Skip to content

The Art of The Bubble

Trading Bitcoin, Cannabis and Everything Bubbly…

  • About Us
    • Welcome
    • Contact Us
    • Disclaimers
      • Results are not typical
      • Privacy Policy
  • Art of the Bubble Series
    • An Absolute Beginner’s Guide
      • Lesson 0: Why Doesn’t Everyone Do This?
      • Lesson 1: The Mechanics of Exchanges and Trades
      • Lesson 2: The Structure of the Stock Market
      • Lesson 3: The Structure of Stock and Crypto Indices
      • Lesson 4: How to Identify the Value of Stocks
      • Lesson 5: Bitcoin’s Intrinsic Value
      • Lesson 6: Why People Feel Good About 80% Losses (And How To Avoid That)
      • Lesson 7: Trading Momentum
      • Lesson 8: A 3-Step Method For Late-Start Trades
      • Lesson 9: The Simplest Way to Make Money During a Bitcoin Crash
      • Lesson 10: How to Make Money During a Crash
      • Lesson 11: What To Do When You’re Late To Exit A Crash
    • The Art of the Bubble
      • Lesson 1: Don’t Try to guess the Top
      • Lessons 2 and 3: An Introduction to Momentum Methodology
      • Lesson 4: Learn to Use Lead Indicators
      • Lesson 5 – Why Only Big Bubbles Will Change Your Life
      • Lesson 6: Use Relative Risk Assessments To Determine If You Should Trade A Bubble
      • Lesson 7: Level one strategy is the big picture
      • Lesson 8: How To Use Internal Leverage and Psychological Dynamics
      • Lesson 9: How The Broader Economic Environment Structures Your Trades
      • Lesson 10: How To Distinguish Bubbles (And How To Trade Them)
      • Lesson 11: The Art of the Crash
      • Lesson 12: Learn How To Scale Your Trades
      • Lesson 13: How To Trade A Bubble Bounce
      • Lesson 14 – Learning To Use Uncorrelated Assets
      • Lesson 15: How to Defeat The Paradox of Investing
      • Lesson 16: How To Trade as a Crypto Maxi
    • Portfolio Optimization
      • Lesson 1: The Secret to 10x Outperformance Over Bitcoin
      • Lesson 2: Statistical v. Logical Optimization
      • Lesson 3: Strategy Diversification
      • Lesson 4 : Relative Performance Analysis
      • Lesson 5: How To Make Money in All Crypto Seasons
      • Lesson 6: The Dumbest Way to Improve Your Investments
      • Our Model
  • DISCORD
  • Log In
    • Account
    • Bubble Rider Report
      • Bubble Rider – Stock Ticker
        • Bubble Rider – Stock Ticker Archives
      • Bubble Rider Report – Archives
    • Crypto Rider Report
      • Crypto Ticker
        • Crypto Ticker Archives
      • Crypto Rider Report – Archives
    • DIY-er Report
      • DIY-er Ticker
        • DIY-er Ticker Archives
      • DIY-er Report – Archives
  • Free Newsletter
Watch Online
  • Home
  • 2021
  • June
  • The Most Important (Big Picture) Lesson For Traders

The Most Important (Big Picture) Lesson For Traders

7 min read

How The Broader Economic Environment Structures Your Trades

Lesson #9 in the Art of the Bubble series

Licensed from AdobeStock Pro-Stock Studio

Let’s start this one off by correcting a misconception: Bitcoin is not a safe haven asset yet. When the stock market falls, Bitcoin falls too (and more). Below, Bitcoin is in black, and the S&P 500 is in blue.

The reason is that everyone needed money and pulled from all the sources they had. At some point, Bitcoin might prove to be a safe haven asset, like gold, but it isn’t there yet. (And, incidentally, gold sold off with the market in March too.)

The big picture here is Lesson #9: the broader economic environment will drive bubbles and crashes. 

If that environment is in good or neutral shape, then you can invest in Bitcoin and other bubbly assets, like marijuana stocks or electric vehicles. If it turns aggressively negative, then you need to stop all bubble hunting.

To make this insight actionable for trading, we can start with a metaphor: trading is structured in layers of dependence like a pyramid. To schematize that, it helps to think of this pyramid as having five layers.

