Author:Cred
Compiled by: TechFlow
Your portfolio peak or all-time high net worth does not represent your true wealth.
Even your current portfolio or profit and loss (especially the unrealized portion) cannot be taken for granted.
The core idea is: How much you make is not important, the key is how much you can keep.
As I mentioned in my previous article, most people (whether by active choice or passive result) will fall into one of two situations: either they make little but keep a lot, or they make a lot but keep little.
What you must avoid is a terrible middle state - making little and keeping little, which is the biggest failure.
Unrealized huge gains and assets returning to the starting point do not bring any real value.
Screenshots of all-time high returns cannot pay your bills.
When faced with these numbers, you need to be wary of some hidden but dangerous traps.
Many people mistakenly believe that the growth rate of their portfolio will remain linear, or even continue to accelerate.
However, the cold fact is that the main force driving the growth of your wealth is often the overall market conditions, rather than your personal trading ability.
Although the saying "everyone is a genius in a bull market" is somewhat one-sided, people do often ignore the huge impact of abnormal market conditions on their results when evaluating their own performance.
Persisting and making money in these favorable conditions is commendable, but you should also remain humble and recognize that these conditions are only temporary, not permanent.
The first trap is: Mistaking the current market environment as the "new normal" and assuming that your trading results and portfolio growth will be maintained indefinitely at the same level.
In fact, this assumption is almost impossible to hold true. Why is this assumption wrong?
First, the current market conditions will not last forever. If you continue to use the same trading approach, you may make less money or even lose.
Second, your trading strategies will become less effective. Even if market conditions remain unchanged (which is almost impossible), the effectiveness of your trading strategies will gradually weaken.
Third, as your portfolio grows, it becomes increasingly difficult to achieve the same high-multiple returns on a larger scale of capital. The larger the scale, the more constrained your flexibility and ability to seize opportunities.
Fourth, a rapid increase in position size in a short period of time may disrupt your psychological state and affect your trading execution. If your total assets were $50,000 just a few weeks ago, and now that's just the floating loss of a single trade, your mindset may collapse. This psychological adaptation takes time and cannot be achieved overnight.
These factors indicate that you should not assume your trading profits and the current market conditions will last forever.
This mistaken assumption usually leads to two major problems:
First, traders believe that trading strategies that were effective early on will continue to work. However, both the market environment and the applicability of strategies will change, and many strategies cannot be scaled up to larger sizes.
Traders, without realistically testing their strategies, continue to significantly increase their positions as market volatility intensifies, often leading to severe consequences.
Just a little too much leverage, a bit more market shock, and a touch of panic can cause traders to suffer huge losses when the market reverses, even dealing a fatal blow to their portfolios.
Worse, this situation is often accompanied by arrogance and stubbornness, such as the mentality of "This strategy has made me $N before, why should I change it?"
Although I have mentioned this issue many times, you may be surprised at how easily people can self-delude themselves into thinking they are "trading geniuses" when they make a large amount of money in a short period of time.
In such cases, people often ignore the importance of market conditions and are unwilling to admit that they were just lucky, mistakenly attributing all their gains to their so-called "newly discovered trading abilities".
By the time you finally realize that the main driver of your profits is the market, not your own abilities, it is usually too late.
The second common mistake is "lifestyle inflation", which is rarely mentioned.
Many traders, based on the short-term growth of their portfolios and profits, rashly speculate on how much they can earn in the next month, quarter, or even year.
Social media, such as Twitter, exacerbates this mentality - there are always people boasting about more expensive watches, more luxurious cars, more extravagant Dubai lifestyles, and envy-inducing PnL screenshots. This makes you feel that your achievements are never good enough.
As a result, many traders significantly upgrade their lifestyles, starting to consume wealth they don't actually have. This behavior is usually based on a blind optimism about short-term gains, and unreasonably extrapolates them into the future.
However, when the market cools down, you may already be deeply entrenched, and significantly reducing your lifestyle not only hurts your self-esteem, but in many cases also seems unrealistic.
