Topic: I want to trust one of you who tells me, buy now and sell now. Nothing more. - page 2. (Read 6824 times)

Chances are that Bitcoin will grow exponentially in the years to come - that's the trend, and fixed allocation will cost you a lot of coins on the way up. Would you care to backtest the fixed allocation strategy since Gox opened trading in 2010 till today, and compare it with buy&hold?

"Invest in BTC as much money as you could comfortably lose" is the best simple advice you could have given to anyone in the last years, and I do not see that changing anytime soon. Obviously this is a volatile market and I do think we will test again $100 sooner than later, so Id recommend buying gradually, but the end goal in my book is to accumulate as much coins as possible - fixed allocation kills that purpose.

For the faint of heart, day trading is just a very expensive gambling, not only because the market is very small and thus volatility wild and unpredictable, but also because of huge fees and slippage.

I studied Gomboo his crossover trendfollowing style of trading. I see many big differences with a fixed allocation strategy, even if you exclude the speculation part:  

• Like a buy and hold, trendfollowing will not sell as it goes up. Fixed allocation will force you to sell as it goes up. Profit is therefore lower with a fixed allocation as long as it continues to go up.
• Like a buy and hold, trendfollowing did not sell anything on the high and when it starts crashing will also give you large losses. Because you sold with a fixed allocation as it went up, you now have a smaller exposure and hence less losses as it starts crashing. You are also forced to start buying again now and since crashes generally go fast you end up buying considerably lower than the last prices you've sold.  
• Whipsaws are the weak point of trendfollowing and can destroy your capital. Buy and holders don't care for whipsaws, and fixed allocation actually makes money with whipsaws.

Obviously with the current price of $140, and the general strong upward move, a buy and hold has been and most likely will continue to be, in the long term, more profitable than trendfollowing and fixed allocation.

However, the risk exposure is immense, and the volatility enormous, leading to most people sooner or later giving up on buy and hold on the worst moments. Trendfollowing does not solve this. The risk exposure is also enormous on highs as you don't sell a single coin and the losses also disastrous once it starts crashing. And eventhough it is true that trendfollowing will stop you out and avoid you losing everything if bitcoin continues to go down. It is also true that if bitcoin whipsaws for some years giving many false signals trendfollowing will fail due to the many small losses whereas buy and hold not. Many people will give up on trendfollowing likely when they lost considerable capital due to whipsaws and the market is close to finally taking a direction. I would agree though that chances are much higher for bitcoin to not whipsaw for years but take a direction.

However, in contrast to trendfollowing, fixed allocation does indeed solve the enormous risk exposure and volatility problems a buy and hold has. By selling as it goes up and buying as it goes down your exposure remains limited and the volatility of the up and down move is less. It is true however that a fixed allocation will also fail if bitcoin fails because you continue to buy more coins as it goes down. Therefore a fixed allocation strategy also needs a limit where you stop buying more coins. For me that limit is around $30 as a fall below that indicates for me that bitcoin might fail. And if the price would exceed new highs of $266 the coming months I will also stop selling as indeed, although chances are low, a black swan may take bitcoin to $1000 in no time too, in which case a fixed allocation would be very painful too.

It remains speculation, and every strategy will sooner or later fail to perform. Be that buy and hold, trendfollowing, or fixed allocation. When chances are high for it to go up strongly, a buy and hold is the best. When chances are high for it to correct strongly or whipsaw for a while, a fixed allocation is best. And when chances are high it will fail completely trendfollowing is the best so that you are out completely.

And every strategy fits a certain personality. I cannot bear to sell an investment that I believe is priced very cheaply as trendfollowing forces you to do. I rather stop buying more and see it go to zero. So for me I prefer to switch between fixed allocation and buy and hold but like to use trendfollowing crossovers (edit: I use historical price analyses) to decide when

Buy and hold has two great advantages. The first is that it is effortless. The second is that you don't need to know anything about trading. If you believe in bitcoin for the long run then IMHO it is the best strategy for the vast majority of ordinary people.

But avoid leverage. It can wipe you out or at the very least give you a horrible sick feeling (I speak from experience....)

If you follow such a strategy, say, deciding to keep a balance of 50% btc and 50% fiat, the first obvious question (that you answered now) is "on which interval should I execute trades?".

You say during volatile time you trade daily, but that's only a partial answer: on a volatile day, price can wildly swing up and down, unrelated to where it will end up finally.. If you would execute your strategy on each of those swings, you'd be broke, because each time you lose some value to fees and slippage. But you say that much in your own post.

So in reality you will probably set yourself some limits, e.g. "if price continues to fall throughout the day, I buy at the end of the day", or something like that. You use your intuition.

My claim is: you're basically following a simplified and intuition based version of an algorithmic trend following method, for example like the one described in Goomboo's thread. (yes, they're not identical strategies, for example the entry/exit points of both strategies are different, but they are principally related: they both wait for trends to manifest, and then attempt to sell higher than the point at which you bought, and vice versa.)

I'm not saying everyone should use an average crossover method like the one described in Goomboo's thread, but my point is, if you use a fixed allocation percentage strategy, you're almost half-way there to use TA to guide your trading. The only difference is that, instead of looking at derived indicators, you're basing your trading decisions on the price directly, filling in the blanks with your intuition.

Nothing wrong with that, but my point is, it's not fundamentally different from using a more algorithmic method, which might have the additional advantage to reduce the influence your emotions have on your trading.

Thank you very much. You are very kind. Your explanations are very helpful for me.

