Title: A Guide to Narrative Trading: Unleashing the Power of Trends in Crypto
Author: The DeFi Investor
Translator: Ismay
Editor’s Note: In this article, crypto researcher The DeFi Investor explores the strategies and techniques of narrative trading, delving into how to effectively trade in the cryptocurrency market, from discovering new trends to profit-maximizing strategies. The importance of psychology in market fluctuations and the time and patience required to build successful trades are emphasized. The author also suggests that beginners start trading with small amounts of capital and learn from tracking their investment performance.
I have been narrative trading for almost three years now. There’s no doubt that narrative trading can be highly profitable if you can bet on emerging trends before most people catch on. However, it can also lead to devastating losses if you jump in too late. When I first started trading, I lost a significant amount of money for this reason. The fact that 90% of traders lose money is not without reason. Making a profit requires a substantial investment of time, effort, and patience. In this article, I’d like to share my cryptocurrency narrative trading strategy and some tips to maximize profits.
Narrative Trading Strategy Handbook
Initially, the general strategy of narrative trading is quite simple:
1. Look for upcoming significant catalysts in the cryptocurrency market.
2. Identify cryptocurrencies related to and benefiting from these catalysts.
3. Invest in them.
4. Sell when everyone starts talking about them.
An example of a catalyst that had a significant positive impact on the price of AI tokens was the AI conference held by NVIDIA in March of this year. Prior to the event, AI tokens performed exceptionally well as speculation was rife that significant AI news would be announced during the conference. Additionally, several cryptocurrency projects, such as Near Protocol, were also involved in the event.
If you had bought NEAR or other popular AI tokens a few weeks before the conference, you would have made a lot of money.
Platforms like Coinmarketcal (a cryptocurrency calendar) can help you find upcoming catalysts that may have a positive impact on the price of certain tokens.
Apart from upcoming catalysts, significant unexpected news can also lead to the formation of new narratives. For example, earlier this year, Blackstone Group announced the launch of its tokenized fund on Ethereum. This news sparked a lot of buzz in the RWA space, and many RWA tokens doubled or even tripled in price in the following days.
In hindsight, trading narratives seems easy. But the challenge lies in determining whether you are an early participant in the trend.
And in the crypto space, timing is everything.
In the subsequent sections, I will present methods to help you increase your chances of early participation in emerging trends.
The Three Waves of Hype
Most major narratives go through three stages:
1. Initially, some smart money starts buying tokens related to the potential upcoming narrative.
2. Then, a few less influential accounts on social media start sharing bullish points about the narrative.
3. Finally, everyone starts talking about the narrative, and the prices of tokens related to it skyrocket. This is an opportune time to make profits.
So how do you leverage this information to gain an advantage? Your goal should be to always catch the new trend before everyone starts discussing it on social media.
Here are a few ways to increase your chances of early participation in future narratives:
Utilize On-Chain Data for an Edge
On-chain analytics platforms like DeFillama (completely free) can help you easily discover emerging trends in DeFi.
For example, here’s how you can leverage DeFillama:
1. Go to DeFillama.
2. Click on DeFi → Overview.
3. Click on “1m Change” to sort protocols by recent TVL growth.
4. Then, click on the TVL range, select the lowest range ($5M-$10M), and choose “Apply Filters.”
5. DeFillama will then display the fastest-growing DeFi projects in the past 30 days.
If you notice that multiple top protocols in a cryptocurrency sector, such as RWA, are growing rapidly, it may be a sign that a narrative is forming in that sector, and it’s time to pay attention to it.
Build Your Network
“The network is your net worth” is more than just a catchphrase.
An underrated piece of advice is to try to connect with other narrative traders on social media platforms and build strong relationships with them.
You can use advanced search features on platforms like Twitter to find people who have discussed a certain narrative or token before it became popular.
Once you find individuals who seem to know what they’re doing, try sending them a message to establish a connection. And if you can offer some value to them in some way, they might reciprocate and start sharing their trading insights with you.
Don’t try to go it alone. It’s like trading in hard mode.
Monitor Smart Money Wallets
The easiest way to track the wallets of the most profitable on-chain traders and investors is by using tools like Nansen. However, Nansen is not free and requires a subscription fee. But even without Nansen, you can use free tools like Arkham to track smart money wallets. Arkham has advanced filtering systems for on-chain transactions.
Profit-Maximizing Strategies
Most narratives emerge due to the following reasons:
1. Significant unexpected news (real-world asset narratives due to Blackstone Group’s announcement of tokenized funds).
2. Upcoming catalysts (the cryptocurrency AI narrative in early 2024 due to high expectations for the upcoming NVIDIA AI conference).
3. Secondary market hype (GameFi is one of the favorite narratives for retail investors).
Depending on the type of narrative you’re trading, your exit strategy should differ.
For narratives driven by significant unexpected news, it’s typically difficult to estimate when they will end. However, most of these narratives only last a few weeks. When trading these narratives, I believe the best approach is to gradually take profits during the uptrend rather than closing the entire position at once.
Next, for narratives driven by upcoming catalysts, I find trading them easier.
In most cases, token prices related to these narratives reach local highs a few days before the catalyst date.
As mentioned before, the NVIDIA AI conference in the first quarter of 2024 was a significant catalyst that fueled the emergence of a new narrative around AI tokens. Many AI tokens reached their highest price levels for 2024 on the day of or a few days before the conference started. After that, they started to decline. So, this conference ultimately became a “sell the news” event.
In fact, 90% of catalysts end up becoming “sell the news” events. Considering this, I recommend taking substantial profits a few days before the catalyst, and possibly even closing the entire position.
As for narratives driven by secondary market hype, they often last until the end of a bull market.
Of course, they go through cycles of ups and downs. But for example, the AI narrative could be a narrative that maintains high performance throughout the entire bull market because it’s easily understood and favored by retail investors.
To Sum Up
Psychology plays a crucial role in the timing and rationale behind market movements in the crypto market, and game theory and market psychology take some time to grasp.
If you want to start making money from narrative trading, I also suggest starting with small amounts of money.
Track your portfolio performance over time, see what mistakes you’ve made, and how you can become more profitable. Do more of what works and less of what doesn’t.
Only consider increasing your bet size after consistently making profits over an extended period.
Trading can help you accumulate wealth, but it’s not something you can learn overnight.
Original Article Link: [insert link]
