It happens to everyone at some point. No one is ever safe in this game. You can do everything right. you get funded. you take a payout. you build your fortress. you feel like a professional. and then the market shifts.
What was working, stops working. The clean trends turn into chop. you take a loss. then another. you’re not in "crawl, walk, run" mode anymore. You're lucky just to be in "crawl” mode. maybe you aren’t even losing. you’re just... stuck. you show up every day, execute your plan, and end the week flat. for a month.
This is the great test of a trader. not the big win. not the first loss. it’s the long, grinding, soul-crushing plateau. The plateau makes you question your edge.
Your ‘Portfolio ATH’.
Your portfolio peak or all-time high net worth shouldn’t stick in your mind. It’s not important. your current PNL, especially if it's unrealized, shouldn't be taken for granted. the core premise is this: it matters less how much you make, and matters more how much you keep.
As mentioned in a previous chapter, most people (voluntarily or not) tend to fall into one of two buckets: make less and keep more, or make more and keep less.
What you must avoid is some shitty middle ground, incorporating the worst of both, where you make less and keep less.
You don't get prizes for huge unrealised PnL and roundtrips. All-time high screenshots don't pay the bills. There are unsuspecting but vicious traps that you must avoid when faced with these numbers. The first trap is assuming that the rate of growth in your portfolio will remain linear (or continue to accelerate).
The sobering truth is that the heavy lifting is being done by the broader market conditions, not by some genius trading breakthrough on your behalf.
I don't fully subscribe to the dismissive "everyone's a genius in a bull market" argument, but people don't give enough credit to exceptional market conditions when it comes to assessing their current performance.
It is important to be humble and give yourself a pat on the back for sticking around and making money in these conditions, but at the same time recognise that they are anomalous and not a permanent fixture.
Herein lies the first trap: assuming that this is the 'new normal' and specifically that your trading will continue to yield the same results indefinitely, and your portfolio will continue to grow at the same rate. Plainly, that is very unlikely to be true.
First, the same market conditions don't last forever. They will shift. If you trade the same way then as you do now, you will make less money (or lose money).
Second, trading edges erode and decay, so even if market conditions were to persist indefinitely (extremely unlikely), the likelihood of your system continuing to print the same way is vanishingly low.
Third, as your portfolio grows exponentially, you can't expect the same radical multiples on a larger amount of capital. You start to become size-constrained and hit other barriers, especially as the cycle/trend progresses and the bandwidth to be very early to stuff (and to do so in size) is reduced.
Fourth, materially increasing your position size in a very short period of time will likely fuck with your psychology, and by extension, your execution. If your entire portfolio was $50,000 a few weeks ago and now that's the PnL of an underwater trade, your mind will start to play tricks on you. It takes a while to 'adjust' and to catch up to trading much larger sizes, and that adaptation is difficult to speed up. There are other constraints here too such as having to deal with market impact (not a concern for smaller operators) and some strategies becoming straight up unprofitable past a certain size threshold, but in any case, you can't expect to be flawless in your execution after a massive leap in your position sizing.
This list is non-exhaustive, but should convey an important point: don't assume that your trading PnL and these market conditions will last forever.
Making the mistaken assumption described above typically leads to two significant errors.
First, as mentioned, traders will assume that the trading style and strategies that worked early on will continue to work in the same way. That is not likely to be true forever, and you'll quickly run into roadblocks - a lot of strategies simply don't scale.
The significant error arises when traders don't reality-check their strategies and continue to size up significantly as volatility increases at the same time.
Suddenly, a bit too much leverage, a bit too much market impact, and way too much panicking can lead to massive dents in a trader's performance (and portfolio) when caught on the wrong side of a move.
This is further fueled by ego and stubbornness i.e. "This shit worked for me and I made $ trading it, why would I change now?" type of reasoning.
I know this particular point is repetitive, but you'd be surprised how easy it is to psyop yourself that you're God's gift to trading after you make a lot of money in a short period of time.
It becomes trivially easy to give no credit to market conditions, no credit to simply being lucky, and to explain all your returns by reference to your (misdiagnosed) newfound trading ability.
By the time you realise that the lion's share of the credit was the market's - not yours - it's usually too late. The second significant error is spoken about less - it's lifestyle creep.
Traders will look at their portfolio growth and returns over a short trading period and extrapolate that to how much they would make in one month/quarter/year, and so on.
Twitter doesn't help - someone always has a nicer watch, car, Dubai lambo, PnL screenshot, and other objects of envy, which make you feel like nothing is ever enough.
As a result, it is common for traders to massively upgrade their lifestyle and start spending money they don't really have, riding high on short-term results (irrationally extrapolated into the indefinite future).
