Why talk to traders? Because the most effective way to build a trading strategy is to learn from people who have achieved results in the cycle. Guest of this episode: Paleking, MVC partner (Twitter@UlquiorraSun)
The growth experience of trading: I started trading from EOS, traded when the market was favorable, and did nothing when the market was unfavorable
FC (Founding Partner of SevenX, Twitter @FC_0X 0)
When did you enter the circle?
Paleking (MVC Partner, Twitter @UlquiorraSun)
I started to speculate in 암호화폐currencies in October 2017. The first thing I speculated was EOS. At that time, I used 10,000 yuan to turn it into 100,000 yuan. I knew about EOS first, and then I knew about Bitcoin and Ethereum. So EOS took on the task of breaking the circle at that time and brought me into this circle.
FC (Founding Partner of SevenX, Twitter @FC_0X 0)
How much capital did you start with, how long did it take, and what did you do to get the results you have today?
Paleking (MVC Partner, Twitter @UlquiorraSun)
After EOS, I probably recharged 200,000 RMB, which is about 30,000 USD, to start playing in this industry. 2018 and 2019 were invalid years for me. I lost money for the whole year in the big bear market in 2018, made a little money in the first half of 2019, and then went through the roller coaster in the second half. I really started to make significant profits in this industry in 2020. Because of the epidemic, the Federal Reserve also loosened its money supply, and all assets were skyrocketing. I also took advantage of this wave of liquidity surge to earn the initial capital and have been doing it all the way to today. The good thing about this process is that there is no place to lose a lot of money, because leverage is rarely used and positions are cleared in time.
In 2021, I clearly felt that the big cycle of the market was over, so I cleared my position very early (before May 19). In the second half of the year, when everyone was hyping NFT and games, I didn’t participate. Then I spent the whole year of 2022 traveling around until the end of 2022 and the beginning of 2023 when I felt that the market had fallen enough. At that time, Bitcoin was around 20,000 US dollars, so I came back to play and have been doing it until now.
So in the final analysis, I am a typical cyclical school. One of the principles I believe in is to trade when the cycle is favorable, and go out to fall in love, travel, and do nothing else when the cycle is unfavorable. This is generally the ups and downs of my growth process in the industry over the past few years.
Trading strategy details Part I: Large-cycle timing through on-chain data
FC (Founding Partner of SevenX, Twitter @FC_0X 0)
How would you summarize your entire trading strategy in one sentence?
Paleking (MVC Partner, Twitter @UlquiorraSun)
There are actually only two main purposes for me to exist in this market: the first is to make stable profits. I am here to make money, not to gamble. The second point is that I just want to outperform Beta. Because in the secondary market, no matter what you trade, there is a law – seven losses, two draws and one win. That is, even if there are bull markets and bear markets, after a whole round, 70% of people lose money, 20% break even, and only 10% can make money. Among these 10%, there may be another 28th law, that is, only 20% can outperform Beta. So after all the calculations, in fact, only 10% multiplied by 20%, that is, 2% of the total population of cryptocurrency traders can make stable profits and outperform Beta. I just hope that I can be in this state of about 2%.
So my trading strategy is actually very simple, which is to choose the timing of the big cycle. Enter at the low point of the Bitcoin cycle, and then I believe that whatever I buy will rise. After exiting at the high point of the Bitcoin cycle, I will not look at anything in the long bear market. I still remember what an old senior who entered the industry in 2017 said, that is, a coin that has fallen by 99% can fall another 99%, so dont look at the bear market cycle anymore, wait until it falls through completely, and judge that the next big cycle is about to come back from the start.
FC (Founding Partner of SevenX, Twitter @FC_0X 0)
So is there a universal method to determine the bottom of a cycle?
Paleking (MVC Partner, Twitter @UlquiorraSun)
The key to judging the cycle is to observe the chip structure/chip distribution of Bitcoin. Because I think that for all assets to rise, first there needs to be a dealer who absorbs all the circulating stocks in the market and makes the chips concentrated. When the chips are concentrated to a certain extent, it can start to rise to the market high, and then the dealer distributes the chips, the state of the chips becomes dispersed, and the market ends. This dealer is not necessarily a person or an individual, it is probably a kind of market force, and this force controls the chips of the market.
So what indicators do you use to judge this? I refer to the on-chain data the most. Glassnode has several free public indicators that are very useful for judging the big cycle of Bitcoin.