In summary: The current market conditions may lead your thinking into a dangerous state:
Do not assume these conditions will last forever.
Do not assume your strategies will continue to bring linear growth, whether in terms of time or capital scale.
Do not assume that you can still manage your trades the same way (both in execution and psychologically) after significantly increasing your positions.
Do not assume you have fully mastered the market rules and can remain profitable forever.
Do not use the current market conditions as a reference for your future income.
Assume that you are a person who makes mistakes and is easily arrogant, and that your previous success was more due to luck. Examine yourself and your trading strategies, especially your arrogance, with this humble attitude.
A common mistake many traders make is to view the dollar value of their investment portfolio as actual wealth that has already been earned.
But that is not the case.
Usually, until your gains are deposited into your bank account in fiat form and the taxes are set aside, all the profits are just "paper wealth" and cannot be considered true income.
This may sound old-fashioned and boring, but I have seen too many traders (almost every market cycle) fall back to breakeven or even legal bankruptcy from assets worth tens or even hundreds of millions of dollars.
This is not an exaggeration, but a very real problem.
I like to use Russian dolls to visualize the relationship between "portfolio balance" and "actual available funds".
Unrealized P&L is like the largest doll, the most superficial number you see.
The funds you can ultimately keep and use in reality are the smallest doll.
In between, there are many gradually shrinking dolls, representing various factors that can lead to a shrinkage of your capital.
From the largest doll to the smallest, your wealth will gradually diminish until only the part that truly belongs to you remains.
(Of course, you can also use the layers of an onion as an analogy, but Russian dolls may be more intuitive.)
When we look at our portfolio balances or unrealized P&L, especially when these assets are still fluctuating in the market and rising and falling with the directionality of our bets (with varying degrees of liquidity), we need to apply some kind of "discount rate" to these numbers.
In other words, you need to recognize that the probability of the full amount in your portfolio ultimately entering your bank account and being 100% freely disposable is almost zero.
This is not only due to the volatility of the market itself, but also because in most countries and regions, tax obligations alone will take up a large portion of your gains. Even if you sell at the highest point, you must pay a portion of the profits to the state.
In addition to tax factors, there are some more practical "discount mechanisms" that need to be considered in your investment portfolio.
As mentioned in the first part of this article, you need to reserve a certain margin of error for the almost inevitable mistakes you will make. One of the main problems is as follows:
1. Timing issue
The probability of completely clearing the market at its peak is almost negligible.
In other words, it is difficult for you to truly achieve the peak return on your investment portfolio.
In reality, the results usually fluctuate within a range - from "panicking and selling too early, locking in most of the gains" to "experiencing the full cycle of ups and downs and returning to the starting point", as well as various situations in between.
Ideally, you can get as close to the former as possible, but this is a very difficult task in itself. You need to remain humble and accept the fact that you may make mistakes.
Remember, the most important goal is to preserve as much capital as possible, not to prove that your judgment is flawless. Arrogance has no place.
Even the experienced top traders in 2021 mostly chose to gradually reduce their risk when BTC's historical high of $60,000 was broken and the trend began to appear unstable, which was about 15% away from the peak.
At the time, this operation might have seemed like "missing the top", but considering the subsequent sharp market decline, it was actually a very successful trade.
For reference, the BTC drawdown alone reached about 15%, which is considered an "early exit". Some major Altcoins even fell two or three times during this period.
Even if your overall timing of the market is relatively good, such a drawdown is still very significant.
If you misjudge the market timing (which is very likely), the losses will be even greater.
In summary, you need to accept the fact that you are unlikely to sell at the market's absolute peak (hopefully this is a recognized premise). Therefore, you must face the fact that due to timing issues, your investment portfolio will inevitably give back a portion of the peak value to the market.
2. The trap of buying the dip
The market environment can form fixed trading habits.
Especially when these habits have previously brought you profits (especially if you just made money recently), it is very difficult to quickly get rid of these habits.