On average I check prices daily. If it is very volatile I trade several times a day and check prices hourly. If price is stagnant I start to check prices less and end up forgetting to check it every other day. My strategy only requires trading when prices change.

A lot depends on the size of your capital since every transaction has a cost, not just the exchange fee, but wiring funds, your own time, etc. So if your capital is small it makes economical sense to have much wider balancing triggers. My target currently is 18% btc. If it becomes 19%, just 1% more, it is already worthwhile to do a trade for me since the capital is large enough. But for others it may be only worthwhile if btc goes up or down 5% in size in their portfolio before making a trade.

There is also some speculation coming in. If I think prices won't go higher I'm quick to sell off btc to remain within my target and lock in those profits. But if I think it will continue to go up I dare to not balance to my target and let it grow bigger for a while. For example, since price has gone up recently above $100 to the current $140 I've been thinking all along it would crash so I've been balancing quickly, ie: on every $5 up move. But likely if it starts dropping I won't balance quickly as I currently think it will fall deep, so I'll probably balance only on every $10 down move.

But yeah I'm behind the screen daily.

Trust myself or trust in you?  I prefer to trust anyone who knows before myself

Buy as you can afford.

How often do you adjust buying or selling BTC to fulfill the percentages? each day, week, month...?

You can help faith a little by showing patience and waiting for the right moment for a trade.

Speculation is a fancy word for guessing. I don't think that most people realize that this is true even for big time NYSE speculators. The best of the best on Wall street rarely do better than random chance.
No one has the answer you seek. There is only guessing about what the squiggly line will do next.

The trouble with that is most people tend to have extra money at the same time as everyone else due to macroeconomic influences.  Unless you are the first to get extra money, you are paying a premium over dollar cost averaging or some other strategy that doesn't buy at the same time as everyone else.  Just include the purchase in your budget and execute it on a schedule.

Interesting strategy, I like it. 

When I say buy and hold I'm thinking years not months though. You're entry point won't matter much if bitcoins are worth multiples higher than you paid years from now. Its more like the 'stacking' mentality that precious metals bugs have. Add more when you can, don't sell.

Thanx. Invaluable a  contribution.

In the hedge fund world this is called 'trading around your position' and was a strategy used by 'Jimmy Balodimas' that succeeded to make money even when he was wrong in the market, thanks to this strategy as well as a control of his emotions.  

This is a great interview with Jack Schwager who studied successful traders and mentioned this around 16min:
http://www.youtube.com/watch?v=AqCOw-pja7E

 

Which one? mine say me nothing.

Thanks

It worked wonders for me.

The only tricky thing is to decide how much of your capital you want to allocate to bitcoin.

I chose for 30% long term. However I added something extra. If price is relatively expensive (meaning price is above the 200 day moving average) I want a lower exposure than my long term target of 30%, if price is relatively cheap (below the 200 day moving average) I want a higher exposure than my long term target of 30%.

Currently my exposure is 20%, 16% to btc and 4% cash on the exchange (meaning I chose 80%/20% btc/cash) because the price ($104) is currently above the 200 day moving average ($86), so relatively expensive. If price goes down I am not only buying more to balance my 80/20, but also to raise my current 20% exposure to 30% and possibly even 40% if price goes considerably below the 200 day moving average.  

This is basically a turbo put on the strategy so that you end up selling even more as it goes up, and buying even more as it goes down.

I plan to continue this strategy for the time being as chances are low we go up soon. However once you go into a parabolic rise this strategy leads you to sell too many bitcoins too soon. So there are times where you want to change to a buy and hold, letting your bitcoins grow to possibly 90% of your capital, and only reactivate the strategy when the parabolic rise is starting to become dangerous.

So during the rise from $13 to $266 this year I only sold some bitcoin at $70, but realized it was not smart as chances were high we would go into a mania like 2011, so I stopped selling and only relaunched the strategy when we went over $150. Even then I didn't stick to the plan and was selling to keep it down to 30% of my capital but I should have reduced to 15% because the price was historically high above the 200 day moving average. I didn't and lost some great profits due to this. But still my return on bitcoin since the start of the year is 1050% whereas a buy and hold has earned 'only' 650%. (Yeah, never expected to have to say 'only' 650% in my investing career )

Don't trust people, trust computers.

¡ Wow. Extremely interesting strategy !

Buy and hold does require a lot of patience, resolve and character that many fail to execute. The profits you make with buy and hold are sometimes euphoric as you haven't sold a single coin, making you considerably richer, and tempting one to buy even more on highs. Inversely the losses are sometimes enormous too, as not a single coin was sold on the high, shrinking ones capital dramatically and tempting one to sell on lows 'to at least have something left if it fails' . Depending on your entry point a buy and hold may end up showing a serious loss for over a year too. I strongly suspect that on average those that choose for a buy and hold tend to make less returns than a buy and hold would have offered due to the enormous volatility of their capital and the resulting emotional rollercoaster. 

Hence why I think a fixed allocation strategy is a better solution for most. Instead of allocating all the reserved bitcoin capital immediately. Allocate only say 75% and keep 25% in cash. If price goes up and your bitcoins become more than 75% while your cash becomes less than 25%, sell some so that you remain with 25% cash. If price goes down, and your cash becomes bigger than 25% and bitcoin less than 75%, buy some btc so that it's balanced again. This way you are forced to sell on highs, and forced to buy on lows. Even if you don't always execute this strategy as greed and fear take you over, at least you won't do the inverse! Your end result will be that your ride up and down is less volatile, and your profits will likely be higher than a buy and hold.