My assets have halved from their peak; how should I adjust my mindset?

Author: Cred

Compiled by: Deep Tide TechFlow

Your portfolio peak or historical high net worth does not represent real wealth.

Even your current portfolio or profit and loss (especially the unrealized part) cannot be taken for granted.

The core point is: How much you earn does not matter; what matters is how much you can keep.

As I mentioned in previous articles, most people (whether by active choice or passive outcome) will fall into one of two situations: either earning little but keeping a lot, or earning a lot but keeping little.

What you must avoid is a bad middle state------earning little and keeping little, which is the biggest failure.

Unrealized massive gains and assets returning to square one do not bring any real value.

Screenshots of historical high profits cannot pay your bills.

When faced with these numbers, you need to be wary of some hidden but dangerous traps.

Many people mistakenly believe that the growth rate of their portfolio will remain linear or even continue to accelerate.

However, the sobering fact is that the main force driving your wealth growth is often the overall market trend, not your personal trading ability.

Although the saying "everyone is a genius in a bull market" is somewhat one-sided, people often overlook the significant impact of abnormal market conditions on their results when evaluating their performance.

Sticking it out and making money under these favorable conditions is commendable, but at the same time, one must remain humble and recognize that these conditions are only temporary and not permanent.

The first trap lies in: mistaking the current market environment for a "new normal" and assuming that your trading results will indefinitely maintain the same level, and that your portfolio will grow at the same rate.

In fact, this assumption is almost impossible to hold. Why is this assumption wrong?

First, the current market conditions will not last forever. If you continue to respond with the same trading methods, you may earn less or even incur losses.

Second, trading strategies will fail. Even if market conditions remain unchanged for a long time (which is almost impossible), the effectiveness of your trading strategy will gradually diminish.

Third, as your portfolio grows, it becomes increasingly difficult to achieve the same high multiples of returns on larger amounts of capital. The larger the scale, the more restricted your flexibility and ability to seize opportunities.

Fourth, significantly increasing your position size in a short period may disrupt your psychological state, thus affecting trade execution. If a few weeks ago your total assets were $50,000, and now this is just the unrealized loss amount of a losing trade, your mindset may collapse. This psychological adjustment takes time and cannot be achieved overnight.

These factors indicate: do not assume that your trading profits and losses and current market conditions will last forever.

This erroneous assumption often leads to two major problems:

First, traders believe that trading strategies that were effective early on will continue to work. However, market conditions and the applicability of strategies will change, and many strategies cannot scale to larger sizes.

Traders often continue to increase their positions significantly without realistically testing their strategies, especially as market volatility increases, which often leads to severe consequences.

Just a little too much leverage, a bit more market impact, combined with a touch of panic, can lead traders to suffer massive losses when the market reverses, even inflicting fatal blows to their portfolios.

Worse still, this situation is often accompanied by arrogance and stubbornness, such as the mindset of "this strategy made me $N before, why should I change?"

Although I have mentioned this issue multiple times, you may be surprised at how easily people can self-hypnotize into believing they are "trading geniuses" when they make a large fortune in a short time.

In such cases, people often overlook the importance of market conditions and are unwilling to admit that they were just lucky, mistakenly attributing all gains to their so-called "newly discovered trading abilities."

By the time you finally realize that the main factor driving your profits is the market, not your own abilities, it is often too late.

The second common mistake is "lifestyle inflation," but it is rarely mentioned.

Many traders recklessly speculate on how much they can earn in the coming month, quarter, or even year based on short-term portfolio growth and profits.

Social media, such as Twitter, exacerbates this mentality—there are always people flaunting more expensive watches, fancier sports cars, more extravagant lives in Dubai, and enviable PnL screenshots. This content makes you feel that your achievements are never good enough.

As a result, many traders significantly upgrade their lifestyles, starting to spend wealth they do not actually have. This behavior is often based on blind optimism about short-term gains and unreasonably extrapolates it into the future.

However, when the market cools down, you may find yourself deeply trapped, and significantly reducing your lifestyle not only hurts your self-esteem but often seems impractical.