In a previous article, we discussed BitMEX and bear market post-traumatic stress disorder (PTSD). In bear markets, traders are often trained to do mean reversion trades in short time frames and take the opposite position in almost all other cases.
The impact of the bull market on trading habits is at least as profound, if not more so, because you actually make more money in a bull market. In this environment, you may fall into a similar trap.
Specifically, if the market rewards you for buying the dip at almost every time frame, and you form the belief that "every dip is a discount and will eventually rebound", then when the market first corrects after reaching its peak, you are likely to choose to continue buying.
Or at least, with the "humble and introspective" attitude we advocate, you should admit that you may not be able to identify the market top, and instead mistakenly think the market dip is a discount opportunity and buy in.
If you are perceptive enough, you may find that this dip is different from the past and does not recover as quickly as before.
There are some data points that can help judge this situation (such as the scale of liquidations in open interest (OI) - if the liquidation scale is very large, it usually means the trend may be reversing, but we will discuss this in more detail later).
However, it is not easy to judge these signals in the moment.
The difficulty lies in the fact that even if the market has peaked, it may still experience some seemingly "golden opportunities" for dips, as they are often accompanied by strong initial rebounds.
For example, the "false" historical high of BTC in November 2021:
At that time, the price had a huge lower wick and a strong rebound from the low to the mid-$40,000 range, but it did not continue the trend and did not set a new high.
Subsequently, the price also had a similar strong rebound at the $35,000 support level, but again failed to continue the trend and did not set a new high.
These rebounds, although seemingly tempting, are actually "illusions" after the market has peaked. If you cannot identify them in time, you may be induced to continue buying during these rebounds, ultimately leading to greater losses.
Two things happening simultaneously often trap traders: 1) the price has a strong initial rebound from an obvious technical support level; 2) the rebound does not continue the trend.
If you are perceptive enough, you may seize these rebound opportunities and view them as medium-term trades, while actively reducing risk (such as reducing exposure to long-tail assets or high-risk speculative assets in your portfolio). This operation is already close to the "best practice" for trading the rebounds after the market has peaked.
But if you are unlucky or lack experience, you may continue to increase your positions during the decline, hoping that these rebounds will create new highs like before (but the reality is, they won't). Eventually, when the market completely collapses, you may end up giving back almost all of your previous gains.
These rebounds are often "baits" thrown out by the market, which can make traders complacent and even continue to increase their positions. But this behavior is a huge hidden danger for your investment portfolio, as it will cause you to take on greater risks after the market peak.
Especially in the period between the market peak and the real collapse, many traders will reinvest their cash reserves, profits, or even realized gains back into the market, further increasing their net exposure.
This situation may seem absurd, but it is very common.
More importantly, these "discounts" are actually cumulative:
First, you did not sell at the market top (Discount #1);
Then, you bought the dips during the decline, consuming your cash reserves or increasing your exposure, but the market continued to decline (Discount #2);
Finally, you either choose to hold these losing assets long-term, or you have to painfully cut your losses (Discount #2.5).
This is not a fictional scenario, but the real experience of many traders. For me, this pattern is all too familiar. I believe that for those investors who have experienced a complete market cycle, this behavioral pattern must also be familiar - you may have even operated this way yourself.
In summary, you need to further discount the peak value of your investment portfolio, because not only is it very likely that you will miss the opportunity to sell at the top, but there is also a great risk that you will be induced to buy during the first market correction, leading to even greater losses.
3. Overtrading during the distribution phase
The market often enters a "distribution phase" at the top, where the price no longer rises in a single direction, but begins to fluctuate and consolidate.
Depending on the market cycle, trading instrument, and time frame, this fluctuation may be a brief sideways consolidation, but for investors who are used to seeing green candles and rushing in to trade at low time frames, this period may seem long and agonizing.
During this phase, there are two common risks: one is buying the dips, but the price continues to decline (or at least does not create new highs); the other is that traders who are used to trending markets frequently operate in the sideways market, and ultimately get slapped in the face repeatedly, suffering heavy losses.