Five Layers of Dependence

The following image gives you an idea of how the more basic layers of the pyramid structure the later layers of the pyramid.

Layer #1: The Basic Economic Cycle

The base layer, even still for the entire world, is the US economy. Apart from events like pandemics, it rises and falls based on a credit cycle. You should really watch Ray Dalio’s video about the credit cycle and the economy, but I can explain the key points you’ll need for trading.https://www.youtube-nocookie.com/embed/PHe0bXAIuk0?rel=0&autoplay=0&showinfo=0&enablejsapi=0

Basically, people borrow money for a variety of reasons. Dalio cites greed, but I think businesses have to borrow to get more money to work with to beat out their competition.

In any case, if a few people default, banks are fine. If a lot of people do, then the status of all the other loans is put in jeopardy. Since a lot of the world’s money is actually credit (to banks), when too many people default, banks begin to default, and then the world’s economy spirals downwards.

So if the basic economic cycle is not well, then almost nothing is well.

Layer #2: Industry Cycles

Built on top of that basic credit cycle, you have industry cycles. Oil, for example, was terrible from 2014 to 2017, then began to bounce back in late 2018 only to be hit with the COVID pandemic. It didn’t matter which company you picked, they all got slaughtered. Here’s a picture of ExxonMobile ($XOM), one of the world’s largest companies and the contemporary heir of Standard Oil, which made Rockefeller rich.

Over the past five years, you can see how the oil downturn crushed XOM. While the S&P 500 gained just over 100% during that period, XOM lost just over 38%. You’ll also notice how the decline in the basic layer, proxied by the S&P 500 here, led to a massive decline in  XOM too.

So in addition to the basic economic cycle, your specific industry cycle has to be good too.

Layers # 3 and #4: Individual Companies and Coins

If an industry is doing well, then individual members (whether coins or stocks) in that industry can do well. Here’s a dramatic example with an offshore driller, Transocean ($RIG), and the price of oil as indicated by the $USO. Oil is in blue, $RIG is in black.

It was a wild ride for $RIG, but as soon as oil began to turn around, the price of $RIG began to climb dramatically–up from $.94 to $3.49 presently.

A point of clarification might help here. In the pyramid image, I had two layers devoted to industry stocks and coins. The reason is that there is an enormous difference between $XOM, which was never in danger of going out of business, and $RIG which might still go out of business. So while $XOM’s price recovery turns on its industry health, it’s not in the same category as $RIG, which needs a prolonged oil price recovery to avoid bankruptcy.

I would put $XOM in layer 3, then, and $RIG in layer 4.

Layer #5: Levered Products

At the highest level, the 5th indicated in the pyramid, you’ll find levered products. Those are securities like call options, 3x levered funds, and speculative alt-coins that depend on the price appreciation of other altcoins. Those will make a ton more money than the underlying securities … and will lose a ton more money if things turn out poorly.

Here’s an image of the UPRO (=3x the S&P) in the recovery of the S&P 500 since March. It’s almost a 300% return!

…and here’s an image of its decline into March (ouch!)

That’s a 61% decline from the starting point 10 months earlier. From its height, the UPRO went from $81 to $18.63 for a 77% decline in a month!

The fifth layer goes up a lot then … and down too. You need to make sure that everything else is healthy if you’re going to look at these sorts of trades.

How To Apply This

The most obvious way to apply this lesson is to understand that when you are picking bubbles for trading, you need to go through a sort of checklist.

  1. Ask first: is the basic economic cycle healthy?
  2. Next ask: is the industry I’m looking to trade healthy?
  3. Then ask: how am I planning to position myself in that industry? With a layer-3 type company? With a layer-4 type company? Or with a layer-5 leveraged product?

If you are picking a layer-3 type company, then you’ll be pretty ok with bumpiness in the basic economic cycle and even the industry cycle. If you’re picking a leveraged product (layer-5), then you need a really fast responding strategy to protect you against downside risk.

But how can I tell whether or not the industry is healthy?

I have been giving you the tools to figure out how to find your own industry-level indicators since Lesson #2. Basically, the Simple Moving Average of the last 200 days (SMA 200) does a good job of telling you whether an industry is ok.

