image courtesy Eftakher Alam on Unsplash
Author's note: People new to trading enter the crypto-market constantly, and the amount of information they must digest to make sound and informed decisions can be overwhelming. Here is the third in a series of articles based upon my own experiences and study to help the inexperienced and under-educated get off to a good start trading/investing in crypto-currencies.
Disclaimer: Nothing I write in any of these articles is financial advice of any type. Be sure to do your own research and thoroughly understand the assets you're investing in and how various trading mechanisms operate before deploying any capital.
A common misconception for the greenhorn trader is that the goal they should seek to attain in the crypto-market is earning profits. Forgiving this error is easy; it was the images of Lambos and beachfront mansions that first caught the novice's attention and brought them here. Focusing on the final result instead of achieving those results is expected of someone who doesn't fully appreciate trading's complexity. As I began this journey, I had little real trading knowledge, and this is often the case with people who find themselves involved in crypto-trading. There is no way to sugarcoat it: market participants are after one another's hard-earned scratch. Trading the crypto-market is war and nothing else. Those who are prone to acting on emotion or who lack the requisite skills to succeed against others who may often have years of experience and well-developed trading chops will most likely get a taste of just how merciless the market can be. The flip side of that coin is this: especially when trading in the crypto market's longer time frames, developing the amount of skill one must possess to leave The Herd behind is not that great for a dedicated student.
At this point, as we begin moving forward, we need to define our terms.
The Herd Ain't A Good Place To Be
I have referred to a group of people that traders call The Herd. As you can imagine, from the way it sounds, it is not a complimentary term. Some essential characteristics define who a Herd member is, and there are individual traits they tend to exhibit.
Psychologists refer to Herd mentality bias, a phenomenon where people rationalize a course of action based on other people doing the same thing. The basis of Herd bias is the notion that following a crowd will lead to a desired outcome and assumes the knowledge of many people must outweigh that of the few. The decision to follow The Herd is generally an unconscious one; people do it because it feels comfortable to be part of a group, all pulling in the same direction. It is hardwired into us as humans and is not entirely negative. If you've ever been caught up in the drama of the moment while attending a sporting event like a baseball game, you have experienced a positive example of The Herd mentality in action. It's great fun to be a part of the crowd, all cheering for the home team as they claw their way back from being several runs down in the bottom of the ninth inning to win the contest with a walk-off home run or on an error by the opposition. In the markets, though, blindly following the crowd can be a recipe for misery.
FOMO or the Fear Of Missing Out can be viewed as one example of The Herd mentality in action and manifests itself in several forms, including panic buying (or selling) due to an increasing number of people doing so. Asset bubbles such as the notorious Dutch Tulip mania of the early 1600s are extreme examples of The Herd mentality run amok in the marketplace. As a trader, one should watch out for and be on guard against The Herd membership's tell-tale signs in their thinking while also bearing mind that sometimes, The Herd is right. There are occasions where everyone is moving in the same direction for the right reasons. One may think of this situation as an example of one of the endless complexities that trading presents to those who attempt to master it.
Emotional Trading Is A Dead Giveaway
The influence of emotion and instinct on their decision-making process is a Herd member's hallmark. Rather than reaching conclusions through independent analysis, they prefer to crowd-source their trading decisions. They'll spend endless hours watching YouTube crypto videos and combing social media sites for tips and information on what everyone else thinks are the "hot" altcoins right now. They eschew studying any trading system and view Technical Analysis as only so much voodoo or other dark art, preferring to rely on the crowd's wisdom for guidance.
Another mark of The Herd: the Herd trader convinces themselves that they can foretell what will happen next in the market. When they open a position, they've invariably convinced themselves it will be a profitable trade. Without such certainty of thought, why else would they open it? A simple truth of trading is that no one and no system will ever produce positive results 100% of the time. No one can know or say with 100% certainty what any one asset or the market as a whole will do. Anyone who tells you they can prognosticate any market's future at such a level is peddling pure snake oil. This inherent uncertainty is why risk management plays such a vital role in the success or failure a trader enjoys. Because of this, The Herd not only lacks any interest in studying trading systems they also decline to follow one of the most fundamental rules for traders: developing a written trade plan for every position they open. Especially for people fresh to studying trading, trading plans provide not only a written guide to follow to execute the trade without emotion interfering in the process, but they are also an invaluable source of information to examine when looking for areas that need improvement.
This entire article could have been devoted to the subject of The Herd and what constitutes membership in that group. Some of the keys are a failure to appreciate the work that's required to successfully trade consistently, a lack of attention to detail and planning, and indifference or hostility to learning/developing a trading system beyond tips & crowd-sourcing. Honestly assess yourself, focusing on your attitudes and the work/study practices that emerge from them. If you find you fit into any of these behavior patterns in any way, you may now consider yourself counseled on the need to overhaul your thinking.
