Crypto Trading Decision Framework

Crypto Trading Decision Framework

Bottom line: Every trade decision runs through 3 gates — sizing, entry checklist, exit plan. If any gate fails, the trade doesn't happen. No exceptions.

When to invoke

Any trading discussion that involves:

• New position entry recommendation
• Position sizing for any asset
• Stop loss / take profit calibration
• Risk-reward analysis
• Live trade management
• Strategy halt / kill decisions
• Portfolio concentration calls

Gate 1 — Position Sizing

Step 1: Risk per trade

• Default: 1% of total liquid portfolio per single trade
• Aggressive: 2% if conviction ≥85% AND backtest sample n≥30 trades
• Conservative: 0.5% on first trade in a new strategy or unfamiliar asset

Step 2: Stop distance

• Hard stop: Always at the level that technically invalidates the thesis
• Time stop: Default 48 bars on 4H, 24 bars on 1H (strategy isn't playing out on schedule = exit)
• Trailing stop: Activate after first 1R achieved; trail at 0.5R below current price

Step 3: Position size formula

Position size (notional) = (Risk % ÷ Stop distance %) × Liquid portfolio
Example: 1% risk, 1.5% stop distance → (1/1.5) × $50,000 = ~$33,333 notional

For leveraged accounts: cap leverage at 3× for new strategies, 5× for proven strategies with n≥50 live trades.

Gate 2 — Entry Checklist (must answer all YES)

1. ☐ Backtest sample size n ≥ 20 trades
2. ☐ Profit factor (PF) ≥ 1.3 in out-of-sample test window (not just training)
3. ☐ Max drawdown (MDD) ≤ 20%
4. ☐ Out-of-sample (OOS) returns positive
5. ☐ Strategy has a clear thesis — not just curve-fitting
6. ☐ Current market regime matches strategy's design regime (mean-reversion in choppy, trend-following in trending)
7. ☐ Position size compliant with Gate 1 above
8. ☐ Hard stop level identified pre-entry
9. ☐ Time exit level identified pre-entry
10. ☐ Take profit ladder identified (TP1 / TP2 / TP3 if multi-target)

Scoring:

• 10/10 YES → proceed
• 8-9/10 YES → proceed with caution, note the gaps
• < 8/10 YES → DO NOT ENTER
• < 6/10 YES → KILL THE STRATEGY entirely

Gate 3 — Exit Framework

Priority order for exits

1. Hard stop hit — thesis invalidated. Cut without question. No re-evaluation during the close.
2. Time stop hit — strategy hasn't played out in expected timeframe. Exit at market.
3. Take profit hit — pre-planned TP reached. Exit per ladder (e.g., 50% at TP1, 25% at TP2, 25% trail).
4. Signal flip — strategy generates the opposite signal. Exit + flip.
5. Regime change — macro backdrop has shifted materially (e.g., dominance flip, Fear & Greed regime change).
6. Discretionary — user decision. Done.

What NOT to do (the most common losses)

• ❌ Moving stops further away mid-trade ("just give it more room")
• ❌ Adding to losing positions ("averaging down" on a broken thesis)
• ❌ Early exit on a winner before TP1 unless thesis explicitly broke
• ❌ Second-guessing a planned exit because of hope or FOMO
• ❌ Holding past time stop because "it might come back"

R:R Minimums by Strategy Type

If a setup doesn't clear BOTH the R:R minimum and the historical win rate floor → DO NOT RECOMMEND.

Strategy Halt Decision Tree

When a live strategy is underperforming, work through this tree top to bottom:

1. Has the strategy hit its account-level kill-switch loss?
   YES → HALT immediately. Post-mortem before any restart.
   NO → next step.

2. Has the strategy hit -3R drawdown beyond its expected backtest MDD?
   YES → PAUSE for 5 trading days. Re-evaluate regime fit.
   NO → next step.

3. Is the live profit factor ≤ 50% of backtest PF over n≥10 live trades?
   YES → SHRINK position size 50%, run another 10 trades, re-evaluate.
   NO → next step.

4. Has the strategy produced zero signals for N days, where N > 2× expected signal frequency?
   YES → Strategy is dead in current regime. KILL or re-tune thresholds.
   NO → Normal volatility. No action needed.

Real-Money Escalation Rules

These always require human approval — never autonomous execution:

• New live capital deployment of any size
• Increasing an existing live capital allocation
• Moving a strategy from paper to live
• Stop loss override or removal
• Adding to a losing position
• Manual close of an open live position
• Any single action that reduces account equity by >5%

4-Model Consensus Rule (for large capital decisions)

For any deployment of significant capital:

1. Primary LLM — full recommendation with confidence tags
2. Second LLM — independent macro + asset-specific opinion
3. Third LLM — code/execution path audit + edge case check
4. Fourth LLM — risk/sizing sanity check

If 2+ models disagree → defer 24h, re-run consensus tomorrow. Disagreement = edge case, not clear enough to act.

Confidence Tags (include on every trading recommendation)

Always attach 3 tags to any trade call:

• Confidence: % belief the recommendation is correct (60-95% typical)
• Research depth: % of relevant data actually pulled this session (50-90% typical)
• Reality gap: % unknowns / black-swan exposure (5-25% typical)

Example: "Confidence 82% / Research Depth 75% / Reality Gap 20%"

This keeps recommendations honest and prevents overconfidence drift.

Output Format

When this framework produces a trade recommendation, structure it as:

## Trade Recommendation: [ASSET] [LONG/SHORT]

**Thesis:** [1-2 sentences — why this setup exists]
**Regime fit:** [why current market supports this strategy type]

**Sizing:**
- Portfolio size: $X
- Risk per trade: $X (1%)
- Stop distance: X%
- Position notional: $X

**Entry checklist:** X/10 YES [list any NO items]
**R:R:** X:1 [minimum met: YES/NO]

**Levels:**
- Entry: $X
- Hard stop: $X (thesis invalidated if price reaches here because: [reason])
- TP1: $X (partial exit X%)
- TP2: $X (partial exit X%)
- Time stop: [date/bar count]

**Confidence:** X% / Research Depth X% / Reality Gap X%

**Escalation required:** YES/NO [why]