I received a note from one of our customers the other day that commented, “I keep getting the direction wrong on my trades. When I go long, the price drops after that. When I go short, the price rallies.”
Welcome to the Jungle. This is precisely why price moves as it does. Who hasn’t felt like this is happening to them at one point or another in their trading career?
To be fair, I haven’t looked at this gent’s trades to understand the root causes behind these decisions, but if he’s like 99% of the other traders that I’ve worked with, these “wrong-way” decisions are deeply rooted and difficult to change. And until they do understand these root causes, it’s likely that he will bounce from system to system looking for the “holy grail” and not truly understanding the root cause of the losses through poor timing and bad decisions.
OK, so what are some likely root causes? After first diagnosing these in my own early career, as well as hundreds of others, I find that it really comes down to two main things:
Affirmation – Humans are really social creatures and like to run in a pack. This is why everyone looks to validate their decisions through others first. “Hey, do you think this is a good trade? Should I buy this coin?” These are questions that I literally get every single day. Our social conditioning is such that we tend to validate all important decisions in a social context, such as asking friends and family before undertaking a big venture such as buying a house or choosing a spouse, or even asking for input on social media. It stands to reason that the same structure should provide value in the investing world, but this automatically places you squarely in the “Herd,” or as some would call, the “dumb money.” You have no edge versus everyone else, and the biggest moves happen when the Herd is surprised or frightened. Trading along with the Herd rarely (if ever) provides any benefit.
Waiting For the Trade to Feel Good – Closely aligned with the previous point is the need for certainty. We want any investment that we make to have certainty in its outcome. If we buy a coin or cryptocurrency, we want it to go higher, and right away. And how do you achieve certainty with an investment? One way would be by achieving an illegal edge through inside information. For the most part, however, there is zero certainty about the forward price movement behind a coin. No one knows the future, even though a few pundits can project certainty or confidence about a forward move. So…we listen to pundits, read articles, talk to others, and wait wait wait until everything feels “just right” for our investment. We pull the trigger, and are shocked when our purchase marks the high-water mark of that move. Why did this happen? Retail traders typically buy at the top of a move and sell out at the bottom. They buy “at the top” because they look for social and technical validation, looking to eliminate “risk” from the trade, and by doing so, they create exactly what they are looking to avoid.
I hope you can see that the traits of 1) looking for affirmation before decisions, and 2) looking to eliminate risk by waiting for the trade to “feel good” are likely the root causes of account destruction for this individual, as well as the majority of others.
So what can be done to avoid this?
Successful investors tend to be more contrarian, preferring to go against the crowd, and will go to great lengths to preserve independent thought. In many cases they will look for conditions where it’s apparent that everyone is pointed in one direction, and they will begin to take the “other side” of the Herd. This does not mean automatically “shorting” every rally in price, but rather to take profits or sell into the move progressively….precisely where most people are starting the process of buying that coin when things “feel good.”
This…is not easy to do. Don’t let me imply otherwise. To achieve better performance than the Herd achieves, you have to be willing to do what everyone else is not.
And this is why the price drops right after most people buy, or rises right after they sell. Stop socializing your trading decisions, and learn to think independently. This is what we discuss all the time in the ReadySetCrypto OMNIA member community…we use social channels to help teach members how to think independently, and not to tell them what to do.