In summary: Current market conditions may lead your thinking into a dangerous state:

• Do not assume these conditions will last forever.

• Do not assume your strategy will always yield linear growth, whether in terms of time or capital scale.

• Do not assume that after significantly increasing your positions, you can still manage trades in the same way (whether in execution or psychological aspects).

• Do not assume you have fully mastered market laws and can remain profitable forever.

• Do not use current market conditions as a benchmark for your future income.

Assume you are a person who makes mistakes and is prone to arrogance, and that previous successes were largely due to luck. Approach yourself, your trading strategies, and especially your arrogance with this humble mindset.

A common mistake many traders make is viewing the dollar value of their portfolio as actual wealth that has been realized.

But this is not the case.

Typically, all profits are merely "paper wealth" until your earnings are deposited in your bank account in fiat currency and you have set aside the taxes owed.

This may sound somewhat old-fashioned and boring, but I have seen too many traders (this happens in almost every market cycle) fall from tens of millions or even hundreds of millions of dollars in assets back to breakeven, or even into legal bankruptcy.

This is not alarmist; it is a very real issue.

I like to use Russian nesting dolls to visualize the relationship between "portfolio balance" and "actual usable funds."

Unrealized gains and losses (PnL) are like the largest nesting doll; they are the most superficial numbers you see.

The funds you can truly keep and use in reality are the smallest doll.

Between these two, there are many gradually shrinking dolls representing various factors that could lead to a reduction in funds.

From the largest doll to the smallest, wealth gradually shrinks until only the part that truly belongs to you remains.

(Of course, you could also use the layers of an onion for comparison, but Russian nesting dolls may be more intuitive.)

When we look at our portfolio balance or unrealized gains and losses, especially when these assets are still fluctuating in the market and moving with directional bets (varying degrees of liquidity), we need to apply some sort of "discount rate" to these numbers.

In other words, you need to recognize that the probability of the amount in your portfolio fully entering your bank account and being 100% freely disposable is almost zero.

This is not only due to the volatility of the market itself but also because, in most countries and regions, tax obligations will take a significant portion of your profits. Even if you sell at the peak, you must hand over a portion of the profits to the government.

In addition to tax factors, there are some more practical "discount mechanisms" that need to be considered in your portfolio.

As mentioned in the first part of this article, you need to allow for a certain margin of error for your almost inevitable mistakes. Here is one of the main issues:

1. Timing Issues

The probability of completely cashing out at the market peak is almost negligible.

In other words, it is difficult to truly realize the peak profits of your portfolio.

In reality, results will typically fluctuate within a range—from "selling too early in a panic, locking in most of the profits" to "experiencing a complete cycle of ups and downs, returning to the starting point," along with various situations in between.

Ideally, you want to get as close to the former as possible, but that in itself is a very difficult task. You need to remain humble and accept the fact that you may make mistakes.

Remember, the most important goal is to retain as much capital as possible, not to prove your judgment is correct. Arrogance has no place here.

Even the most experienced top traders in 2021 mostly chose to gradually reduce risk when BTC's historical high broke below $60,000 and the trend began to show instability, and by that time, there was already about a 15% gap from the peak.

At that time, this operation might have seemed like "missing the top," but considering the subsequent sharp market decline, it was actually a very successful trade.

For reference, this pullback of BTC alone reached about 15%, and this was considered a "relatively early exit." Some major altcoins during this period even saw declines of two to three times.

Even if your overall timing in the market is relatively good, such pullbacks are still very significant.

If your timing judgment is wrong (and in fact, you are likely to be wrong), the losses will be even greater.

In summary, you need to accept a fact: you are unlikely to sell at the market peak (hopefully this is a universally acknowledged premise). Therefore, you must calmly face the reality that due to timing issues, your portfolio will inevitably give back some profits to the market relative to its peak.

2. The Trap of Buying the Dips

Market conditions can lead to fixed trading habits.

Especially when these habits have previously brought you profits (especially if you just made money recently), it is very difficult to quickly break free from these habits.

