On August 7, prominent trader and macro-economist Alex Krüger shared valuable advice for new traders on the social media platform X (formerly Twitter). His insights apply to both stock and cryptocurrency markets. Let’s break down his advice, explaining key concepts along the way.

1. The Power of Contrarian Trading

Krüger highlights the potential profitability of trading against the consensus. This strategy, known as contrarian trading, involves doing the opposite of what most market participants are doing. However, he emphasizes that the direction of your contrarian bet significantly impacts its effectiveness.

2. Long vs. Short: Understanding Market Positions

In trading, two main strategies exist:

  • Going Long: Buying an asset expecting its price to rise.
  • Going Short: Betting that an asset’s price will fall.

Krüger warns that these strategies aren’t equally effective across all market conditions.

3. Market Irrationality and Solvency

Krüger references a well-known trading adage about market irrationality outlasting an individual trader’s solvency. This concept suggests that even if you correctly identify market mispricing, the market might not correct (i.e. return to a rational price) before you run out of funds to maintain your position.

4. The Persistence of Bull Markets

Expanding on the irrationality concept, Krüger explains its particular relevance to bull markets. He notes that optimistic market trends can persist far longer than pessimistic traders (bears) anticipate, often causing repeated losses for those betting against the trend.

  • Bull Market: A period of rising prices and high optimism.
  • Bear Market: A time of falling prices and prevalent pessimism.

5. The Peril of Being a “Smart Bear”

Krüger advises against consistently being a “smart bear” – a trader who bets against rising prices based on careful analysis. He suggests this strategy rarely proves profitable, as bullish trends often outlast bearish predictions.

6. When Shorting Can Work

Despite his caution against bearish strategies, Krüger outlines two scenarios where shorting can be effective:

  1. Very short-term trades lasting less than a week.
  2. Carefully managed long-term strategies using options and strict position sizing.

Position Sizing: This refers to how much of your total trading capital you risk on a single trade. Proper position sizing is crucial for managing risk and ensuring you can withstand temporary losses.

7. Understanding Market Dynamics

Krüger observes that bullish trends tend to be prolonged, while bearish movements are often sharp and brief. This pattern, he notes, favors traders who buy during temporary price drops in an overall rising market.

8. The Probability of Success in Long-Term Trading

A key point in Krüger’s advice concerns long-term market trends. He explains that traders are more likely to successfully buy at a global bottom than to short at a global top. This is because most assets tend to increase in value over extended periods.

  • Global Bottom: The lowest price point of an asset over a long period.
  • Global Top: The highest price point of an asset over a long period.

9. The Importance of Bias in Trading

Krüger shares a personal insight about trading bias. He suggests that adopting a generally optimistic outlook (a bullish bias) can lead to larger profits, despite occasional larger temporary losses.

10. Krüger’s Advice for New Traders

Finally, Krüger offers a step-by-step strategy for new traders:

a) Identify assets with strong upward trends

b) Focus on buying during price dips

c) Hold positions for extended periods

d) Gradually sell when prices seem excessive

e) Prepare to reinvest during future dips

f) Avoid using borrowed money (leverage) across your portfolio

Buying the Dip: This strategy involves purchasing an asset when its price has temporarily decreased during an overall upward trend. It’s based on the assumption that the price dip is temporary and the asset will regain its value.

Leverage: Using borrowed money to increase the potential return of an investment. While it can amplify gains, it also increases risk and can lead to larger losses.

This approach emphasizes long-term trend following, risk management, and capitalizing on market cycles.

In conclusion, Krüger’s advice strongly favors a long-term, optimistic approach to trading. While he acknowledges potential short-term gains from bearish strategies, he emphasizes that most traders, especially beginners, are more likely to succeed with a bullish outlook. However, it’s crucial to remember that all trading involves risk. Thorough education and careful consideration of your financial situation are essential before making any trading decisions.

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