  • In oil, for example, you could just pull up the SMA 200 on the $USO. 
  • With cryptocurrencies, you could use the SMA 200 on Bitcoin itself.
  • In the electric vehicle market, you could use the SMA 200 on $TSLA.
  • For marijuana stocks, the matter is a little more complicated. You’ll have to rely primarily on the political news coming from Washington DC concerning national legalization and decriminalization.

In Lesson #3 I told you all about how to use the ROC14 (Rate of Price Change over the last 14 days) to pick out some better exit points, and I warned you about relying too heavily on that. In future pieces, I’ll go over some of the methods that I use to get a little better insight into these indicators, but these basics will make money.

How can I tell whether the basic economic cycle is healthy?

Your biggest difficulty is going to come from trying to construct your own basic economic cycle indicator. I will absolutely teach you how to do this, as that’s the whole point of my newsletter.

I’ll also note up front there are three problems that we’ll have to tackle:

  1. it will take some time,
  2. some of you won’t want to go through all the effort,
  3. it takes an investment in a data provider to get you the information you need to build your algorithms.

That third one will cost you about $200 / month — but it can be absolutely worth it (I do it and have done it for years!).

For the present, I’ve decided to put together a simple subscription product. This will tell you:

  1. whether the basic economic cycle is intact using my own 10-signal, 2-layer proprietary algorithm with a testable history,
  2. whether an industry cycle is intact for Bitcoin, Oil Markets, EV Markets, and Marijuana Markets,
  3. and the actual positions that I own and when I initiated my trades for these bubbly areas.

How much would you be willing to pay to have a reliable indicator for when to start a trade? How about when to get out of a trade and save yourself from losses?

Disclaimers

General financial disclaimer: This post is provided for entertainment purposes only. I am not giving you financial advice and I am not a financial advisor. You should expect no financial returns one way or another based on my statements. These points hold equally for any statements that could be attributed to The Art of The Bubble or any related business entities. If you decide to buy or invest in anything, then your returns and potential losses are your own. No statements about taxation are taxable advice and you are encouraged to consult your own tax professional. You are also encouraged to do your own due diligence before investing in anything.

Tags: Bitcoin Bubbles cryptocurrency Economic Investing

Continue Reading

Previous: The Art of The Crash (With Bitcoin)
Next: When To Buy and When To Sell (And Why Most Don’t Do It)

Related Stories

How To Trade as a Crypto Maxi
5 min read

How To Trade as a Crypto Maxi

The Art of the Bubble: Don’t Try to Guess the Top
5 min read

The Art of the Bubble: Don’t Try to Guess the Top

How Rationally to Trade (Crypto) On Emotions
6 min read

How Rationally to Trade (Crypto) On Emotions

View Subscriber Plans

  • Cryptocurrency, Bubbles, And Financial Freedom: Some Perspective On Where We Are Now
  • Whales Continue Moving Risk-Off As They Handle Stablecoins and Basic Staking
  • We Are Seeing An Increase In NFT Activity: Momentum Is Still Weak 
  • Our Portfolio Maintains Positive Numbers As We Outperform The Benchmark by 51% Since Last Year
  • The AOTB News Update: CryptoWhales Increase Their Shib Inu Stash Overnight

You may have missed

Cryptocurrency, Bubbles, And Financial Freedom: Some Perspective On Where We Are Now
2 min read

Cryptocurrency, Bubbles, And Financial Freedom: Some Perspective On Where We Are Now

Whales Continue Moving Risk-Off As They Handle Stablecoins and Basic Staking
1 min read

Whales Continue Moving Risk-Off As They Handle Stablecoins and Basic Staking

We Are Seeing An Increase In NFT Activity: Momentum Is Still Weak 
1 min read

We Are Seeing An Increase In NFT Activity: Momentum Is Still Weak 

Our Portfolio Maintains Positive Numbers As We Outperform The Benchmark by 51% Since Last Year
1 min read

Our Portfolio Maintains Positive Numbers As We Outperform The Benchmark by 51% Since Last Year

  • About Us
  • Art of the Bubble Series
  • DISCORD
  • Log In
  • Free Newsletter
Copyright © All rights reserved. | DarkNews by AF themes.