How To Salvage After You've Been Hit By A Selling Avalanche
Have you ever loaded up on a cryptocurrency, confident that it was only a matter of time before the rocket ride takes off, only to find that a selling avalanche has buried you? That's exactly the situation I found myself in when I woke up at 7:50 AM. (All times Eastern.) I've been trading Bitshares on Poloniex since I started a daily trading diary. Trading on margin.
I got excited by the upcoming Peerplays sharedrop, whose snapshot period starts September 1st. In order to guarantee a share of the shares, every Bitshares holder has to withdraw their holdings from all centralized exchanges and hold them in a Bitshares wallet or Open Ledger until midnight GMT Sept. 16th. Since the sharedrop adds value to BTS, I was confident that it would go up. My confidence was bolstered by this comparison of Bitshares to Nxt before its Ardor snapshotting began. Seeing Bitshares trade in a stable range after a nice climb, and seeing lots of bids in Poloniex's buybook, I went long in a big way. When I dropped into bed at 2 AM, I was confident that Bitshares would either stay in its 970-1030 range or start climbing.
Six hours later, this is the six-hour chart I woke up to:
And this was the two-week chart:
Ouch! While I was sleeping, Mr. Market had handed me a painful lesson. Since I was margined up, I had to come up with a salvage plan while buried in a snowpile of red. Especially since I was margined up with a sizable loss!
In the next four hours, I not only had to come up with a salvage plan but also execute it - while wondering if I was going to be buried even further. I did it, and have made sure that I've banked some Bitcoin in case this avalanche represents a buying opportunity. I also learned how to take a loss gracefully.
This plan works! You don't have to be a margin trader to use it, either; it works even if you're less than fully invested.
Here it is, as developed and executed in blood-chilling real time:
1. Lose The Panic
Riding a huge loss is the worst time to panic. Do whatever it takes - coffee, pacing back and forth, a shower, a short walk, etc. - to get the panic out of your system.
2. LOSE THE HOPE
At a time like this, hoping your coin will bounce back is like seeing the Devil inviting you to sign an enticing contract. Do whatever it takes to lose your hope! Do not assume that it'll turn around and go back up to where it was. Don't do any buying or selling until the loss you're riding is real to you.
3. Recognize That Someone's Scary-Low Price Is Someone Else's Bargain
In a nutshell, this is the reason why downturns are ragged. Every now and then, hopeful buyers come in because they think the coin's now a bargain. These are the people you will be selling to as you put some capital aside.
4. Keep A Close Eye On The Market If You Can
For a trader-writer like me, this goes without saying :) But even if you're a regular investor, now's the time to watch the market if you can. Because, you're going to..
5. Sell In Small Chunks When The Market Peps Up
The market's turned up! Do you find yourself saying "Yippee"? LOSE THE HOPE! Once you've stifled it, sell a small chunk into the rally. If you have to concentrate elsewhere, just sell your chunk into the low ask.
6. Keep Selling In Small Chunks Until You're Comfortable
This may take a few sells; it may take several. You sells might be at lower and lower prices; they may be higher; they may be the same. Right now, it doesn't matter. What does matter is getting your exposure down to a holding you're comfortable with. When you've sold enough so that you no longer have to keep calm because you are calm, it's time to stop and think.
7. Don't Do Anything With The Proceeds Except Save Them.
The proceeds from your sales are now your reserve. Bank them - don't buy anything with them - and sit on them.
8. Ask Yourself This Important Question: "IS My Coin A Bargain?"
When you scaled down, you sold to bargain hunters while not caring if they're right or wrong. Now that you're calm, it's time to ask yourself this question. Before you answer, try to find out what went wrong. If the answer is "Nothing," you may have a buying opportunity. In Bitshares' case, I concluded that it was snowed under by punters looking to dump at any price because they wanted to chase hotties like Monero and Factom. I didn't see any reason to give up on Bitshares. This is only my bull-side-tilted opinion.
9. Take a LONG TIME To Sit On The Question
You do have a lot of time if the decline is truly over and the alt's a potential bargain. When declines like this end, the coin is listless. Folks don't know what's going to happen, so trading is quiet. This indecision gives you the time you need to chew over the question.
10a. If You DO Decide To Get Back In, Be Cautious!
Don't buy right back in, even if there is a rally in play. Watch and wait for sellers barge into the buybook; some of them will be people who are in the same fix as you. They're selling out of relief. Buy little chunks from them if you want to buy actively. If you don't want to, or if you want to hedge against another avalanche, place a lowball bid deep down in the orderbook.
10b. If You DON'T Decide To Get Back In, Consider Going Back To Steps 4 To 6
If you've lost your confidence, you might as well keep scaling down. Use the same procedures in #s 4 to 6 and save what you've got.
Through implementing these rules, I've scaled down my long exposure from about 900,000 to 600,000. Yes, I've taken losses - but I've gained a clear head that I need. More importantly, I didn't make my losses worse by panicking. If BTS is hit by another selling avalanche, I'll lose less.
As I write, Bitshares has recovered a little. As this one-day chart screenshot at 2:15 PM shows, the second avalanche has not struck...
Maybe it won't. Maybe I sold too low; maybe it will turn around. If so, I'll take the losses I've booked as a lesson for me not to get overly confident and overly extended.
Every loss delivers a lesson.
Feel free to bookmark this post if you think you'll need it for later. Thanks for reading it!