Why Two Gauges?

Here are three gauge-related questions subscribers frequently ask:

1. Why does SX Wealth’s platform include two gauges? 
2. Why have separate buy and sell gauges? 
3. Why not combine the signals into a single gauge?

Here are our straight-forward, pragmatic reasons for offering two gauges.

Reason No. 1. First, the majority of Sovereign X subscribers are interested only in buying cryptos. These buyers want to initiate long positions and then sell only to take a profit. Buyers focus on the Buy gauge.

A smaller subset of subscribers may be interested in hedging cryptos, and these will want to initiate short positions. 

Sellers focus on the Sell gauge.

Coming from opposing viewpoints, we want a simple-to-read indicator that speaks directly to both buyers and sellers.

Reason No. 2: regardless of whether you focus on buying cryptos or selling cryptos, many use the reading on our gauges to guide the allocation of capital.The higher the reading on a gauge, the more capital they allocate (for more guidance on capital allocation, see our guides to Trading Cryptos [part 2] and Risk-Based Position Sizing for Cryptos). [insert links to these documents]

Further, an example from our professional money management days will offer another perspective. This situation may help you understand why we would have two gauges. 

We have managed money in the past using systems with different trading approaches while trading the same market or instrument or asset. At the highest level, trading systems divide into two broad categories: trend-following approaches and counter-trend approaches. 

• Trend-following systems (like our proprietary SX models) essentially buy strength (or sell weakness).  The objective is to buy “high” in an uptrend and then sell “even higher” (sell “low” in a downtrend and buy back “even lower”). The reason to wait to buy high (or sell low) is for the market to prove itself before initiating a position.  The market has to move some amount in the direction of the trend to indicate that a trend is actually underway before an entry signal is triggered.

• Counter-trend systems follow the classic “sell high” and “buy low” approach and bank on a return to a recent average value to capture profits. 

These two approaches are diametrically opposed.  When a trend-following system is starting to buy, a counter-trend system may be starting to sell, and vice versa.

For diversification purposes, a savvy systems trader will trade more than one system.  Many will trade a few trend-following systems while simultaneously trading a few counter-trend systems.  Managing multiple systems can be challenging though, particularly when trading a single instrument (e.g., a single commodity like Gold or single crypto like Bitcoin) in a single account. This is because often the signals from the two types of systems cancel each other out.  A long position from one system cancels out a short position from another system.

You might be wondering why a trader would want to trade multiple systems with opposite approaches.  The key to success is in how the two types of systems exit trades.  Ideally, a system with a losing trade will exit quickly, whereas the system with a winning trade will stay longer with the winner.  The net result should be consistent growth of trading capital.  This is difficult to manage within a single account, however, because many times the multiple systems are in opposition, and no position will be put on at all.

How does a professional trader who trades multiple systems handle this quandary?  The main approach is to use more than one account.  They put trend-following trades in Account A and counter-trend trades in Account B.  It’s easier to manage the systems and accounts separately, even if both accounts are opposed at times, and the trader’s resulting net profit/loss results are a blend of the two account values.

Note, this example of the problem with blending trend-following and counter-trend trades, where the opposing trades would cancel each other out in a single account, is similar to a single gauge that blends buy and sell signals. The gauge would frequently register in the middle with a neutral reading.  This wouldn’t provide much value for our subscribers, especially those who trade a buy-only or sell-only approach.

Thus, the separate buy and sell gauges better serve buy-only and sell-only traders, as well as subscribers who trade multiple technical approaches.