While the market awaits the first interest rate cut and the typical Uptober run, I’ll bring you a trading lesson from the Day Trading academy. On the academy, of course, these are video lessons, and The Art of the Bubble videos are being added as we speak.

But a lesson about taking profits in this environment makes sense. This is the first of two key lessons and it concerns the most overlooked part–despite the fact that you cannot succeed without doing it. Let’s start with the overview.

A key feature that distinguishes day trading from swing trades or algorithmic trading is that it aims to achieve an absolute return.

Our Risk Parity crypto strategy, for example, aims to outperform a well-structured alt-coin portfolio such as is represented with the MVIS 100 Mid-Cap index.

• The MVIS index gained better than 2x the large cap index (which includes BTC and ETH) in the last bull run for understandable reasons.

• The risk parity algo aims to beat the Mid-Cap returns both on a total performance basis and on a risk adjusted basis over any 2 year period.

Similarly, our 1 stock MicroStrategy algorithm aims to beat the returns of MSTR over any 2 year period–both by way of performance and by way of volatility reduction (risk adjusted basis).

Both of those strategies aim for performance goals relative to a benchmark.

A day trader wants something else: absolute returns. For example, they might aim to achieve 0.25% a day in profit for their total portfolio. Stated differently, they might want a ~7.7% positive return on a monthly basis. Or slightly better than a 140% return on an annual basis.

There is no benchmark.

As a day trader, your plan is to use whatever asset you can to achieve that absolute goal. It could be Bitcoin, but it also could be DOGE, or NEAR, or just whatever meme coins happen to be trending.

To achieve your goals, you need to assess 3 key items: liquidity, daily volatility ranges, short options.

You can think about the liquidity problem this way. Many will think that 0.25% daily is paltry and that 140% over a year in cryptos is … ok. But if you were to begin with an initial $10k and add $5k each year, then excluding taxes, at that rate of return you’d have just over $1m in 5 years. How are you going to trade that $1m?

You cannot easily dump $1m of meme coins for a single trade without causing too much slippage. In fact, you will run into liquidity concerns at just the six figure range for meme coins–maybe even earlier.

This means that you need an asset with ample liquidity. Bitcoin works pretty well, as on most exchanges a million dollar trade won’t be too hard to execute. That’s why our academy is focused on BTC primarily. We’ll talk about meme coins later, but it’s easier to start with an asset class that can accommodate your liquidity needs.

Next, you need to assess daily volatility. Does your asset have a daily volatility high enough to achieve your target returns? In general, you are going to want your asset to have a trailing 180 day volatility of 8x your daily target return.

In the academy, I’ll give you a video walk-through for this process, but here are the main points. 

Step one is to go to TradingView, pick your coin and timeframe (over 180 days). Then click as the image suggests. Pick the ISO timestamp when you get the option so that the dates are human readable.

Now that you have the .cvs file go on over to ChatGPT and upload it (paperclip symbol). Ask ChatGPT to measure, in percent terms, the absolute value of the difference between daily highs and lows. This should be a new column in the file. Then ask it to give you the average of the column over the past 180 days.

It’ll do the coding in Python for you and spit out a number. When I ran this task recently the number was ~4.13%. That’s well over 8x our 0.25% target. And that means that BTC could be day traded as we expect. Were it to degrade below that, we might want a different asset class.

You could do more stats work if you wanted. For example, you could also ask for the median of daily variance – this will nullify much of the effect of outlier days. Also, it would be ideal if your daily target was within 0.5 sigmas of daily variance.

Finally, you need to consider how you will short the market. Day trading only works if you can take long and short positions. What options do you have available to you?

• Your CEX might allow you to open a margin account. This means that you will need to watch liquidity levels.

• You could try perpetual options (perps), though this puts you at higher risk of liquidation.

• You could try inverse coins. But you need to be sure that there is enough volume trading these to remain feasible as you earn more.

There is no “one size fits all” answer here. Your goal is to discern whether your ability to short will face liquidity constraints. Typically, it does and that means that while your long strategies can use leverage 2x or 3x leverage, your short strategies are best confined to -1x. That’s probably for the better anyway, as it is short strategies that are the hardest to execute.

To wrap up, we’ve covered the following items in this lesson:

• That day trading profits (and success) are measured in absolute, not relative returns.

• That you need to pick an asset class that can give you the returns you desire.

• There are three questions you need to consider when picking an asset class, namely liquidity, daily volatility, and short options.

Bitcoin does fit the bill, so in the next part we’ll discuss

Happy Trading!

                                                                               - Sebastian Purcell, PhD