This continues the thoughts shared in my previous post about Buy Low, Sell High.

This is accompanied by the concept to buy when everyone else is selling, and to sell when everyone else is buying.

Sometimes the most obvious concepts are the most helpful to remember when things are stressful in the marketplace. Often, we think simple principles aren't helpful because they should be obvious. So, why is it, then, that most people lose and get out of trading all together?

When you buy a position, and assume it is lower than it has been in previous scenarios, you feel you've accomplished the first step. Now, it's time to sell high. "How high?" you might ask. Let's assume we're looking at relatively small profit % in short time, since crypto is highly volatile.

In the other article, I focused mostly on the fact that the risks are much trickier than first assumed, and as you break down the opportunities and the likelihood of earning a profit, there is an extremely small chance of guessing right and earning. Over long trends, with Bitcoin for example, the earlier you got in, the higher the long term trend works in your favor, but not everyone had the opportunity to get in when Bitcoin was extremely inexpensive. The shorter trends of almost all coins has a great deal of volatility.

So, I want to focus on a few hidden reasons that coins are more likely to go down, than to go up. Again, this may not be about hodling for entire 2-3 year bear or bull runs, but more about the ongoing movement in the market, likely what is faced by scalping, day trading and swing trading (1-5 days usually) and even mid term, from one week to the next.

When you place a limit buy order, it is seen by the order book but it is not yet executed. So, the value is 'known' by the matching engine. It can be calculated upwards and averaged into every position higher than it, and pass that information on to the sell positions upwards. When there is a match, typically there is more likely to be a higher number of people placing more money in lower positions, because if it came down to eat your position for lunch, it means it went down to do so. This increases the chance that it will find more volume and liquidity in the positions below yours, which increases the likelihood it goes down further in price.

When there are a lot of people increasingly wanting to take advantage of the falling price, eventually the amount trying to buy becomes shallow, and fewer people are available to sell at these lower positions. Manual traders see this, and get nervous it will either drop further, or get stuck not fulfilling orders. People who just bought in before you are probably setting up their sell orders, and those are too high to fill even lower amounts.

It becomes less likely to keep going down because now there are fewer people who want to sell at lower positions. Now the trend is less favorable. But, if people are noticing the market starting to stall a bit, and they see this popular coin is going low, it usually leads to more action via market orders. Wherever the current math says a position can be filled, it will grab from everything selling in the order book to fill the market order, and the more there is, the higher the price will go. Without making this an entire novel on market movement in the order book, the truth is that it takes more conditions, more money, and more contributors to get the price moving upwards than downwards. Wherever your starting point begins, it is very likely in order to get in, it was headed down a little bit more before going up. 

If you get in, and the price goes down slightly, you must establish what the profit percentage actually needs to be based on how low it goes, and not just where you placed your buy. So, to continue the previous article's example, let's say with $100 you want it to go up 2%, but first it goes down 2%. That first 2% is just going to get you back to your buy-in, and then it has to still go up 2%. Since I assume this kind of thing might happen, I mentally prepare for something I feel has a pillow of an added 2% just in case it needs to fluctuate until it strikes my profit. I personally don't even go for this large a percentage, because the volatility has taught me to go very safe, very often.

Here is the part that people may struggle with; from the order book to volume to the trader's mental and emotional journey, the math works against us from low to high. For example, a deeper math discussion here:

Let's say we bought at the market price value of $100 (not the size of the trade, but the cost of the coin).

Let's say we did so at exactly the wrong time. It goes down to $50 in value.Your first thought might be that it went down 50%, so it has to come up 50%. Makes sense. Except, what is 50% of $50? Did you just have your eyes opened?

Listen, any day on the market, for a real coin, not a tiny coin getting the life pumped out of it, but a real coin, 50% is a massive move. But, in this case, you aren't going down 50% and needing to come back up 50%. When your $100 went down 50%, it became $50, and 50% of $50 is $25, meaning if people view the current trending position as their low, regarding buy low, sell high, then they are likely looking to earn maybe 2-3% on $50, which is a lot easier to do than earning 2-3% of $100. It takes twice as large a move to hit the same percentage when it is worth twice the amount. So, we actually need our $50 coin to go up 100% just to get back to even Steven.

I am going to add an analogy to this for you to understand.

We know that gravity causes a downward pressure on things. You throw something in the air, it is assumed it will fall back down with force because of gravity. If we use the same energy to throw an item towards the ground, it accumulates more 'oomph' because of gravity. We are adding our energy, force, momentum, to gravity, so the item will likely journey with a lot more speed and impact force if we throw it down. If we throw it upwards, we are working against gravity and the speed and force of the object will be less. There is a very strong, similar correlation to how the market works in this scenario.

Another example would be if you used a ruler to measure your child's height as they get older. If you're a good parent, you might have a place in the house that has a lot of marks with dates that your kids got taller, and if you don't, get to it! You use the even measurement of the ruler to measure upwards movement. The likelihood that the child will go against the majority of what happens with growth spurts is very low (until they get old then watch out they start shrinking). In the metaphor of statistics, we're looking at probability. It is highly unlikely that you will measure your child into their teens and find them getting shorter and shorter than they were in 4th grade. This is similar to the probability of value going up in the order book versus going down. It isn't just the mirror image of movement. FUD, or fear, uncertainty, doubt, works against the trader and coin value, and FOMO, the fear of missing out, may drive the price upwards in the short term, but it almost instantly can lose value and volume because the higher it goes, the more you find the experienced traders know to back off so as to not get stuck at the peak. The most inexperienced, fearful traders will market buy right up to the top, and then when they see the trend reverses, they freak out and sell quickly, and the result is they did the exact opposite of that simple rule; buy low, sell high.

One final point for people on this part of the topic; even the most experienced traders will make these mistakes, and they will tend to do so in the coins that people focus on the most. Bitcoin being the top of that list, whenever there is a huge expectation for the price to go up, despite knowledge of how things work, there is such pressure to assume Bitcoin will keep going up once it starts, it is very easy for whales with huge sell orders to sit back and wait for those to get filled. If they are on the books for weeks, months, even longer, the market has been adjusted to that with newer volume for a long time. When FOMO drives the price up to old, high value positions, it's going to peak out and come dropping down. Everyone who was ready to take profit in that range will gladly sell off at market licketty split. In the end, it is the inexperienced trader that eats the losses heavier than seasoned pro's and bots, but the more people are counting on something huge, the more likely they are to break their own rules.

I hope you found this interesting. If so, tip!

Gordon Freeman Out.