Mastering Narrative Trading: A Complete Guide from Trend Discovery to Profit Strategies

Original Title: 《A narrative trading guide》

Author: The DeFi Investor

Translator: Ismay

Editor's Note: In this article, crypto researcher The DeFi Investor introduces strategies and techniques for narrative trading, exploring how to effectively trade in the cryptocurrency market from discovering new trends to profit strategies. He emphasizes the important role of psychology in market fluctuations and the time and patience required to build successful trading. He also suggests that beginners start trading with small amounts and learn lessons by continuously tracking investment performance.

I have been engaged in narrative trading for nearly 3 years. Undoubtedly, if you can bet on emerging trends before most people, narrative trading can be very profitable. But at the same time, if you follow the trend too late, you can also suffer significant losses. I lost a substantial amount of money when I first started trading for this reason. There is a reason why 90% of traders lose money. It takes a lot of time, effort, and patience to be profitable. In this issue, I want to share my cryptocurrency narrative trading strategy and some tips to maximize profits.

Narrative Trading Strategy Handbook

At first, the general strategy for narrative trading is quite simple:

1. Look for upcoming major cryptocurrency catalysts
2. Identify the cryptocurrencies related to and benefiting from them
3. Invest in them
4. Sell when everyone starts talking about them

An example of a catalyst that had a huge positive impact on AI token prices was the AI conference held by NVIDIA in March this year.

Before this event, AI tokens performed exceptionally well as there was speculation that some significant AI news would be released during the conference. Additionally, several crypto project teams, such as Near Protocol, also participated in this event.

If you bought NEAR or other popular AI tokens a few weeks before the conference, you would have made a lot of money.

Platforms like Coinmarketcal (cryptocurrency calendar) can help you find upcoming catalysts that may positively impact the prices of certain tokens.

In addition to upcoming catalysts, major unexpected news can also lead to the formation of new narratives.

For example, earlier this year, BlackRock announced the launch of its tokenized fund on Ethereum. This news generated a lot of hype 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 problem is, it’s hard to determine whether you are an early participant in the trend.

And in the crypto space, timing is everything.

In the follow-up content of this issue, I will introduce some methods to help you increase your chances of early participation in emerging trends.

Three Waves of Hype

Most major narratives go through three stages:

First, some smart money starts buying tokens related to the potential upcoming narrative. Then, several lesser-known X accounts begin sharing bullish arguments about the narrative on X. Finally, everyone starts talking about the narrative on X, and the prices of the related tokens skyrocket. This is a good time to start taking profits.

So how do you leverage this information to gain an advantage? Your goal should be to always catch new trends before everyone starts discussing bullish scenarios on social media platforms.

Here are a few ways to increase your chances of early participation in future narratives:

Leverage On-Chain Data for an Edge

On-chain analysis platforms like DeFillama (completely free) can help you easily discover emerging trends in DeFi.

For example, here’s how you can leverage DeFillama for an edge:

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 $5M-$10M, and then choose "Apply Filter"

After that, DeFillama will display the fastest-growing DeFi projects over the past 30 days.

If you find that multiple top protocols in a certain cryptocurrency sector (e.g., RWA) are growing at a very fast pace, 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

"Your network is your net worth" is not just a meme.

An underrated suggestion is to try to connect with other narrative traders on social media platforms and build strong relationships with them.

You can use X's advanced search feature to find people who were discussing a narrative or token before its price increase.

Once you find some people who seem to know what they are doing, try sending them a message to establish a connection.

If you do this, and perhaps provide them with some value in some way, they may reciprocate and start 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 to use tools like Nansen.

However, Nansen is not free and requires a paid subscription. But even without Nansen, you can use free tools like Arkham to track smart money wallets. Arkham has an advanced filtering system for tracking on-chain transactions.

Profit Strategies

Most narratives arise for the following reasons:

1. Major unexpected news (the RWA narrative was triggered by BlackRock's announcement of a tokenized fund)
2. Upcoming catalysts (the cryptocurrency AI narrative in early 2024 was driven by high expectations for the upcoming NVIDIA AI conference)
3. Secondary market hype (GameFi is one of the narratives favored by retail investors)

Depending on the type of narrative you are trading, your exit strategy should vary.

For narratives driven by major unexpected news, it is often difficult to estimate when they will end. But most of these narratives only last a few weeks. When trading these narratives, I believe the best practice is to gradually take profits during the uptrend rather than closing the entire position at once.

Next, for narratives related to upcoming catalysts, I find them easier to trade.

In most cases, the prices of tokens related to these narratives reach local highs a few days before the catalyst date.

As I mentioned earlier, NVIDIA's AI conference significantly contributed to the emergence of a new narrative around AI tokens in Q1 2024. Many AI tokens reached their highest price levels for 2024 on the day of the conference or a few days before. After that, they began to decline. So this conference ultimately became a "sell the news" event.

In fact, 90% of catalysts eventually become "sell the news" events. Given this, I recommend taking significant profits a few days before the catalyst, or even possibly closing the entire position.

As for narratives arising from secondary market hype, they often last until the end of the bull market.

Of course, they will all experience cycles of ups and downs. But for example, AI may remain a high-performing narrative throughout the entire bull market because it is easy to understand and favored by retail investors.

Summary

Psychology plays a crucial role in the timing and reasons for movements in the crypto market, and game theory and market psychology take some time to understand.

If you want to start making money from narrative trading, I also recommend starting with a small amount of money.

Track your portfolio performance over time to see what mistakes you made and how you can become more profitable. Do more effective things and less ineffective things.

Only consider increasing your bet size after consistently making money over a long period.

Trading can help you accumulate wealth, but it is not something you can learn overnight.