Chapter 12

Entry & Exit

Entry is permanent. There are no take backs. People often pose the question, “When do I exit? When do I sell an asset?”

This seems to trouble them deeply. They torture themselves over a decision that was largely decided when they made a decision to buy.

The first foundational purchasing rule of thumb that I want to drill into your head is that your entry purchase price is exponentially more important as a decision than your exit price. Anyone can strategically plan their exit based on how the market decides to move. The true skill lies in anchoring your entry into a position where loss is unlikely and profitability likely.

No guarantees exist.

No one promised you universal success with entering and exiting a position, and if they did, they were lying. Here is the truth: what I tell you comes with zero guarantees. The market ultimately decides price movement and the valuation of any given asset. You don’t control the market. You are simply trying to figure out where the consensus of an asset will be in the future compared to now, and if there is a discrepancy the market has not yet factored into the price.

Here are the three assumptions I will make when investing in an asset:

1.You believe the asset is undervalued under some time frame

2.You believe the asset’s price evaluation will eventually reflect this under evaluation over the course of a certain time frame because of information (from your qualitative or quantitative analysis) that the market has not yet priced in

3.You are looking to buy and sell without leverage instruments

These simplified assumptions are established to keep things simple as we discuss entry and exit. This is not to say I don’t believe in selling an overvalued asset—quite the contrary!

Mean

Mean is the central value of a set of numbers. Mean price in the market does not reflect immediate price, but it does reflect the average price valuation by traders and investors over a certain time frame. The thesis of this chapter is that a mean is an okay indicator for an entry point—far better than using no indicator.

Price is constantly in flux trying to determine what we all agree to be the true permanent value of an asset. Buyers and sellers are always in disagreement on the long run, trying to find the price at which all buyers and sellers are permanently content, which is impossible. Over the course of a large data set such as two years, the thesis would hold that there is a price point that throughout the flux of agreement and disagreement is ultimately close to the theoretical true value of the present moment not yet agreed upon. It is the hidden equilibrium in the market that will never be sustained. Price will always rebound away from or toward this point because such a consensus will never be reached. This Equilibrium Mean Price Point (EMPP) is essentially a complex moving average that is tough to influence, creating an excellent indicator for entry and exit decision-making.

The implication is if you can find a price point that is within even 5 percent of this extremely slow-shifting equilibrium, you can confidently buy below this EMPP because at that point in time the market is very likely undervaluing the asset (compared to this equilibrium price point), assuming you have done your qualitative and quantitative research and are confident the asset is undervalued with regard to that analysis as well.

Note that I am not necessarily claiming the current price is “wrong.” I am simply claiming that as the current set of information has shifted sentiment to the point that the market collectively agrees, the current price is what the underlying asset is worth at this moment.

But markets are finicky. Chaotic. Temperamental. Is a market bubble an exercise in collective rational thought? On the contrary, bubbles are the evidence that shows that markets will go mad. People can be irrational, and they can do so as a collective unit.

You have the ability to make rational decisions based on historical data that give us indicators that maybe, just maybe, the market will be “wrong” on a different time frame. Sometimes the best thing you can do is to make no decision at all. Your money should always be growing in some sort of investment vehicle (or else you are losing money to inflation), but if you have money that is dedicated to investing particularly to volatile assets, not making a decision can be the smartest thing to do. Standing still is a decision in and of itself, and not acting is okay.

EMPP

The goal of designing Equilibrium Mean Price Point (EMPP) was to have an indicator that keeps a beginning investor extremely grounded in reality when it comes to entry. A much more simplified process than what is described can be found at , which has the option to include moving averages on multiple time frames for any cryptocurrency chart. Moving averages attempt to spot market divergence from historical pricing and do not make any projections about the future.

As a result of this conservatism created by moving averages, risk is ultimately reduced at the cost of perhaps not choosing to enter (losing out on potential gain). This is why dollar-cost averaging is my recommended entry strategy for anyone beginning to invest in cryptocurrency. While the EMPP is your sanity check, dollar-cost averaging is your risk reduction strategy for when you do decide to invest in a crypto asset because of your quantitative and qualitative analysis.

Calculating for the EMPP involves creating an average of averages, and it must be recalculated every time an entry or exit decision is being made.

I am not suggesting using EMPP as a day trading strategy. EMPP is an entry point indicator used as a sanity check for your quantitative model price target (created with the help of your qualitative analysis). The value of an asset is the present value of future cash flows. EMPP cannot reflect this projection into the future, but it can warn us if the market has gone off the deep end and give us an idea if the current price is reasonably safe for entry.