The first one is called NUPL, which measures the loss/profit level of everyone on the Bitcoin chain. It presents a rainbow of red, orange, yellow, green, blue, and purple. Every time it turns deep red, it means that all people who buy Bitcoin have lost money. When the loss reaches an extreme, everyone frequently sells their stocks, and the chips will be taken away. This proves that it is the low point of the market, and it doesnt matter if you buy in. What does it mean when it turns blue? It means that all the people who speculate in cryptocurrencies in the world have made a large profit, and the floating profit level is particularly high. Once the profit-taking flees, the market will collapse. Then I judge that the market profit-taking has reached a particularly high level, and the market sentiment is extremely optimistic. This is the top of the cycle, and you should flee.
The second indicator is HODL Waves, which is used to determine the stratification of Bitcoin holders. It is divided into users who hold Bitcoin for less than one month (short-term users) and users who hold Bitcoin for 1 to 3 years (long-term users). During the 70% crazy decline of Bitcoin, short-term users sold their shares madly. From the data, the proportion of such users will decrease sharply. When it decreases to a very low level, it means that all short-term users have been washed out of the market, which indirectly proves that Bitcoin has bottomed out. When the proportion of long-term users decreases drastically, it means that all old leeks are fleeing and dumping the market for profit, while short-term users are rushing in and their proportion is increasing madly. At this time, it must be the top of the market.
In this cycle, I bought Bitcoin at 18,000 yuan, and I “sold the top” at the end of April in 2021, all based on the above two data indicators, so I think this has been very effective and will continue to be effective in the future. As for macroeconomics, emotions and other messy things, I think they are meaningless in judging the cycle timing of Bitcoin.
Trading Strategy Explained Part II: Successfully Finding Alpha Using the “Zeroing” Strategy
FC (Founding Partner of SevenX, Twitter @FC_0X 0)
How to find beta enhancement or alpha after timing is completed? Is it also based on indicators? What is the whole screening logic?
Paleking (MVC Partner, Twitter @UlquiorraSun)
The method of finding alpha is different in different time periods, and the strategy needs to be adjusted according to market conditions.
In the window period from March 12, 2020 to the Bitcoin halving in May, we observed the trading of large centralized exchanges such as Binance, OK, and Huobi and found that some tokens had begun to rise inexplicably, such as SNX. Five months later, the market named this theme DeFi. In the second half of 2020, I found that people began to complain that Ethereum was a noble chain and gas was expensive, and funds began to flow to Solana, Avalanche, etc. In 2020, I basically only traded these two themes.
At the end of 2022, when we started looking for alpha again, we started a new strategy called zeroing. Because we reviewed all the projects that increased by more than 100 times in the bull market cycle from 2020 to 2021, and found that they have common characteristics, which can be roughly summarized into 5 points:
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Being born and developing in a bear market shows that the founder dared to start a business in a bear market, and his determination and willingness to do things are very strong;
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From the perspective of valuation, it has a relatively good price-performance ratio, that is, the currency is cheap when it is issued, and after a long bear market, the price further drops and becomes extremely cheap;
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The unlocking ratio of tokens is relatively good, which means that the chips on the market are very clean and there is no selling pressure, because investors with large chips have washed out. At the same time, the project side still has huge chips, and they have not made any money in the entire bear market, so they have a strong desire to pull the market up;
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Good investor background;
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Are there any good exchanges that can provide liquidity first once the market recovers? Because Uniswap had not yet developed in the market at that time, DEX was not considered.
Thinking further, what does a project that meets the above five characteristics represent? The team founder is determined, the team founder has bargaining chips, the team founder has the willingness to pull the market, and the team founder has the ability to obtain global macro liquidity. Projects that meet the above conditions have increased 100 times in the 20-21 cycle. So from the end of 22 to the beginning of 23, we used this standard to examine the top 1,200 projects on the market, and then deleted all the old projects that issued coins before October 21, and looked for entrepreneurs who dared to start a business after October 21. After screening, I selected about 30 coins and bought them in, and obtained some alpha. By the Spring Festival this year, I think the results are pretty good.
But I think the way to find alpha next time may be different from before, because the market has changed from a comprehensive bull market in the previous cycle to a structural bull market. The altcoin season should still exist, but it will show two characteristics: first, sector rotation. Because the funds in the industry are obviously still relatively small, when one sector rises, other sectors have to lie flat and rotate repeatedly; second, the differentiation is drastic, that is, most Altcoins cannot rise, or most of the rises cannot outperform Bitcoin, and only a small part has alpha performance. Therefore, if you want to obtain alpha again in the next three months, it should be completely different from the previous two cycles, and you have to think about what to do.
Trading strategy detailed explanation Part III: Give up fundamental analysis and focus on trend trading of strong targets
FC (Founding Partner of SevenX, Twitter @FC_0X 0)
So do you have a preliminary judgment on what characteristics Alpha will show next?
Paleking (MVC Partner, Twitter @UlquiorraSun)
In fact, my team members and I have discussed this issue for a long time. After the market education of the structural bull market in the past six months, I suddenly became a little afraid of the word alpha, and even came to a conclusion that we believe that beta is the real alpha.
