knowledge speak for themselves. The end goal is for us to understand why some calls are made and
being able to make our own assessment about the market and thus make our own set-ups (trading
plans or investment plans). Such plans always consist out of strategical entry points, stop-loss points
& take-profit points.

We see calls of Samurai & Pablo regularly so it’s very important to understand the fundamentals of
trading before entering them: TRADING IS NOT A GET RICH QUICK SCHEME: Although you might do
a few successful trades on short term, to be a consistent trader and make profit on the long-term
discipline and risk management are key. Long-term successful trading works accumulative, let’s say
you make 5% a month on your 100$, next month u make 5% on your 105 -> cumulative gains.

Understanding the statistics of the trade you’re about to enter.

With this in mind there are a few key points we have to understand before we enter such trades:
In any trade we do we can calculate potential losses and potential gain with a simple formula
ourselves: (note: binance has a feature where they do this for you):
Gain/loss = ((new-old)/old) * leverage * entry value
=
Gain/loss = (((new-old)/old) * nominal entry (-> leverage * entry value = nominal entry)
The new-old/old is the simple formula of calculating a %rise or %decrease.
Example:
we limit order a long at 10$ of crypto X, with take-profit at 12 and stoploss at 9.5.
Person A does this with 100$ on 5x leverage and person B with 100$ on 20x leverage.
A Potential gain: ((12-10)/10) * 5 * 100 = 100$
A Potential loss: ((10-9,5)/10) * 5 * 100 = 25$
B Potential gain: ((12-10)/10 ) * 20 * 100 = 400$
B Potential loss: ((10-9,5)/10) * 20 * 100 = 100$

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Risk to reward ratio
In trading it’s important to realize a trade is never guaranteed to succeed, even the best trading plans
can fail. This is why we want a higher potential reward relative to the potential risk. The trade above
had a risk/reward ratio 1:4, because 100/25 = 4 = 400/100. This means we can fail 3 of these trades
and succeed one and still break-even on the trade. That means if only half of our trades were
successful, we still make money.

Absolute numbers & understanding losses

Besides this ratio, absolute numbers are also important. Let’s say person A and B have a total wallet
of 500$, that means person A potentially risks 5% of his wallet, and person B risks 20% of his wallet. If
the trade was unsuccessful that is a huge chunk out of your wallet, especially for person B.

If we look at this graph, we can see the cumulative

element of losses. The bigger the loss, the bigger gain we
need to make to break-even again. This can put a lot of
pressure on the upcoming trades and also could lead to
emotions interfering with the correct plays -> you want
to make up for the loss.

This is one of the many reasons Pablo will always tell you
to not trade with too much leverage or entry size ->
THINK IN WORST CASE SCENARIO’S: What are the
implications if this trade isn’t successful? Can I still buy
dinner, do I have to make some crazy %gain on my
upcoming trades to make up for it? etc.

Samurai & Pablo recommend not to risk more than 2% in absolute terms of your total wallet. In this
scenario that would mean 500*0,02 = 10dollars, person A was already at 25$ risk with x5 and 100$
entry (nominal entry = 500) -> A nominal entry of 200 would be equivalent with this %2 max risk rule.
Although this is what Pablo and samurai recommend, this is different for everybody and is
dependent how risk tolerant you guys are. Although always be aware of the graph above -> big
losses/risks can lead to evaporating wallets short-term, rather than accumulating your wallet in the
long-term.

Discipline:
Stick to the trading plan, in the previous example if we missed the entry of 10$, realize there will
come another opportunity, chasing trades leads to higher risk to reward ratio / absolute losses. You
should decide for yourself if at that point it is still worth it. Besides that, you have to realize there will
be dozens of setups every day, if you miss one it is not the end of the world.

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Enter & exit the trades with strategy
So we’ve discussed the stoplosses & takeprofit points in our document (basics of any trade). We also
discussed the principle of Dollar Cost Averaging. This concept is also often used by successful traders
when they enter or exit their trades. Often trades will have TP1 TP2 and an entry range. Here’s an
example:
We’re looking for a 100$ nominal entry - short on crypto X with entry range price = 10-12 and T/P1 =
6 and T/P2 = 5
Thus we use our knowledge of multiple limit orders and put 33$ short limit orders on 10,11 and 12 :

Here we see how DCA ing in to enter a trade helps to not miss the boat -> the price never hit the
upper boundary of the entry range (12$) but the limit orders from 10 and 11 got us in the trade on
average entry = 10.5.

We can do the same when we take profits, we can scale out like 50% of the trade at our t/p 1 and the
other half at t/p 2. OR like we discussed before we just move the stop-loss down so the trade is in
guaranteed profit.

Big question that remains: how do we make our own investing/trading plan ? This requires a broad
knowledge of Psychology, Market cycles, TA & Macro economical analysis which are topics that we
will dive into next.

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