Data and Computation

Where does one acquire the data to compute an EMPP calculation? Coinmetrics (open-sourced and free to use) is an excellent site that lets you download spreadsheets of each cryptocurrency with all of their historical data for free—no account needed. Using the price data of said cryptocurrency, you can then calculate for the EMPP with some very basic Excel skills. The CSV data offered by Coinmetrics contains the following information:

•Active addresses currently using the blockchain protocol

•Market capitalization

•Block count

•Block size

•Mining difficulty

•Daily fees generated

•Issuance/inflation rate

•Price

•Total current supply

•Daily transactions

•Volatility of daily returns

I would encourage you to play around with Coinmetrics. It’s empowering to do so. With some basic Python coding or Excel skills you have the basis for creating your own quantitative models or comparison ratios between a range of blockchain protocols and cryptocurrencies using quantitative metrics.

Data gives hard quantitative insights. Never underestimate what can be uncovered with this type of research.

Returning to the process of creating the EMPP, three sets of starting dates are used to compile our sets of averages that are used to generate the EMPP.

1.Present day

2.Ninety days previous to today

3.Highest priced day in the last year

The present day is used because, clearly, we care about market sentiment in recent history. Ninety days previous to today is leveraged to account for any price trends leading to the present day, as well as the lead up to those trends. The highest price within the last year from the present day is used to account for the data leading up to any recent bull runs. We must include volatility within the EMPP to some degree, as at these focal points in time a consensus existed between buyers and sellers that the asset should be priced at a significantly higher price than the previous historical prices.

For each starting date, you compile a set of price averages looking back into history. Four averages for each starting date are calculated using the last one hundred, two hundred, three hundred, and four hundred days respectively. Next, a mean of the four averages is generated for each starting date. Finally, the EMPP is created using the mean of all three means previously computed.

When all is said and done, the EMPP consists of three thousand data points, with heavier weight given to days closer to the starting points because of overlapping averages creating redundancy. This is intended to amplify the effect of these data points on the overall EMPP.

Here is an example of calculating and using EMPP with Bitcoin using today (2/21/2020).

Figure 22: Average Daily Means

Figure 23: EMPP Calculation

If the price of Bitcoin were below the EMPP of $7,206.83, then you would have a healthy indicator that now may be a good time to enter. Your quantitative and qualitative analysis are your driving forces for a decision—EMPP is merely the sanity check. The further the price is from EMPP, the more wary you should be. Clearly, if the current price is drastically different from the EMPP, then the market currently is diverging from historical pricing. You need to understand why that is, and then make a decision if you believe the market is right or wrong in the long run.

As always, dollar- or value-cost averaging is the safest method for entering consistently once you have identified an asset you want to purchase. Use EMPP or some other moving averages as a sanity check, and then go ahead and make your purchase consistently over a longer time range to reduce your overall risk (at the cost of potential return).

Technical analysis will attempt to coach you on spotting short-term trends to decide on entering and exiting. Personally, I believe in the power of long-term trends in tandem to the belief that consistently beating the market is nearly impossible for the average person in the short term.

Exit

We’ve talked about entering, but what about exiting? A couple of options to consider exist, all with varying degrees of risk and return.

•Sell all crypto “shares” at once

•Scale out of a position quickly

•Scale out of a position slowly

Figure 24: Entry & Exit Scenario

This chart is an excellent example of a typical entry and exit scenario. Circle 1 is where you purchased, with a target sell price at circle 5, generated by whatever quantitative model you are leveraging. Note that while you are at circle 1 when you purchase, you cannot see the rest of the chart because the future has not yet happened. Zones 2, 3, 4 are price ranges where you might look to sell a certain percent of your position leading up to your target sell price (circle 5) in order to “lock in” profit (selling at these lines are at prices higher than what you bought for, therefore generating a profit).

But how do we determine how much of our position we want to sell at any given price? Do you sell all your cryptocurrency at zone 2? Only 10 percent of your crypto? As you can imagine, infinite ways to exit a position exist. Thus, we will return to our three original ways to exit: all at once, quickly, and slowly.

All at Once

The first scenario involves selling your entire position at a target price. The problem with pegging your decision to sell your entire position at a single price is if the market does not fully achieve the price you are aiming to sell at.

Maybe you are targeting fifty dollars and you purchased at thirty. What if the market hits forty-nine dollars and then turns around for an indefinite amount of time? As a result of your all-or-nothing strategy, you missed out on profitability that could have been locked in if you were willing to sell a portion of your position incrementally. On the flip side, if the price does reach the target sell price as per your strategy, you maximize your possible return compared to other strategies.

This is the difficulty of exiting. You make a trade-off between the probability of reaching the target sell point (circle 5) with the probability of maximizing return. Simply put, the probability the price increases by 5 percent is greater than the probability the price increases by 10 percent. This is because in order to increase by 10 percent you must increase by 5 percent along the path to the 10 percent increase.

