Conceptualising Capitulation

Jose Mourinho hearing the Aggr tape as Bitfinex machine gun sells 100k clips.
The day I stopped feeling feelings.
  1. You may not be in a position to even attempt to catch the volatile downside move. By definition, these moves are caused by (or at the very least exacerbated by) liquidation cascades. This entails speculators getting liquidated en masse and others trying to avoid that same outcome by reducing their positions and/or adding collateral. Having cash and no positions to babysit is a luxury.
  2. Margins of error in estimating when the selling will stop tend be very large. Your idea to buy could be ‘correct’ and you still might have to eat a 10%–20% move against you at the extremes. That’s why knife-catching with leverage is particularly precarious. What can sometimes work is identifying a high time frame ‘value area’ to buy and being mentally prepared for a significant spike through it (which you should technically see as a discount).
  3. Liquidity evaporates. These one-sided moves are very toxic, so spreads will reflect that. Liquidity providers will also typically be quoting smaller sizes. Colloquially, this makes for ‘thin’ order books i.e. market order fill prices will be worse and the price impact of market orders will be much higher.
  4. It’s unnecessary. As we’ll discuss when identifying other forms of capitulation, buying the bottom of an outsized move isn’t a prerequisite for great returns. Although there are much better arguments to illustrate this point, consider the following: nobody’s bull market ‘flex’ (returns-wise) is buying the Bitcoin or Ethereum bottom. It’s usually the conditions that followed that bottom, quite often months later, that facilitated the eye-watering returns. Having a sense of the bottom certainly helps with timing altcoin discounts, but it’s not necessary (especially when considering the cost of being wrong on your knife-catch).
  1. Don’t risk your ability to take risk. High leverage and poor collateralisation in general significantly increase the likelihood that you don’t make it. At the very least, don’t become a forced seller. If you want to optimise things, have a stack of cash to throw at the market when everything breaks.
  2. Tailor your trading to the environment. Sometimes that means no trading. That can remain the case for weeks or maybe even months. If you have to ask yourself whether you have an edge as your finger is hovering over the buy/sell button, you probably don’t. Keep a journal, and take note when setups that were previously printing start to eat shit.
  3. Capitulation exists at both ends of the volatility spectrum. Just because you survived the nuke, does not mean you’ll immediately be rewarded with a trend. Just because there is no nuke, doesn’t mean the market can’t bottom.
  4. You don’t need to catch or trade the capitulation to be ‘early’. You can buy momentum and constructive higher time frame market structure, assuming your ego can handle paying a higher price than your mate’s 39th knife-catch. Example would be buying BTC/USD on the reclaim of $8000 or even the breakout of $12000 in 2020, even though the capitulation occurred much lower than that.
  1. My free trading videos and articles (full resource list)
  2. My free weekly newsletter with market commentary
  3. TechnicalRoundup, where I make market analysis videos with a duck on the internet
  4. My Twitter, where I am an elite tier reply guy

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