What is Narrative Trading?
Cryptocurrency (and the stock market in general) is dominated by cycles - remember BTC halving → bull market → bear market → bull market → etc. This is not unique to cryptocurrencies, but a trait that can be seen in any market in general. However, during these cycles, there are "mini-cycles" in which certain "narratives/trends" emerge - recent ones might be the DEX narrative after the FTX crash or the L2 narrative. These “week/day” ups and downs are specific to cryptocurrencies because, as far as I understand, I don’t see anything like this in the Trad-Fi markets.
No one knows how they arise, and this is not necessary. Narratives are a function of price - i.e. the price almost always moves before the narrative appears. Most of the time, the crowd simply comes up with "reasons" for why the price moves in a certain direction, and that reason - whether true or not - becomes the main topic. Think back to the recent GALA pump - why it happened, secondary to the outpacing move that followed with SAND and MANA as people gradually realized we had a "metaverse pump".
So we know more or less what a narrative is and how it spreads. So, what are the stages that narrative trading usually goes through? In general, there are three main points at which you can jump into an idea, namely:
Point (1) before the start of the pump of a certain narrative.
Point (2) is where only the earliest users find the narrative and tap into it.
Point (3) when everyone finds out what it is.
Of course, entering an idea at each of these points has its drawbacks:
At point (1) you have the highest potential reward, but a low probability.
At point (2) you have a slightly lower reward, but a higher chance of being right.
At point (3) you get the least reward, but practical confirmation that this narrative exists.
Personally, I like to trade point (2) as it offers the best balance between the three options. Most narrative traders also trade at point (2) because it is a strategy that does not depend on luck as much as (1), and at the same time is more profitable than (3).
Finding Alpha
The context has been set, and now it's time to dive into exactly how you can discover a narrative at the ideal moment - before it's pumped, but after confirming that it's real.
It sounds very simple, but in reality, thousands of tools are not so useful if you use them all at once. We are talking about monitoring wallets, tracking networks, etc. These are incredibly time-consuming methods that, when viewed over the longer term, probably won't get you as much alpha as being on a Twitter/Discord group full of DeFi degens and beyond. You need to decide and select a certain list of tools specifically for yourself and improve yourself using them.
So, back to Twitter lists and Discord groups. Now, it's not so much the platform that is used, but the type of connections. This is the key point to grasp - it's all about the network. If you're in a Discord group full of traders who are actively following the markets, you can more or less watch the flow - the flow of where the overall trend is heading. But if you are in a group where everyone is just watching the price action, bad times are ahead of you.
Certain lists/influencers are also great for these kinds of observations.
Research
The next step is to do your own research on what you are going to trade. Research is essentially searching for everything you don't know about a project, from reading documents to talking to admins on Discord. All this is not at all meaningless (as you might think), but rather the opposite.
Research is extremely important for building your personal thesis. You cannot just blindly repeat what someone else tells you. You just need to know the project in order to build conviction, and conviction is what allows you to stay afloat after shaking out in order to capture the most profitable trade.
For example, HOOK went through an extremely volatile period and many traders were shocked by the erratic price action. However, in the course of the research, you gain knowledge about how the protocol works and what exactly makes it good and attractive. With this knowledge, you can stay in your positions for a longer period of time, knowing that they still have "some value."
While you don't have to know everything about the project, it's important to know at least the basics - for example, that MATIC is a scaling solution and will benefit from the L2/scalability narrative.
Gathering everything in one place
It is also worth talking about how not to get confused in all the narratives or forget/miss them. One easy way to organize is to start a narrative tracker. Below is an example of a dashboard in Notion that will certainly help you keep track of what is happening. Don't get hung up on the platform - you can create a narrative tracker wherever you feel most comfortable, even in Excel or even in the form of physical sticky notes. Returning to the example below, here is what each column means:
Potential narratives. "I don't see catalysts at the moment, but this is something that has long-term potential."
Under control. “It means that I am not actively investing in it right now, but I am paying attention and watching what is happening.”
Short-term deals. “Narrative that I trade in the short term.”
Long-term investments. “I am considering investing for the long term.”
Already done narratives. “That's it, the performance is over, and I don't think it has any potential left.”
You can add additional columns for your convenience, for example, that the token is issued or not issued. Or if you click on the card, it gives you more details. As a result, there is so much information in the crypto ecosystem that it simply needs to be sorted, monitored, and not lost sight of.
Final Thoughts
To be honest, there is no top-secret method by which narrative traders beat the markets. Much of this also comes with experience. So just “do these exercises” every day.