To briefly describe this with statistical terminology, the more standard deviations from the expected price (the EMPP), the less likely it is to occur under a short time frame. For example, a cryptocurrency worth one dollar is much more likely to reach ten and drop back down to five in under a month than it is to skyrocket to one hundred and return back to five. This isn’t to say that in the long run the cryptocurrency isn’t valued to be worth one hundred dollars using a quantitative model. Instead, understand that strategically, if you are looking to exit, sell targets closer to the current price target, which is more likely to occur than prices farther away.

Quickly

The second simple strategy you can use is to scale out quickly. This would involve selling more of your position at sell prices closer to the current price than your target quantitative sell price (circle 5).

Figure 25: Exit Quickly

How do you decide how these sell zones are spaced? I would recommend having them placed at prices that are one-fourth of your target return that would be achieved if the target quantitative price is reached (circle 5). To simplify, if your target price is one hundred dollars and you purchased a crypto asset at fifty, you would achieve a 100 percent return if you sold at one hundred, doubling your position’s value. Therefore, your zone increments would be at sixty dollars (20 percent return on original investment), seventy (40 percent return), eighty (60 percent), and ninety (80 percent). This leaves your original target price at one hundred dollars (100 percent return).

This is the most conservative exit strategy and aims to lock in as much of the profitability as soon as possible. The trade-off, as mentioned before, is less overall return than if the price continues to climb past the first and second sell zones all the way to the quantitative model target price (circle 5). On the flip side, if the market retraces before reaching the final sell increment, you have safely locked in profits, and still have a portion of your position to play with, as well as the potential to reenter and purchase more shares of the cryptocurrency than you originally had.

Slowly

The third strategy involves scaling out slowly. This involves selling more of your position at sell zones further away from the current price. This is the inverse of exiting quickly and aims to obtain a greater return by waiting longer to sell large portions of the position as the price rises—incurring greater risk (less likely to achieve this higher return).

Figure 26: Exit Slowly

Note that you can have as many sell increments as you want. The problem is the more sell zones you execute at, the greater the total trading fees incurred because more trades are being executed. This cuts into the bottom line and reduces overall return. You can play around with how you scale out of a position and find what matches your risk profile.

Planning

Selling at a loss was discussed earlier in this work, but it is worth mentioning again briefly. You must have preplanned exit prices (also known as “stop-losses”) or zones for portions of your position. Most people view selling at a loss as failure when the reality is that selling is an opportunity to rebuy in at a lower price—expanding your number of shares or tokens and thus your potential profitability.

Preplanned exit zones should be placed anywhere from 6 to 30 percent below your buy price based on your aptitude for risk. Because crypto is so volatile, having large portions of your position ready to be sold at prices between –1 percent to –10 percent from your original buy price can be counterproductive because of price bouncing back quickly from these temporary dips. More flexibility on your exit plan ultimately resides in your risk profile. As long as you understand the impact of your exit strategy on your potential return, you should be in a reasonable place.

Let’s put everything together into a simple narrative of what entering and exiting looks like.

You identify a mispriced cryptocurrency according to your quantitative model and wait for an excellent entry price using EMPP as a general indicator. Next, you purchase the first of many purchases that will be spaced out every month using dollar-cost averaging.

Next, set sell increments between the current price and the quantitative model target sell price by evenly spacing these position exit points based on the return they would provide. Based on your return strategy and risk aversion, you will decide how much of your position you will sell if these price zones are encountered in the future.

Have the discipline to wait for your sell increments to be hit. All the investment advice about strategic conviction and discipline discussed in previous chapters comes into play in the vast desert of time where you wait to execute your strategy sell zone strategies. Many investors run toward the mirage of the sneaky promise of an impulse decision that ignores their original plan. When they arrive at the dried-up investing watering hole, they realize it was all an avoidable bad dream. Entry and exit success is not about being the smartest guy in the room. It’s about having a plan while being the most disciplined, patient, and emotionally and cognitively balanced investor you can possibly be.

“The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages.”

—Jesse Livermore

Having an entry and exit plan is leaps and bounds better than an investor that purchases or sells impulsively. The typical investor does a marginal amount of research and decides to purchase a cryptocurrency right in the moment. They then examine the charts further and realize they entered at a high price point as they watch the price tank (EMPP and moving averages reduce the chance of this mistake, but no promises).

Eventually, the price skyrockets past its initial entry. Because this unfortunate type of investor doesn’t have a sell price target, they unwisely hold the crypto asset through the peak of the price movement. Eventually, the price retracts. Sadly, the investor is left holding the same amount of the crypto asset they started with, wishing they had sold on the uptrend and locked in some profitability. The new investor then sells their cryptocurrency with disdain, blaming the asset class.

If you fail to plan, then you plan to fail.

But you know better.

You now have some of the skills to be able to navigate the murky waters of entry and exit. No promises and no guarantees exist. But you can do your best to have a plan and execute on it when the time comes.

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