How To Get An Edge In Trading - About Inefficient Markets
Inefficient markets are something I've discussed in several newsletters.
But I read a thread from @tree_of_alpha and was again reminded of how important it is if you want to have an edge in crypto.
As Tree of Alpha writes:
"The Efficient-market hypothesis states that at all times, asset prices reflect all available information. This is only partially true."
I fully agree with Tree of Alpha, because information can't be priced in at the exact moment it comes out.
When something news-worth gets out you have to either interpret it as fast as possible, guess how long time it will take before the effect of the news reflects the market prices, and/or try to understand how people will react to the news.
Let's do an example since it's always easier to understand concepts that way.
The hack on Binance Smart Chain Oct 6th 2022
An attacker stole 2 million BNB (~$566M USD) from the Binance Bridge.
The news broke out around 4 PM EST on October 6th.
In a matter of 90 minutes, $BNB fell 4.5%. That isn't too crazy in crypto, but the R/R (risk/reward) was great. That means low risk, potentially high reward.
Let's go through it with the help of a framework to see how we should play this.
How big was the hack from 1-10?
Let's check the leaderboard on REKT: https://rekt.news/leaderboard/
It's in the top 3. So the impact is maybe a 9/10. That sounds like a great shorting opportunity, right?
Consequences for Binance Smart Chain and the holders?
We didn't know at the time, but there was a risk of halting the chain. That's not positive, and a short seems even more tempting.
How will other players in the market interpret this news?
My common sense says this is a shorting opportunity, and the more people that see the news, the more people will try to short it.
How fast should you interpret this?
As fast as possible.
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All right, this was very simplified. But it just shows my thinking at the time of the news.
Most traders tend to focus too much on the rewards side and not enough on the risk side.
If you regulate a portfolio with sentiments and not discipline, then be prepared for an explosive and depleting ride.Β
Your goal should be risk management, not risk avoidance. Risk can be managed by significantly controlling the possibility and the amount of loss.
For more about money management in crypto and how much you should risk on a trade (the Kelly criterion, position Size, stop loss & take profit), check out my newsletter from 2 months back:
The Black Swan π - The newsletter about crypto, DeFi, and other speculative markets.
As in everything, this is speculation.
After some hours CZ (Binance CEO) tweeted that funds were safu, and the price reacted immediately to the upside.
In trading, you got to react quickly. Trading on news is 100% not a safe bet at all.
The moment a news headline like this comes out, the market participants start pricing in the new Expected Value (EV) for the asset. Your job is to calculate that EV more accurately and take position earlier, than most other participants. This is how you can make money.
But where do you find news that is not priced in?
These are some good accounts that can leak important news/info.
Start by following these 11 accounts and put on notification:
1) DB: https://twitter.com/tier10k
2) Tree of Alpha: https://twitter.com/Tree_of_Alpha
3) Cobie: https://twitter.com/cobie
4) Light: https://twitter.com/lightcrypto
5) Cred: https://twitter.com/CryptoCred
6) High Stakes Capital: https://twitter.com/HighStakesCap
7) Hsaka: https://twitter.com/HsakaTrades
8) GCR Classic: https://twitter.com/GCRClassic
9) GCR: https://twitter.com/GiganticRebirth
10) PeckShield: https://twitter.com/peckshield
11) Sam: https://twitter.com/samczsun
There are obviously several more accounts you should follow, but these 11 are a good start. Feel free to reach out to me here or on Twitter with names you feel should be on this list.
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I'm keeping the newsletter a little shorter this time because I wanted to just push this out today.
I've also started a free Telegram channel:
An archive of tweets, threads, articles, blog posts etc. that I find interesting within crypto
It will basically be an archive of tweets, threads, articles, blog posts etc. that I find interesting within crypto.
Mostly things that I bookmark on Twitter.
Will be updated on a daily basis.
Feel free to join here: https://t.me/cryptogoodreads