System

I Have A Problem

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Here are some examples of bad trading behaviors and errors I made this year.

I made 100k. And then lost it.

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I made the following buys year end 2024 and Jan 2, 2025:

First txn, second, third.

For about 2.8M UOS. Total bet size was about 7K at the time.

If you look at the coingecko graph, you see that it went up to $.024, but actually it went up to $.034-ish on a finer granularity. I remember clearly because I was looking at my Phantom wallet, and it went up to $120K.

I sold to cover here for a tiny profit. And I never took a screenshot of the $120K because I thought screenshots were bad luck. After taking out the $10K, it was about $110K left.

Well, it crashed anyways. And over a few weeks I slowly watched the $110K crumble into almost nothing. If I hadn’t sold out, the same tokens would be worth about $50. Or a 99.95% drop.

The rule here is if it’s some sort of shitcoin meme, you should just sell if you run a 10X and then see it start to dip. This is because there’s no amount of conviction or fundamentals.

It can go up as easily as it can go down because there’s no logic supporting it. So it’s stupid to hold (or even buy in the first place).

But if you gamble with these, you need a system.

Losing $70K then earning it back.

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I made a fair amount of money last year shorting binary events.

I shorted quantum as it is overpriced. However, the fraudulent prices were inflated longer than expected. So I watched my shorts erode away my gains and gave back $70K. I eventually had to convert them to puts to limit my losses.

Then I earned it back on shorting another binary.

Example system for this would be 2 rules:

• Shorting binary events, can go in relative to your conviction. You’re guaranteed to know whether your thesis is right or wrong by a certain date, so it is really betting on experimental results.
• Shorting things that don’t have an end date (quantum) should be short-term. If it doesn’t work out immediately, get out. Otherwise you run the risk of a slow bleed.

Emotional/revenge trading

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As the market is crashing, I’m currently involved in some emotional/revenge trading. Shorting quantum yet again, and finding spikes pre-market to short if the fundamentals don’t work out. For example:

A merger is announced with company A and company B. Stock for company A goes up 200%. You find out that company A is almost bankrupt. So you look at company B’s assets to see if there’s potential profit. But copmany B only has 1 failed drug in their pipeline, so it is also destined for bankruptcy. A short premarket is good and scalped roughly 10%.

Another example: A biopharm company is rewarded with $300M upfront and potentially 3.5bn from $LLY if their drug works. Well, LLY is not known for being so great with their investments (ask $NKTR), and the 3.5bn isn’t guaranteed. The company’s stock went up $600M premarket though. I shorted that. Scalped 10%.

Or buying $HUT because Eric Jackson on X keeps pumping fraud stocks so I thought I might have a go at it (lost money).

Or trading short-dated ITM $CRCL options because I saw $1M+ in heavy OTM calls, and this was reminiscent to a trader doing the same thing before AMD announce their OpenAI partnership. Of course, I lost 100% on that one. And of course n=1 doesn’t mean it’s a strategy.

There’s no system here and emotional/revenge trading should be avoided.

Because like the crypto example, it can go up or down, and if there’s no conviction nor edge, you’re forced to put in a stop loss and keep getting knocked out. Even in the short-scalping examples: I am good at it and have a good track record, but there’s no real certainty it won’t bump up 10% and knock me out. The profits are reliant on 2 things:

1. There exists common sense in the market.
2. Time that common sense resumes in the market is short.

Whereas fundamental longs only relies on 1) primarily and you can hold positions for a very long time.

Short-scalping assumes 2 as well (i.e. market is relatively efficient). Could be true some days, not others.

But you can turn short-scalping into a system if you collected data on the % odds of profitability and then impute a Kelly position. This creates conviction that you have an edge long-term and those won’t be very emotional even if you lose 5 days in a row (because you know from the law of large numbers you’d win long-term).

The Problem

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Emotional trading is addictive because entry/exits are easy.

And it is easy to be fooled into thinking you’re skilled when you’re just temporary lucky.

So you increase your positions, thinking that “heads” will come up one more time.

And then you get got.

But hey, no crying in the casino.

As humans, we think we are above monkeys. But we are simply monkeys. Emotional discipline is improbable if not impossible in the markets. If it was so easy, everyone would be rich in the markets.

The best way to not get emotionally involved are really 2 styles of trading:

1. Quantitative investing
2. Value investing (long-side only)

Both of these require you to look away from the markets and not ‘watch the tape’ 24/7 like a crack addict. Being a tape addict is also emotionally exhausting, not to mention not profitable.

I don’t know why I do it!

System

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In poker, you can gamble with a 27o. You’ll likely lose. But if you hit it big, it doesn’t mean that the system works.

But in poker, the numbers are transparent and easy to calculate. So it is easy to retain emotional discipline while executing the mechanics of betting.

In the stock market, everything’s opaque, so it’s hard to know whether what cards you’re holding unless you do a lot of data collection.

Both value and quant investing requires tons of data collection.

Great data and insight in value investing builds conviction, and you’re more likely to make good logical trades. Warren Buffett has done this with great success as have many others. And it’s a lot less emotionally tolling than watching the tape.

Great data in a quant strategy also builds conviction. Imagine a statistically significant strategy that outperforms SPY for the past 42 years. Doesn’t mean it will predict future performance, but you’ll have tons more conviction it will do very well vs. some new stock you just heard about today that you want to long/short.

Systems will outperform the emotional trader, that is obvious to everyone already. But I think the most rewarding part of systems is that you can emotionally disengage. Which allows you to compound the logical part of your brain to make the systems even better, further compounding your growth.

So I’ll try my hand at quant investing on the side as I’m inspired by this video. And I’ve had some decent success with value investing.