SX Wealth | Crypto: Technical Position Status

The Technical Position Status reports the suggested position exposure for three types of users of SX Wealth | Crypto market analysis. It is important to understand that the following descriptions of how these user types (personas) apply our analysis are not the only ways to make use of our models, but they represent typical profiles of traders and investors who use technical signals.

Additional detail on how subscribers can apply our analysis to their own trading styles and approaches can be found insert link to SX Wealth Market & Trading Philosophy.]

Trend Followers

Timeframe: Long-term (anticipated holding period from months to years)

Trading Frequency: Low

Objective: Capture value from long-term uptrends

Trend Followers look at the big picture and want to capture value from longer-term trends. Long-term trend following has proven to be the most efficient approach to technical trading with its high reward to risk ratios and lower transaction costs. The challenge, however, with longer-term trend following in a single market is the lack of diversification.

The best trend-following traders are active in dozens of markets, with only a few of those at any one time in sustained trending mode. The out-sized profits gained from those trending markets usually more than offset the small losses suffered in markets that are not trending.

The SX approach to trend-following in a single market is to achieve diversification by trading multiple models. Rather than rely on one or two trend models which leads to a boom or bust outcome, we rely on multiple models and a dynamic capital allocation approach to achieve superior returns through model diversification.

The idea is simple.

When only a few of our models are bullish, and our Buy Gauge is at lower levels, you commit a smaller portion of your funds allocated to this market. As more models generate bullish signals, you add more capital to your long position. Our Buy Gauge will read 100% for a good portion of the strongest, most sustained rallies in bull markets, leaving you with a full commitment during the best opportunities.

When conditions weaken and our Buy Gauge starts to fall, you incrementally take profits and systematically reduce your exposure step by step.

You can gain the benefits of longer-term trend following in a smoother manner, without the herky-jerky boom/bust outcome of relying on a single long-term model.

Note for Asset Allocators: This approach is also well adapted for tactical asset allocators. Many leading traders and money managers (Paul Tudor Jones), some investment banks (JPMorgan), and leading journalists (Forbes) have gone on record recommending a small allocation to Bitcoin and other cryptocurrencies in investor’s portfolios (from 1% to 2%). But with the enormous volatility of Bitcoin, even a 2% static allocation can feel like a boom/bust exposure.

Applying SX Wealth’s Trend Followers approach to tactical asset allocation leads to a smoother return for that key alternative investment component of asset allocation and portfolio diversification. By following the Trend Follower position allocation, tactical asset allocators can gain the maximum benefits of the allocation while the market is trending higher, yet have the potential to avoid much of the downside of the asset when the market is trending down, and the Sell Gauge is at high levels.

Hedgers

Timeframe: Variable, depends on the risk reduction objectives of the hedger

Trading Frequency: As needed according to hedge strategy

Objective: Dynamically protect the value of a core long position while still being in position to benefit from long-term uptrends

Hedgers are those that build and maintain a core position in cryptos like Bitcoin and then use specialized derivative instruments to hedge (mitigate the price risk) of those core positions. The ideal hedge protects value when the market is going lower but does not sacrifice all of the upside when the market is moving higher. In practice, the type of hedge that increases protection when needed but decreases exposure when the hedge isn’t performing is challenging to implement and manage.

One way to achieve this is to hedge with put options, however, liquidity in put options is limited, and put options in crypto are prohibitively expensive, with super high premiums driven by the greatest price volatility of all traded assets.

A way to achieve an option-like hedge performance, where the downside is covered but the upside is still available, is to use a decision support tool to dynamically manage an option-like hedge position. Our SX Sell Gauge can serve as that tool (for those with an option trading background, it produces Delta-like hedge targets).

As progressively more and more of our models turn bearish, the Gauge reading provides a target for a dynamic hedge position. When the Sell Gauge is at 100% (all technical models are bearish), a 100% hedge is indicated. As the market rallies and the Sell Gauge falls, portions of the hedge can be liquidated to allow the underlying core long position to benefit from upward price movement.

In strong, sustained upward moves, the Sell Gauge will fall to 0% allowing full participation in the upside. But in strong, sustained downward moves, the Sell Gauge will eventually rise to 100%, allowing a substantial portion of price risk to be mitigated by dynamically following the target value.

Trend Traders

Timeframe: Short to intermediate-term (anticipated holding period from days to weeks)

Trading Frequency: Moderate

Objective: Capture value from each predominant rally within longer-term uptrends

Trend Traders seek to profit from every significant zig and zag of price movement. Trend Traders seek to buy when momentum is bullish within the context of a bullish trend, and seek the sidelines and preservation of trading capital when momentum is falling.

Our SX models support this style of trading. The biggest, most powerful upward moves occur when all of our trend models are bullish as well as all of our momentum models. Corrections occur when our trend models remain bullish, but our momentum models are bearish.

Our objective is to generate reentry buy signals when corrections in bull markets end and upward price action resumes.

Note for Hedgers: This approach for Trend Traders, which combines momentum indicators with our trend models, can be used to time the entry of hedge positions. Those opportunities will occur when our Sell Gauge is high (meaning that most or all trend models are bearish) and our momentum models roll over from bullish to bearish. We make note of these opportunities in our daily commentary.