Especially in the late stages of the market cycle, asset prices may be rising sharply every day, and the only entry opportunity may be through an extremely aggressive low-timeframe trend-following strategy. If you continue to use these strategies when the market enters a distribution or sideways consolidation phase, losses are almost inevitable.
In fact, the failure of this strategy itself is an important signal of market changes. If your low-time-frame trend-following system has been performing well, but suddenly starts to fail across the board, beyond the normal range of fluctuations, it is likely that the market environment has changed.
Whether it is because of buying the dip but encountering a pullback that is too small, or because of blindly chasing a trend that no longer exists, the result is often the same: when your bull market strategy fails, you are likely to suffer losses.
4. Market Impact
Do you remember the feeling of having your nose completely blocked?
At that time, you may have regretted not cherishing the ability to breathe normally.
Liquidity plays a similar role in the market - when it is abundant, we often overlook it, but when it disappears, the problems will immediately become apparent.
If you are trading with a large position, or if your portfolio includes many low-market-cap, low-liquidity assets, you need to pay special attention to two issues:
The impact on the market when you are urgently selling;
If you choose to sell at an inappropriate time (such as dumping a market order into a market with almost no buy-side), this impact can be further amplified.
Slippage will directly erode your profits, so in the case of insufficient liquidity, your portfolio will have an "invisible discount" relative to the peak earnings.
If the main assets you trade are high-liquidity ones like BTC, ETH, or SOL, this problem may not be too serious. But if your main trading is in new coins, memes, or other high-risk assets, this problem becomes very critical.
In the crypto market, there is almost no true "safe-haven asset". When the market crashes, the price fluctuations of all assets tend to synchronize (correlation close to 1), and almost no asset can escape the price plunge. The emerging, low-liquidity assets are usually the most severely impacted, which not only leads to poor trading execution, but also potentially greater losses.
Furthermore, there is a psychological trap in this situation:
"It has already fallen so much, why should I sell it now?"
Or, "It has already fallen so much, I might as well wait for a rebound to sell."
However, in most cases, there is no rebound to sell. And even if a rebound does occur, many traders overestimate their ability to withstand the drawdown and seize the moment of mean reversion.
The main problem here is pride - selling late will make you feel stupid because you didn't sell earlier. So you simply don't sell, and end up losing even more.
In summary, if your portfolio contains assets with poor liquidity or high speculation, you need to be more conservative in your expectations of the portfolio's peak value and appropriately reduce the "discount rate" of your psychological expectations.
5. Revenge Trading
This is a classic psychological trap in trading.
After going through the stages mentioned earlier in the article (with varying degrees of success), you will find that the current account balance is significantly different from the previous peak value.
This gap is large enough to make you feel regretful and self-blaming, but it also seems not too large, making you feel that you just need a few good trades to make up for the losses.
This is the beginning of revenge trading - laying the groundwork for a huge failure caused by the accumulation of mistakes.
The characteristics of revenge trading are very obvious:
It is often an irrational and desperate behavior driven by pride.
In this state, your thinking becomes chaotic, completely oriented towards short-term results, and ignoring the long-term trading process.
Almost everyone has experienced revenge trading, and the outcome is usually disastrous - in most cases, this behavior will only plunge you deeper into the abyss of losses.
The most terrifying thing is that the risk of revenge trading is extremely high: a single emotional operation can easily wipe out the results of your efforts over months or even years.
6. Conclusion
The purpose of this article is to help you break free from the obsession with your portfolio's peak value and prevent it from dominating your trading decisions.
If you are too attached to that peak value number and treat it as the only goal, it may ultimately lead to devastating consequences.
The suggestion here is: View the portfolio's peak value in a more rational way, treating it as a dynamic reference value that needs to be discounted, rather than an absolute target.
This perspective is more in line with reality:
You will reduce unnecessary panic;
You will preserve more capital;
You won't destroy the efforts of months or even years by chasing a number that never truly existed.
Remember, the core of trading is to maintain rationality, not to be controlled by emotions.