In a previous article, we discussed BitMEX and post-bear market trauma syndrome (PTSD). During a bear market, traders are often trained to engage in mean-reversion trading within short time frames and to take the opposite approach in almost all other situations.

The impact of a bull market on trading habits is at least equally profound, if not more so, because you actually make more money in a bull market. In this environment, you may fall into similar traps.

Specifically, if the market rewards you for buying the dips across almost every time frame and instills the belief that "every drop is a discount and will eventually rebound," then when the market experiences its first drop after hitting a peak, you are likely to choose to continue buying.

Or at the very least, with the "humble self-reflection" attitude we advocate, you should acknowledge that you may not be able to identify the market top and mistakenly buy in during a market decline, thinking it is a discount opportunity.

If you are perceptive enough, you may notice that this drop is different from previous ones and does not recover as quickly as before.

There are some data points that can help assess this situation (for example, the magnitude of open interest (OI) liquidations—if the liquidation scale is very large, it usually indicates that the trend may be reversing, but we will discuss this in detail later).

However, it is not easy to judge these signals in the moment.

The difficulty lies in the fact that even if the market has peaked, it may still experience some seemingly "golden opportunities" for drops, as they are usually accompanied by strong initial rebounds.

Take the "false" historical peak of BTC in November 2021 as an example:

At that time, the price saw a huge lower wick and strong rebound from the low to mid $40,000 range, but then failed to continue the trend or make new highs.

Subsequently, a similar strong rebound occurred at the low of the $35,000 range, but again, there was no continuation of the trend or new highs.

These rebounds, while seemingly enticing, are actually "illusions" after the market peaks. If you fail to identify them in time, you may be lured into buying during these rebounds, ultimately leading to greater losses.

Two things often happen simultaneously that can trap traders: 1) a strong initial rebound from a clear technical support level; 2) after the rebound, there is no continuation of the trend.

If you are perceptive enough, you may seize these rebound opportunities and treat them as mid-term trades while actively reducing risk (for example, by decreasing exposure to long-tail assets or high-risk speculative assets in your portfolio). This operation is already close to the "best practice" for trading rebounds after the market peaks.

But if you are unlucky or lack experience, you may continuously add to your positions during the decline, hoping these rebounds will make new highs like before (but the reality is, they won't). Ultimately, when the market completely crashes, you may give back almost all of your previous profits.

These rebounds are often "bait" thrown out by the market, causing traders to become complacent and even continue to add to their positions. But this behavior poses a huge hidden danger to your portfolio, as it exposes you to greater risks after the market peaks.

Especially during the period after the market peaks and before a real crash, many traders will reinvest their cash reserves, profits, or even realized gains back into the market, further increasing their net exposure.

This situation seems absurd but is very common.

More importantly, these "discounts" are actually cumulative:

• Step one, you did not sell at the market top (discount #1);

• Next, you bought the dips during the decline, depleting your cash reserves or increasing exposure, but the market continued to decline (discount #2);

• Ultimately, you either choose to hold these losing assets long-term or have to cut your losses (discount #2.5).

This is not some fictional scenario but the real experiences of many traders. For me, this pattern is all too familiar. I believe that for investors who have experienced complete market cycles, this behavioral pattern is certainly not unfamiliar—perhaps you have even operated this way yourself.

In summary, you need to further discount your expectations for peak portfolio profits, as not only is it likely that you missed the opportunity to sell at the top, but there is also a significant risk of being lured into buying during the market's first pullback, leading to greater losses.

3. Overtrading During the Distribution Phase

Markets often enter a "distribution phase" at the top, where prices no longer rise unilaterally but begin to consolidate and oscillate.

Depending on the market cycle, trading tools, and time frames, this oscillation may manifest as brief sideways consolidation, but for those who are used to jumping into trades at the sight of green candles on low time frames, this period may feel long and torturous.

During this phase, there are two common risks: one is buying the dips while prices continue to fall (or at least do not make new highs); the other is that traders accustomed to trending markets frequently trade in a choppy market, ultimately getting slapped back repeatedly and suffering heavy losses.