When things slow down, you're in too deep, and reverting massive lifestyle upgrades are a blow to the ego as well as impractical in many cases.
To summarise, these market conditions can one-shot your brain.
- Do not assume that these conditions will persist forever.
- Do not assume that your strategies will continue to return and scale linearly, both in terms of time but also size.
- Do not assume that you'll be able to enter, manage, and exit trades the same way (execution-wise and psychology-wise) after a quantum leap in your position size.
- Do not assume that you've cracked/solved the market and can do this forever.
- Do not use current market conditions as an index or reference price for what your income will look like forever.
- Assume you're a fallible, ego-prone human who got lucky, and exercise that humility by reality-checking yourself, your strategies, and most importantly, your ego.
- One of the most common mistakes is looking at the USD value of your portfolio and counting that as (effectively) money in the bank.
As a general premise, you shouldn't count any gains as realised until they're in fiat in your bank account with the appropriate tax liability set aside for them.
Sounds boomerish and boring, but I've witnessed a LOT of traders (every cycle) literally go from tens and sometimes hundreds of millions to break even and at times even legally bankrupt. It is a serious matter.
The way I like to visualise portfolio balance vs real money is via Matroyshka dolls.
Your unrealised PnL is the first, biggest doll. The actual money you keep and can use in the real world is the last, smallest doll. And there are a bunch of dolls in the middle. The dolls get progressively smaller between the first and the last doll.
(You can also use layers of an onion for this analogy, but whatever)
When we look at our portfolio balance/unrealised PnL - especially if it's deployed in the market and fluctuating based on directional bets (with varying degrees of liquidity) - we need to start applying some sort of discount rate to that number.
The probability of that exact amount landing squarely in your bank account and being 100% deployable is close to zero, not least because in most jurisdictions the tax obligations alone will mean that even if you make money, you still forfeit some of it to the state.
Taxes aside, there are other more practical discount mechanisms that should be applied to a portfolio. In line with Part 1 of this chapter, you need to start baking in a discount that reflects your nearly inevitable fuck ups along the way.
Here are a few of the big ones.
1. Timing
The probability that you sell everything at the exact top is very low.
That simple fact means you'll most likely never realise your exact portfolio peak.
Naturally, there's a range of outcomes here ('panicking' early and realising a majority on one end, full roundtrip on the on the other end, and a bunch of stuff in between). Ideally you end up as close as possible to the former, but these things are inherently difficult and you should exercise some humility and give yourself some bandwidth to fuck this up. As a reminder, the priority is keeping as much money as possible, so there's no room for ego here (a theme that will be recurring).
If I could mention crypto here, even the sharp traders in 2021 generally derisked when the BTC all-time high 'breakout' started looking shaky back below $60,000, and that was a whole ~15% from the top. At the time it seemed like you were 'late' relative to the top, but given the magnitude of the downside move that followed, it ended up being a fantastic trade.
For context: that's a 15% haircut on just BTC, and that's if you were early. Some major altcoins were down double or even triple that in % terms. These haircuts are significant, even if you get the timing generally right. If you don't (and you shouldn't expect to), the haircut is even bigger. In summary, you should assume that you're not going to sell the top (hopefully an uncontroversial premise) and be comfortable with giving back a significant amount to the market relative to your peak just from that.
2. Buying The Dip
Market conditions are habit-forming. It is hard to immediately break from those habits, especially if they made you money (especially recently).
A bull-market is at least equally formative for your trading habits (probably more potent given you're actually making more money) and so the same pitfalls apply.
Namely, if the market has been rewarding you for buying dips on virtually every single time frame and conditioning you to believe that every dip is a discount that'll eventually resolve higher, the likelihood that you buy the first dip after the top is fairly high.
Or at the very least, in line with our zen humility self-reflective wannabe stoic BS, you should assume you're fallible enough not to recognise the top and instead buy the breakdown (which will look like a good discount in the moment).
If you're sharp, you may recognise that the dip is different from others and isn't resolving as it ordinarily would.
The concurrent fact of 1) solid initial reaction from clear technical levels; and 2) fuck all trend continuation, is what ultimately shafts traders.
If you're sharp, you're actively trading your tits off and treating these as medium-term trades while derisking (or having already derisked) the long tail/speculative part of your portfolio. That's pretty close to the 'best case' outcome for trading post-top bounces (pause).
If you're less fortunate, you're basically adding the entire way down, hoping the bounces resolve in new highs like you're used to (they don't) and you roundtrip basically everything when the breakdown happens.