The market generally believes that we are in a bull market where no one takes over, and the difficulty of pursuing alpha increases under this background. On the one hand, due to the high volatility of the market and the excessive hype of themes, the success of ambush a certain theme from a top-down perspective is reduced; on the other hand, even if a specific project is selected from the bottom up, it is difficult to gain recognition from the capital market. Therefore, it is recommended to adopt a more cautious strategy: invest most of the funds (80%) in cryptocurrencies with large market capitalization and stable performance (Solana, BNB, etc.) to obtain beta returns; at the same time, use a smaller proportion (20%) of funds to try to find potential alpha opportunities and do something small for big. Adopting the extreme barbell strategy aims to maximize the protection of the principal while capturing the markets upward trend as much as possible.
Going one step further, what is my own review of Alpha? I will completely give up the prediction of the fundamental track and only want to do one thing well, which is to buy here and sell there. What does it mean? I want to find strong targets in the market and do my trend trading well. For example, from November last year to February this year before the Spring Festival, I didn’t care what was happening in the market at all, and I didn’t care what track topics people were discussing on Twitter. I only made one transaction, which was to find a nine-month high. I have a data monitoring robot that is responsible for pushing which coin has set a nine-month high every day. If I find a nine-month horizontal breakthrough through the K-line, the target is good and there is no obvious pit, I will chase it, and it turns out that this strategy works particularly well.
The reason is that the digital currency industry is a strong cyclical industry. Bitcoin has a four-year cycle, and altcoins have their own small cycles. At present, it is generally said that the cycle of an altcoin is about six months, that is, three months of rise and three months of fall, which is basically the state. If a dealer wants to make a market value plan for an altcoin, in this process, he needs to constantly absorb funds and pull up shipments. So if we find that a coin has been sideways in a bear market, has been absorbing funds, and has been preparing, then once it breaks through the nine-month new high, its increase will be very amazing. Because a main force has spent a lot of money, patiently nurtured this plate in the past nine months, and collected a lot of chips. After he decided to pull up, it proved that his determination was the stars and the sea, and you just have to wait for him to pay you. For example, Solana fluctuated between 10 and 30 for nine months, and after breaking through, it tripled; TON, when it broke through two yuan, it should have broken through a new high of about one and a half years, tripled; and there were also RNDR and INJECTIVE, which rose and fell at the time.
So what is my simple thinking for the next three months? I cant judge the track and the fundamentals, so I might as well return to my first principles and pay attention to whether there are bankers operating. I think my alpha in the next wave of the market should not come from the track theme and the judgment of the target. It comes more from the price performance of the strong target, and I make some money by following the trend.
Trading strategy detailed explanation Part IV: The strongest alpha is the one who can correctly identify which target can outperform Bitcoin
FC (Founding Partner of SevenX, Twitter @FC_0X 0)
From 30,000 to 50 million US dollars, what impact do you think the change in scale has on your entire trading system?
Paleking (MVC Partner, Twitter @UlquiorraSun)
The impact is very large. Scale is the enemy of profit. The larger the scale, the smaller the multiple of your absolute return will become, because when you are large, the investment target needs to have higher liquidity and larger trading volume to meet the demand, which will lead to the concentration of holdings in a few large targets. At the same time, the increase in scale will also affect trading strategies, reduce operations such as selling high and buying low, and pay more attention to long-term and stable investment. Therefore, larger institutional investors need to be more cautious in selecting investment targets and adopt corresponding trading strategies to ensure returns.
So frankly speaking, there are a lot of complicated information in the cryptocurrency circle, a lot of so-called alphas, and a lot of ecological projects are meaningless to us because they are too small. A qualified fund manager who can correctly identify which of the top 20 market capitalizations can outperform Bitcoin is actually the strongest alpha.
Revelation of trading: Only by doing subtraction can you form your own trading strategy
FC (Founding Partner of SevenX, Twitter @FC_0X 0)
What are the key points in your process of forming your own trading strategy? For example, what kind of people did you meet and what knowledge supported your trading strategy? If someone wants to copy you, what should he do?
Paleking (MVC Partner, Twitter @UlquiorraSun)
In fact, the formation of my trading strategy is a process of subtracting myself step by step. In 2018, I did not trust digital currency, but just tried it to make money. At that time, digital currency was simply classified as emotion. Everyone discussed what to speculate and what projects were speculating. In 2019, the market was weak, and I began to learn to embrace strong dealers, that is, to examine the market from the perspective of dealers. At first, I would start with technical analysis, but later I found that it was just scratching the surface, because the indicators of technical analysis are only the results of dealers behavior rather than the causes, so I began to focus on the behavior and intentions of dealers. Why did he let it fall? Why did he let it rise? Why did it rise in large volume? Why did it fall in large volume? Why did it fall in small volume? It is to analyze what the dealer is doing now to judge his next intention. This is now my main way to speculate in coins.
