Title: The Art of Narrative Trading: A Comprehensive Guide
Author: The DeFi Investor
Translator: Ismay
Editor’s Note: In this article, cryptocurrency researcher The DeFi Investor discusses the strategies and techniques of narrative trading, delving into the process of discovering new trends and profit strategies in the cryptocurrency market. The author emphasizes the importance of psychology in market fluctuations and the time and patience required to build successful trades. Additionally, the author advises beginners to start trading with small amounts of capital and learn from tracking their investment performance.
I have been engaged in narrative trading for nearly three years. 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 disastrous losses if you jump in too late. I personally lost a significant amount of money when I first started trading for this reason. The fact that 90% of traders experience losses is not without reason. It takes a great deal of time, dedication, and patience to be profitable. In this article, I would like to share my strategies for narrative trading in the cryptocurrency market, as well as some tips for maximizing profits.
Narrative Trading Strategy Handbook
Initially, the general strategy for narrative trading is quite simple:
1. Identify upcoming major catalysts in the cryptocurrency market.
2. Identify cryptocurrencies that are related to and benefit from these catalysts.
3. Invest in these cryptocurrencies.
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 organized by NVIDIA in March of this year. Prior to the event, AI tokens performed exceptionally well as speculation grew that major AI news would be announced during the conference. Additionally, several cryptocurrency projects, such as Near Protocol, participated 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 identify upcoming catalysts that may have a positive impact on the price of certain tokens.
In addition to 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 created a lot of buzz in the RWA sector, and many RWA tokens doubled or even tripled in price over the following days.
Hindsight makes narrative trading seem easy. However, the challenge lies in determining whether you are an early participant in a trend or not.
And in the crypto space, timing is everything.
In the following sections, I will introduce some 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, smart money starts buying tokens that are related to an upcoming narrative.
2. Then, a few lesser-known accounts on social media begin sharing bullish points about the narrative.
3. Finally, everyone starts talking about the narrative, and the prices of related tokens skyrocket. This is a good time to take profits.
So, how can you leverage this information to gain an advantage? Your goal should be to consistently capture new trends before everyone starts discussing them on social media.
Here are a few methods to increase your chances of early participation in future narratives:
Utilize On-Chain Data for an Edge
On-chain analysis platforms like DeFillama (completely free) can help you easily identify 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 and select the lowest range ($5M-$10M) and click “Apply Filters.”
DeFillama will then display the DeFi projects that have experienced the fastest growth in the past 30 days.
If you notice that multiple top protocols in a particular cryptocurrency sector (e.g., RWA) are growing rapidly, it may be a sign that a narrative is forming in that sector, and it’s time to pay attention.
Build Your Network
“The strength of your network is your net worth” is not just a meme.
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 gained popularity.
Once you find individuals who seem to know what they are doing, try reaching out to them and establishing a connection. If you can provide some value to them in some way, they may reciprocate by sharing their trading insights with you.
Don’t try to go it alone. It’s like trading on hard mode.
Monitor Smart Money Wallets
The easiest way to monitor 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. But even without Nansen, you can use free tools like Arkham to track smart money wallets. Arkham has advanced filtering systems for tracking on-chain transactions.
Profit Strategies
Most narratives arise due to the following reasons:
1. Major unexpected news (e.g., the Real World Assets narrative was triggered by Blackstone Group’s announcement of tokenized funds).
2. Upcoming catalysts (e.g., the cryptocurrency AI narrative in early 2024 was fueled by the high expectations for the upcoming NVIDIA AI conference).
3. Secondary market hype (GameFi is one of the favorite narratives among retail investors).
Depending on the type of narrative you are trading, your exit strategy should differ.
For narratives driven by major unexpected news, it is usually difficult to estimate when they will end. However, most of these narratives only last a few weeks. When trading these narratives, I believe it is best to gradually take profits during the upward trend rather than closing the entire position all at once.
Next, for narratives driven by upcoming catalysts, I find that trading is easier.
In most cases, the prices of tokens related to these narratives reach local highs a few days before the catalyst date.
As mentioned earlier, the NVIDIA AI conference in the first quarter of 2024 significantly contributed to the emergence of a new narrative around AI tokens. Many AI tokens reached their highest price levels for 2024 on the day or a few days before the conference started. Afterward, they began to decline. So, this conference ultimately became a “sell the news” event.
In fact, 90% of catalysts eventually turn into “sell the news” events. Given 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 generally last until the end of a bull market.
Of course, they will go through cycles of ups and downs. But for example, the AI narrative may maintain high performance throughout the entire bull market because it is easy to understand and beloved by retail investors.
In summary, psychology plays a crucial role in the timing and reasons behind market movements in the crypto space, and game theory and market psychology take time to understand.
If you want to start making money from narrative trading, I also recommend starting with small amounts of capital.
Track your portfolio performance over time and see what mistakes you 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 a long period of time.
Trading can help you accumulate wealth, but it’s not something you can learn overnight.
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