These bounces are fantastic bait to get traders complacent and/or adding to their bags, and it's a huge risk to your portfolio relative to its high.
In many cases, traders will shove their dry powder/profits/realised PnL back into the market and increase their net exposure after the top has taken place and before the breakdown occurs. It's rough, but extremely common.
You can also start to see how all these discounts are unfortunately cumulative.
You don't sell the top (discount #1) —> you buy the dip on the way down and burn your dry powder/increase exposure, but it keeps dipping (discount #2), and eventually you either baghold or eat shit (discount #2.5).
Again, these aren't excerpts from a fantasy novel. This is real and familiar. It's certainly familiar to me, and I'm sure many of you who've been around for at least 1 full cycle have seen this exact behaviour (or have done it yourselves).
In summary, you should discount your portfolio peak even further to account for the decently high likelihood that not only will you miss selling the top, but there's a significant risk that you get blown out buying the first pullback(s).
3. Overtrading the Distribution
This is similar to (2), so I will try to avoid repeating myself. Depending on the cycle, instrument, and time frame, shit can get choppy at the top.
Chop is a relative term in this case - the actual distribution needn't be long, but if you're trained to ape every low time frame green candle, it feels like a lifetime.
Buying the dip that keeps dipping (or at least doesn't resolve in a new high) is one risk, but getting chops to bits after getting used to trading a trending market is another risk.
Especially towards the tail end of a cycle, stuff goes up a lot every day and the only way to get an entry is via extremely aggressive low time frame trend following strategies. If you continue to deploy those strategies when the market is distributing or going sideways, you'll lose money.
(For what it's worth, that in itself is a pretty good indicator of a change in market conditions. If your low time frame trend following system has been consistently printing, and then suddenly it starts eating shit across the board beyond normal variance, you should take that as a serious signal that something may have changed.)
In any case, whether it's buying a dip that's too shallow or being too aggressive in chasing a trend that no longer exists, the effect is the same: you are likely to lose money when your bull market strategies stop working.
4. Market Impact
Remember the last time you had a really blocked nose? Most of your time is spent castigating yourself for being so ungrateful when you could breathe properly.
But when you can breathe properly, you typically don't spend time thinking about it. Liquidity is similar - we take it for granted, and then immediately notice when it's gone.
If you're trading significant size and/or your portfolio has a bunch of lower market cap, lower liquidity assets in it, you must seriously consider two things.
- First, the market impact that will come as a result of you selling with a high degree of urgency.
- Second, the exacerbated market impact if you do so at an inopportune time (e.g. yeeting market sell orders into an empty bid-side book during a cascade of red candles).
Slippage directly eats your PnL, so there's an inherent discount there relative to your portfolio peak.
When things go to shit, correlations converge towards 1, and everything gets sold- with the newer, less liquid stuff typically being first on the chopping block (which means worse execution and bigger PnL loss for you).
Similar to the section on buying the dip, there's a real bait (or in this case psychological cope component) that may form. "It's down so much, why would I sell now?" Another popular version is "It's down so much, I might as well wait and sell the bounce."
In most cases there is no bounce to sell, and traders vastly overestimate their ability to sit through drawdown, time a mean reversion, and fully derisk on the bounce (even if one takes place). The main culprit here is ego - selling "late" makes you feel dumb for not selling early, so as a result you don't sell at all and lose even more money.
In summary, the more illiquid/speculative your holdings, the bigger discount rate you should apply to your portfolio peak.
5. Revenge Arc
The all-time classic. You've gone through the first 4 points (with varying degrees of success) and now there's a big gap between the balance in front of you and the balance you saw yesterday (or whenever your peak took place).
It's far enough to make you feel stupid and regretful, but close enough to make you feel like you can bridge the gap in a few good punts. The perfect cocktail for a colossal fuck up via compounding errors. Cue revenge trading. Virtually no need to expand on this section. Every single one of us has revenge traded before.
Ego-driven, irrational, desperate trading. Clouded mind, entirely result-oriented (versus process-oriented).Digs a deeper hole 9/10 times. The risk here is extreme: it is scarily easy to undo months of progress in one tilted stint of revenge trading.
6. Conclusion
The goal of this chapter is to provide sufficient grounding so that your portfolio peak doesn't control you and your actions. Taking that number at face value and indexing too heavily on it can, without exaggeration, lead to your ruin. The framework proposed here - whereby the portfolio peak at any moment in time is viewed sceptically with discounts layered on top of it - is much healthier. It's more realistic. You'll panic less. You'll keep more money. You won't blow up months/years of progress chasing some number that was never real in the first place.
PART VI: LONGEVITY, SCALING & PHILOSOPHY