Find Your Edge & Sharpen It
The often unseen truth for the novice trader is that it is necessary to find a way to create an edge for themselves over other market participants to achieve the profits they seek. When someone has an edge in the market, they have developed an advantage that makes them more likely to be successful than other traders. Defining an edge and putting it into practice is precisely the same mechanism that allows casinos to remain open for business and happy to see new customers. The casino wants to entice people to play their various games of chance because they know that, over the long haul, they will beat the public more than the public beats them. Here is why they crack down so hard on blackjack players who have mastered the art of card counting: anyone who has the skill to disrupt the system by beating the odds is not welcome to play. With the house always winning in the long run and the promise of large payouts available, the players willingly participate in a game they understand (or should understand) is statistically rigged against them.
On a few occasions, I've had the experience of trying to explain the concept of "trading cryptocurrencies" with someone who knew very little about either. Their responses have always been along the lines of: "sounds like gambling to me." There are similarities between the two. Successful trading relies on using the probability of a desired outcome to open and close asset positions with a profitable result that does bear a likeness to gambling. After all, there's a risk involved in every trade, or it's not a trade. In a future article, I will explore the differences between wagering on the outcome of random events by pulling a slot machine handle or betting on a football game and speculating on an asset's price action by utilizing a trading system to analyze data and execute a trade.
Generally, one can think of an edge as the ability to see the potential for a better probability of one thing happening over another. Different methods or systems are used by traders to create this advantage. The trader's experience level and ultimately, their intuitive ability also play a role in defining or, perhaps, refining their edge. For the novice trader, developing enough of an advantage to expect to trade successfully consistently is a daunting task.
Put The Work In
Long answer short: if one is a complete novice and lacks any substantial amount of knowledge or experience regarding trading, they have a lot of work ahead of them. No one can expect to master all the skills needed or to experience the level of personal growth and emotional development required for profitable trading overnight. Doing so involves a process of study, work, and practice that will consume many hours of one's life. How long is needed for a given individual to become a consistently successful trader is very much an open-ended question. The timeline for developing that skill level will depend on numerous factors, including the student's aptitude for learning, the amount of time they can apply to study, and their enthusiasm for the subject matter. Elsewhere, I've written that possessing or developing the mental skills of persistence and patience are vital to a trader. Without those, the prospects for a student to succeed are dim ones indeed.
No Matter What, Don't Quit
Persistence requires the stubborn refusal to quit working towards one's dream, no matter what obstacles the trading student encounters. Those obstacles can be many and come from different sources, some external, others from within. Constraints on one's time from family or work commitments are prime examples of external obstacles that can interfere with studying time. Developing time management skills and a plan will help to an extent, but nothing replaces prioritizing crypto-study to a very high position on one's list of daily tasks. Nothing replaces the determination to commit to studying and carrying it out. One must be willing to learn crypto-trading even when it's inconvenient to do so and to place it ahead of many of life's other priorities.
There will be times along the way where one feels discouraged at the slow pace with which their progress is moving forward. As my studies moved on, this was an issue that I had to address again and again. I often felt as though I would never understand how technical analysis works and how one utilizes it. I was spending several hours a day, seven days a week, for several months studying T/A without ever being able to form the ideas I was learning about into concepts I could apply and use. At that time, I couldn't see that the studying I was doing was building a base of knowledge that would eventually merge subconsciously to set the stage for an "AHA!! moment" that would instantly bring all my learning into crystal-sharp focus. With only the conviction that "if others can figure this out, so can I," buoying my spirits, I patiently continued to work towards a goal that at times was nearly impossible to see. Had I lacked either the persistence to continue or the patience to accept that my progress was slow, the Eureka Effect moment I was seeking would have remained forever beyond my grasp. It is worth noting that my "AHA!! Moment" arrived as I watched and made notes on a T/A instructional video I had already seen twice. I knew I could gain more from that video. Still, the sudden comprehension of utilizing the various aspects of trading I had studied that came to me in a flash was an unexpected result I could not foresee and would never forget.
An Edge Isn't Any One Thing; It's Lots Of Things
Developing an edge that allows one to trade successfully demands that the trader possesses many skills. Included are developing effective written plans, executing trades flawlessly, maintaining an emotion-free decision-making process, learning to employ a trading system to find potentially profitable set-ups, and understanding various trading mechanisms. Specific to the crypto-market, one must consider online security, protection against scammers, safe methods for storing cryptocurrencies, and using only reputable exchanges. Some of the skills needed involve learning about various aspects of trading. Some of the development that occurs involves re-tooling one's thinking to foster emotional growth and control. None of this happens over-night nor without serious effort and intent on the student's part. One of the reasons why so many balk when they reach this point in their development is that learning mental skills is very difficult. Mastering new ways of thinking through conscious effort is not something most people do every day. Through my own experience, I can tell you that, once it has begun, one does become more comfortable learning new ways of thinking with practice.
As this process unfolds, one will find opportunities to develop new mental skills and the chance to practice the two critical character traits that are vital to a trader: persistence and patience.
As I continue producing these articles, I hope you will come back for more. Up next: Part 4: Lessons From 2017