SX Wealth Market & Trading Philosophy

Traders need to pursue trading approaches that conform to their beliefs about how markets work. Only by trading in alignment with your beliefs can you achieve consistent and lasting success.  With that in mind, we offer our beliefs about the crypto asset market and how those beliefs translate into our analysis and trading approach. 

Sovereign X’s leadership understands the crypto markets will continue to ride the proverbial rollercoaster, moving from periods of rampant enthusiasm (“When you measure [Bitcoin] in terms of dollars, you have to think it’s going to infinity … and eventually, will be the world’s currency.”) to rampant pessimism (in the words of Warren Buffet, “Bitcoin will be worthless because it is ‘rat poison squared’”).

The dramatic swings between enthusiasm and despair, representing the human element that drives all freely traded markets, seem to be carried out in the extreme with crypto assets. The swings in sentiment drive substantial and reasonably sustained moves in crypto prices, and technical market measurements and trading techniques can capture these movements to your advantage.

Our beliefs align more with a trend-following approach—periods of volatility and trending lend themselves to the pursuit of trend-following and breakout approaches.

Occasional periods of market inactivity mean that we need to minimize false entry signals during periods of sideways behavior.  Large potential profits during times of enthusiasm can make up for small losses on false entry signals.

Trend-following

We have found that the most historically profitable approach, offering the greatest reward relative to the risk taken, and to the resources required, is a trend-following approach.  Trend-following does not mean trying to predict where a market is going in terms of price; it means 1) objectively determining the predominant direction of price movement, 2) jumping on board the trend, and 3) riding it until it loses momentum.

Historically, the most profitable and efficient trading approach in commodity markets has been long-term trend following.  We don’t need to cite references here to back up this statement— they’re easy to find by searching for academic studies on the subject, plus the superior track records evidencing the long-term success of numerous hedge funds and commodity trading advisors.  The benefits of trend-following include capturing large market moves, high ratios of profits compared to losses, and reduced trading, which minimizes transaction costs.

We made a strategic decision to pursue trend-following as our primary analytical approach to achieving superior returns in crypto trading without subjecting ourselves and subscribers to the tremendous risk inherent in these assets. Our approach takes into consideration our observations of the behavioral characteristics of crypto assets, our beliefs about crypto market behavior, and the historical success of trend-following.

The SX Wealth | Crypto Diversified Approach to Technical Models

However, this presents a challenge in applying a technical trend-following approach to an advisory service for individual traders and investors.  Why? Because the most historically successful trend-following traders use diversification to their advantage—diversification across a wide variety of markets.  Not all markets trend all the time. By allocating trading capital across a range of liquid markets, preferably uncorrelated markets, the outsized profits from a few markets that are trending will more than cover the smaller losses in the larger number of markets that are not trending.

This is an ever-present challenge for institutional traders whose task is to position-trade a single market (e.g., oil, bonds, precious metals).  Two of the founders of Sovereign X Wealth have substantial experience in trading single markets. Most single-market institutional traders are not trend-followers – they focus on counter-trend approaches. 

An example of a counter-trend approach is to sell into rallies and to buy into market declines, banking on the (hopefully) inevitable reversion to recent average values (i.e., mean-reversion trading).  The are many reasons for the institutional focus on counter-trend trading:

• the traders believe they can always outsmart the market and thus try to profit from every swing in the market,

• their managers expect the traders to be “doing something” all the time, and countertrend trading typically involve more frequent trades, and

• the traders are continually being evaluated with 20-20 hindsight, meaning that If the market rallies and a trader isn’t long, then the boss wants to know why the trader didn’t predict the rally and buy the market, and, likewise, if a market falls.

This approach can work if a trader has substantial capital resources to backstop their trading. It is much harder for an individual investor or trader to pursue because 1. they don’t have the cushion of institutional capital to keep buying when the market is falling, and keep selling when the market is rising, and 2. they don’t have the time or resources to monitor the market continually.

This means that for an individual investor to succeed in trading a single market (or single asset class), they need to pursue some degree of diversification.  And if the market doesn’t allow for diversification of assets (to date, there is a fairly high correlation between crypto assets, meaning that if Bitcoin falls a lot, most cryptos will also fall), then a trader needs to pursue diversification by trading multiple models. 

And this is the approach that SX Crypto offers.  We calculate and monitor a wide variety of models based on proprietary algorithms to further enhance the probability of superior returns with less risk.  In addition to diversification across timeframes (models based on daily data and weekly data), we also offer diversification through several different time-tested technical approaches: moving average models, volatility breakout models, price channel breakout models, and momentum models. 

And to keep a wary eye on our blind-side, we also employ algorithms that accurately track the amount of trending energy in the markets and will signal periods on non-trend or counter-trend environments.  When the market is not trending, that’s when we need to lay low, not over-commit trading capital to the market, and patiently wait for the next period of trending (which inevitably arrives and rewards our patience).