Especially in the late stages of a market cycle, asset prices may rise significantly every day, and the only entry opportunity may be through extremely aggressive low time frame trend-following strategies. If you continue to use these strategies when the market enters a distribution phase or sideways consolidation, losses are almost inevitable.

In fact, the failure of such strategies is itself an important signal of market change. If your low time frame trend-following system has been performing well but suddenly starts to fail across the board, exceeding normal volatility ranges, it likely indicates that the market environment has changed.

Whether due to buying the dips but encountering insufficient pullbacks, or blindly chasing a trend that no longer exists, the result is often the same: when your bull market strategy fails, you are likely to incur losses.

4. Market Impact

Do you remember the feeling when your nose was completely blocked?

At that time, you might regret not cherishing the ability to breathe normally.

Liquidity plays a similar role in the market—when it is abundant, we often take it for granted, but when it disappears, the problems become immediately apparent.

If you are trading large positions or your portfolio contains many low market cap, low liquidity assets, you need to pay special attention to two issues:

1. The impact on the market when you are eager to sell;

2. If you choose to sell at an inappropriate time (for example, dumping market orders into a market with almost no buyers during a market sell-off), this impact may be further amplified.

Slippage can directly erode your profits, so in situations of insufficient liquidity, your portfolio's peak profits will have an "invisible discount."

If you primarily trade assets like BTC, ETH, or SOL, which have higher liquidity, this issue may not be severe. But if you primarily trade new coins, memes, or other high-risk assets, this issue becomes very critical.

In the crypto market, there is almost no true "safe haven asset." When the market crashes, the price movements of all assets tend to synchronize (with correlations close to 1), and almost no asset can escape price plummets. Those emerging, low liquidity assets often suffer the most severe impacts, leading not only to poor trade execution but also potentially greater losses.

Additionally, there is a psychological trap in such situations:

"It has already dropped so much, why should I sell now?"

Or, "It has already dropped so much, I might as well wait for a rebound to sell."

However, in most cases, there is simply no rebound to sell. And even if a rebound does occur, many traders overestimate their ability to withstand drawdowns and time mean reversion.

The main issue here is pride—selling late makes you feel foolish for not selling earlier. So, you simply don't sell, ultimately incurring even greater losses.

In summary, if your portfolio contains illiquid or highly speculative assets, then your expectations for peak portfolio profits need to be more conservative, appropriately lowering the "discount rate" of your psychological expectations.

5. Revenge Trading

This is a classic psychological trap in trading.

After experiencing several stages mentioned earlier in the article (success or failure varies by individual), you will find an undeniable gap between your current account balance and the previous peak.

This gap is significant enough to make you feel regret and guilt; yet it seems not too large, leading you to believe that just a few good trades can make up for the losses.

This is precisely the beginning of revenge trading—a setup for a massive failure caused by a combination of errors.

The characteristics of revenge trading are very clear:

It is often driven by ego, irrational, and filled with desperation.

In this state, your thinking becomes chaotic, completely focused on short-term results while neglecting the long-term trading process.

Almost everyone has experienced revenge trading, and its outcomes are usually disastrous—in the vast majority of cases, this behavior only leads you deeper into the quagmire of losses.

The most frightening thing is that the risks of revenge trading are extremely high: just one emotional trade can easily wipe out the results of months or even years of hard work.

6. Conclusion

The purpose of this article is to help you break free from the obsession with portfolio peaks so that it does not dominate your trading decisions.

If you are too fixated on that peak number and view it as the only goal, it may ultimately lead to devastating consequences.

The advice presented here is: view portfolio peaks in a more rational way, treating them as a dynamic reference value that needs to be discounted, rather than an absolute goal.

This perspective is more aligned with reality:

• You will reduce unnecessary panic;

• You will retain more capital;

• You will not ruin months or even years of effort by chasing a number that never truly existed.

Remember, the core of trading is to remain rational, not to be controlled by emotions.