The second evolution is that I have given up thinking about fundamentals more and more in the process. Of course, I do not deny the role of fundamentals, but I am gradually reducing fundamentals for my own trading framework. I attribute the rise of a coin to only three reasons, namely funds, chips, and emotions. My understanding of fundamentals is that I don’t care about the objective fundamentals themselves. I only judge what emotions are derived from fundamentals, whether emotions can be condensed into consensus, and whether funds pay for this consensus.
FC (Founding Partner of SevenX, Twitter @FC_0X 0)
So during the entire transaction process, what usually happens when you are most anxious?
Paleking (MVC Partner, Twitter @UlquiorraSun)
The most anxious state is that I dont know what I am making money from. It may be that this transaction is not based on my own framework, but I just bought it because of FOMO. Because people are inevitably affected by emotions, when everyone is shouting, and it seems that what they shout makes sense, the fear of missing out will appear. Anyone who buys for such a reason will 디파이nitely be unhappy in the first place, and secondly, the result is basically not very profitable.
FC (Founding Partner of SevenX, Twitter @FC_0X 0)
Do you have a stop doing list? Like no fomo?
Paleking (MVC Partner, Twitter @UlquiorraSun)
I actually have only one principle, which is: small profits at ordinary times, small losses at ordinary times, big profits occasionally, and never big losses. My stop loss is not targeted at a single target, because in fact our industry fluctuates greatly. I control it based on my total position and set it to the range of small profits and small losses. I will never allow myself to fall into a big loss. That is, every time my total position goes back to normal, I will directly close the position with one click.
FC (Founding Partner of SevenX, Twitter @FC_0X 0)
In fact, I think it is very important to keep being sensitive to the market. So what are your current ways of improving yourself? Who has a greater influence on you? What is your main source of information?
Paleking (MVC Partner, Twitter @UlquiorraSun)
Two people have had a great influence on me: one is my former boss, the biggest help he gave me was to let me look at the market from another perspective as an opponent of retail investors, which was a huge improvement to my trading methods; the second person helped me by giving me a large sum of money and helping me increase the scale of my daily transactions, because now the scale of our fund is ten times that of my own, and when I had this large scale of management, it passively made me mature.
As for the channels for obtaining information on a daily basis, to be honest, I don’t obtain any information on a daily basis now. In terms of the trading of the subject matter of centralized exchanges, I don’t communicate with anyone. There is no need. Because there is only the last wave of the bull market in this cycle, I will no longer pay too much attention to market hot spots and themes, but focus on my own investment targets and judge their trends by the strength of the market. Recently, many altcoins have been able to hold their prices, which may be because the dealer has not yet shipped or has not shipped completely. So you still need to pay attention to weighing risks and benefits.
FC (Founding Partner of SevenX, Twitter @FC_0X 0)
What book would you recommend? Or a person worth following? What do you think would be helpful to others?
Paleking (MVC Partner, Twitter @UlquiorraSun)
I recommend you to watch the battle of clothing companies in the prosperous period. The game between Abao and Qiao Mujie on the stock price of clothing companies is exactly the same as the game of many of our digital currencies when they are first listed on the exchange. I think as long as you can savor the battle of clothing companies carefully, you will be able to speculate in cryptocurrencies.
FC (Founding Partner of SevenX, Twitter @FC_0X 0)
The last question is, is there any mechanism that can keep me sensitive to new things and Alpha?
Paleking (MVC Partner, Twitter @UlquiorraSun)
Three methods.
First, through organizational changes, we adopt a split-position system, allowing each partner to have his or her own position, thereby increasing the overall winning rate and alpha return.
Second, get rid of prejudice and follow the behavior of the price itself. For example, Ordi actually has many opportunities to build a position, but many friends I know have already made millions of dollars in this target, and I want to take over after they have made ten times the profit. I often miss out on many things because I cant cross this threshold.
Third, clarify your position in the communication chain. Because a topic has almost 4 links in the communication chain, ABCD, from its birth to fermentation, to entering the mainstream consensus, to entering the leek takeover stage. I will arrange a small position for the people I know in this industry. Now everyone is talking about something. I don’t really observe what the thing is, but observe who is talking about it now, and then which link of the communication chain I customized this person is in, and then by identifying my own position in the communication chain, I decide how much determination and position I should use to participate in this thing.
This article is sourced from the internet: Dialogue with trader Paleking: From a small retail investor with $30,000 to a fund trader with $50 million, how do experts develop their trading strategies?
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