Lastly, the best trend-followers do not try to pick tops and bottoms.  Top and bottom picking is the antithesis of the trend-following approach.  Trying to pick a top during Bitcoin’s monstrous moves up in late 2017 and 2020/2021 would have left a lot of potential profit on the table.  And trying to pick a bottom during the murderous decline in the early part of 2018 would have been disastrous.  Fortunately, our models were signaling bullish conditions for most of those uptrends in 2017 and 2020/2021, and our models exited the market and were generating bearish signals during the majority of the market’s 2018 decline.

That said, one of our proprietary momentum models is strong at signaling market tops and bottoms, so we will include those signals in our market models and will incorporate them in our regular market analysis and commentary.

The SX Crypto Philosophy for Specific Trades

We don’t believe in blindly following trend reversal models. 

For example, if you are using a two moving average crossover model (a shorter-term average crossing above a longer-term average triggers a buy signal, and the reverse triggers a sell signal), blindly following only that model for specific trades might work. However, in the meantime, you are exposed to too much risk. The experience is simply not sustainable. Buying and selling on these signals is too simplistic and would produce a day-to-day experience that would be hard to tolerate. 

Thus, for Trend Traders, we offer two versions of these models.  First, we will calculate and monitor the reversal versions of these models to give us an overall sense of the trend and strength. But for specific trading recommendations, these models will serve solely as an entry signal or entry filter.  We will use other methods to trigger exits, and still other techniques for re-entry signals. 

A sustainable trading approach incorporates several elements.  Let’s consider an example based on a two moving average crossover system.  As previously discussed, if we use the crossovers as the only signaling trigger, we would always be in the market (if we could short the market in question).  It’s too risky to be in the market all the time—it’s much more to your advantage to pick your opportunities and then get in and out of the market, hopefully with a profit. Then wait on the sidelines for the next opportunity to develop.

Let’s use the following elements in our example:

1. Setup/Filter. With a two moving average crossover system, we can use crossovers as our master filter and as well as initial trade entry signals. We can use the condition of the averages (i.e., shorter average > longer average = uptrend, shorter average < longer average = downtrend) as a filter for subsequent entries only in the direction of the prevailing trend.
2. Exit. We can achieve beneficial diversification by using exit algorithms that differ from our entry/filter algorithm. A trailing stop works well for trend-following trading, and we use volatility-based trailing stops for this purpose. And we make secondary use of some of our trend-following models by using them to generate trailing profit targets.
3. Re-entry. Consider the following scenario: we buy when we get a crossover signal from our two moving average crossover model, and we eventually exit the trade at a profit when the market hits a trailing profit-target.  But what if the bullish moving average crossover signal is still valid?  Do we have to wait for a bearish crossover and then even longer for the next bullish crossover to buy again?  No – this is why we want to use another algorithm as a re-entry signal (and for even more diversification). 

How to use our service:

• Our models offer a valuable and easy way to track the predominant direction of the market, and the strength of that direction when multiple models are signaling simultaneously. This is particularly relevant for subscribers who desire an easy way to monitor the market objectively, to confirm their analysis, and generate their own trades. They can use our models as a filter for their own preferences for entering and exiting trades, and they can use our gauges (which report the proportion of our models that are bullish or bearish) as a means of allocating trading capital for overall exposure.

Effectively, they allocate less capital when fewer of our models are bullish, and then allocate more when more of our models are bullish. And in the midst of a profitable longer-term trade, they start pulling money off the table when our gauge level starts to drop.

• For our subscribers who follow specific entry and exit recommendations, there are a couple of ways to use our signals:

• Some subscribers take advantage of the diversification we offer, allocating capital to each of our models and following the trading recommendations generated by each one.

• Other subscribers have a more fervent belief in certain types of trading approaches (e.g., they believe more in breakout models than in moving average models).  These subscribers often assign a portion of their trading capital to trade recommendations from their favorite models.

• Whatever your preferred approach, we offer critical advice: to be consistently successful, you must take all of the trades. You won’t know in advance which one will turn into a major winner. The vast majority of annual profits from trend-following tend to be generated on just a handful of trades each year. So, be consistent.  Subscribers need to monitor our website regularly and be prepared to follow our signals. We don’t employ a guru promising that the next trade will be the biggest one of your life. We promise that our models catch the big winners and responsibly manage risk when the market does not cooperate.

Technical Position Status Explained

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 at: Trading Crypto (Part 2)—Trade Decision-Making.

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 (ranging 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 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, put options in crypto are not liquid, and 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 a substantial part of 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 (in effect a Delta hedging target – for the option oriented). Our SX Sell Gauge can serve as that tool.

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 managed 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, or the market’s trend is down.

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