The Trading Concepts Handbook series aims to share some "rarely mentioned, but extremely important" trading concepts. I believe that whether you are a Newbie or a Crypto Veteran, you can take away something from this series of articles. There are a total of 10 articles in this series, and this is the first one. (Previous context: Using the Bitcoin 2021 double top structure as an example: Discussing what "future data leakage" is.) (Background supplement: On-chain Data Academy (1): Do you know the average cost of BTC in the entire market?) Original link. In the Cold War, Li Wenbin once said something like, "Every place has its own rules of the game, whether they are clear or hidden. The first step: learn it... but many people die before they reach this step, why? Because they are self-righteous." This statement also applies to the financial market: Spot, Futures, Perptual Futures, leveraged borrowing, Options, etc., each product has its own "Game Rules." If you don't know these rules and rashly enter the market to trade, you are likely to become prey to those "who understand the rules." "At the card table, if you don't know who the fool is, then you are that fool." Those transaction costs that erode profits. When trading in the crypto market, common transaction costs include the following: 1⃣ Transaction fees (paid for both buying and selling, depending on position size) 2⃣ Slippage 3⃣ Funding rate (exists in the Perptual Futures market) The above three are the most common transaction costs, and if you are an on-chain player, there may also be other costs such as "gas fee." Perhaps upon seeing this, some may question: "These costs are very low; I can easily make back the profit from a single profitable order." Yes, if viewed as "a single transaction," transaction costs may indeed be negligible; however, for seasoned traders who are "long-term" fighting in the market, these will become a significant factor affecting performance. As shown in the illustration, I assume there is a god-level trader: Making money every time they trade with a principal of 10,000, earning 1% of the principal each time. Comparing the performance with "an additional 0.1% transaction cost per trade," it can be seen that after 365 consecutive trades, the performance difference is about 1133%. This is assuming they are very strong and make money every time; for the average person: even losing trades still incur transaction costs. Trading frequency & Opportunity cost. Based on the above, two basic but important concepts can be derived: 1⃣ The higher the trading frequency, the greater the transaction costs. Frequent entries and exits, if performance cannot be guaranteed, even without causing substantial losses, can easily lead to "unnecessary wear and tear." "If you only have 10 chances to act in your life, would you really be so casual in entering the market?" 2⃣ Invisible opportunity costs. This is also what most people tend to overlook: too many trades can lead to a situation where "you are holding a position most of the time." It is important to know that usually, everyone has a limit to their funding; if you use the U in your hand to trade, it is equivalent to "not being able to use it for other things." In other words, once a better trading opportunity arises during your holding period, you cannot participate directly (unless you decide to switch positions). Interestingly, many people love to hold a losing position and are unwilling to stop loss even when their position falls drastically, missing out on more and better trading opportunities, which is not worth the loss. Conclusion. The above is the content of the Trading Concepts Handbook (1). I hope it is helpful to everyone, and thank you for reading this far. Related reports: Analyzing the 6 current statuses of the Web3 AI track: Compared to AI Agents, institutions are more concerned about infrastructure. AI Agents integrated with Web3, are we entering an era where Bots will help you manage your on-chain finances? Complete introduction to Mind Network: Using FHE technology to solve the security issues of AI Agents. <Trading Concepts Handbook (1): Profit Killers, like vampires, are transaction costs> was first published in BlockTempo, the most influential blockchain news media.
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A Comprehensive Guide to Trading Concepts (Part 1): The Profit Killer, Like a Vampire, is the Transaction Cost
The Trading Concepts Handbook series aims to share some "rarely mentioned, but extremely important" trading concepts. I believe that whether you are a Newbie or a Crypto Veteran, you can take away something from this series of articles. There are a total of 10 articles in this series, and this is the first one. (Previous context: Using the Bitcoin 2021 double top structure as an example: Discussing what "future data leakage" is.) (Background supplement: On-chain Data Academy (1): Do you know the average cost of BTC in the entire market?) Original link. In the Cold War, Li Wenbin once said something like, "Every place has its own rules of the game, whether they are clear or hidden. The first step: learn it... but many people die before they reach this step, why? Because they are self-righteous." This statement also applies to the financial market: Spot, Futures, Perptual Futures, leveraged borrowing, Options, etc., each product has its own "Game Rules." If you don't know these rules and rashly enter the market to trade, you are likely to become prey to those "who understand the rules." "At the card table, if you don't know who the fool is, then you are that fool." Those transaction costs that erode profits. When trading in the crypto market, common transaction costs include the following: 1⃣ Transaction fees (paid for both buying and selling, depending on position size) 2⃣ Slippage 3⃣ Funding rate (exists in the Perptual Futures market) The above three are the most common transaction costs, and if you are an on-chain player, there may also be other costs such as "gas fee." Perhaps upon seeing this, some may question: "These costs are very low; I can easily make back the profit from a single profitable order." Yes, if viewed as "a single transaction," transaction costs may indeed be negligible; however, for seasoned traders who are "long-term" fighting in the market, these will become a significant factor affecting performance. As shown in the illustration, I assume there is a god-level trader: Making money every time they trade with a principal of 10,000, earning 1% of the principal each time. Comparing the performance with "an additional 0.1% transaction cost per trade," it can be seen that after 365 consecutive trades, the performance difference is about 1133%. This is assuming they are very strong and make money every time; for the average person: even losing trades still incur transaction costs. Trading frequency & Opportunity cost. Based on the above, two basic but important concepts can be derived: 1⃣ The higher the trading frequency, the greater the transaction costs. Frequent entries and exits, if performance cannot be guaranteed, even without causing substantial losses, can easily lead to "unnecessary wear and tear." "If you only have 10 chances to act in your life, would you really be so casual in entering the market?" 2⃣ Invisible opportunity costs. This is also what most people tend to overlook: too many trades can lead to a situation where "you are holding a position most of the time." It is important to know that usually, everyone has a limit to their funding; if you use the U in your hand to trade, it is equivalent to "not being able to use it for other things." In other words, once a better trading opportunity arises during your holding period, you cannot participate directly (unless you decide to switch positions). Interestingly, many people love to hold a losing position and are unwilling to stop loss even when their position falls drastically, missing out on more and better trading opportunities, which is not worth the loss. Conclusion. The above is the content of the Trading Concepts Handbook (1). I hope it is helpful to everyone, and thank you for reading this far. Related reports: Analyzing the 6 current statuses of the Web3 AI track: Compared to AI Agents, institutions are more concerned about infrastructure. AI Agents integrated with Web3, are we entering an era where Bots will help you manage your on-chain finances? Complete introduction to Mind Network: Using FHE technology to solve the security issues of AI Agents. <Trading Concepts Handbook (1): Profit Killers, like vampires, are transaction costs> was first published in BlockTempo, the most influential blockchain news media.