Avoiding Momentum Crashes
Avoiding Momentum Crashes
I’m well known for my ability to take a punch from the markets… but I gotta say… boy oh boy, the last few months of crypto trading have left a few marks. And it’s not that I haven’t been through the wringer many ties before, so I sort of knew what to expect. But it sucked big time, not gonna lie.
A shakeout event of this magnitude has a silver lining in that it drastically increases the upside potential of the bull market, but still… you don’t really have to touch the stove to know that the stove is hot. You do that exactly once in your life.
So Scott and I spent a large amount of time thinking about the recent crash and whether or not it was avoidable. The answer is… maybe, and kinda sorta. So here’s the deal.
The system goal is to pick the ULTIMATE bull market top and remain invested in the strongest crypto-assets along the way. How do we pick tops? Tops are EXTREME events.
Extreme bullish sentiment, extreme price moves, wildly bullish narrative… The same way that market bottoms are events with massive fear and despair. (Like a few weeks ago)
The more extreme the top the more obvious it is, right? So it’s about 10x easier to pick the absolute top than an interim top. Which complicates things. And if I try and have a system pick every wiggle in the market… I only have to miss one and I screw the whole thing up.
That makes the system more complicated. More complicated is more fragile. And fragile trading systems are ones that look good on paper but fail in the real world.
Robust trading systems feel like a series of cock-punches to trade, but they actually make money. (Pro Tip: the edge actually derives from doing the emotionally difficult thing since most people don’t have the stones for it)
So I don’t think I can build it into the system, but that’s a weak answer. Looking back it’s obvious there were clues, and I decided to spend a few weeks diving deep into the academic journals and peer reviewed papers, trying to snag a few ideas from the pros.
That’s right – beg, borrow, or steal, baby!!
Turns out, momentum systems like ours are famous for “remarkable performance with occasional large crashes”.
Here’s a summary (or better: translation) of what the pointy-heads have discovered about momo crashes:
1) Momentum WORKS because money flows into coins that are moving up quickly, which makes them move more, which means more money chasing a smaller and smaller amount of available supply. This causes the explosive profits we’ve been getting but also fuels the periodic crashes when there are no more sideline buyers to step in and support the market.
2) Garbage floating to the surface
Momentum crashes happen when low quality assets are selected by momentum systems (which usually only select the best coins). Remember we saw that in our own system, which made 63% one single week by selecting some truly awful scamcoins like ETC. The crash was 2 weeks after that. It’s interesting that it played out the same way in crypto as it did in stocks.
3) Momentum crashes happen when system returns expressed as a Z score spike. (daily returns / standard deviation of daily returns)
This works like a magic trick for picking BTC tops, as you can see above. This isn’t anything new as it has worked like a charm on the VIX for as long as I can remember. And it is exactly why I’m looking to see if that same logic holds true for our actual system. Game changer if it does.
4) Momentum crashes happen when the pairwise correlation between low quality coins approaches 1 (watch the video for more details).
In plain language this means the stage when you can just randomly pick a coin and expect it to go up 20% the next day is very close to a crash.
The research continues, but I made a video about it HERE to get you guys primed. By the way, don’t forget to subscribe and upvote as it helps my nascent channel immensely! Thanks in advance.
The bottom line is I doubt I can just build all this into the system without turning it into a fragile bag of cats. BUT I should be able to give us a little advance warning next time to take some profits off the table.
If you want to get your share of the life changing windfall on offer, you can still get it for the old price until we go back into alt season (which is almost certain for next Monday).
After that I jack up the price substantially.
