Are most cryptocurrency traders streetwise and immune from manipulation?
“It is not the strongest species that survive, or the most intelligent, but the one most responsive to change.”
— Charles Darwin
If you ask most people what they paid for their car, the price you hear is probably not the price they paid. Today, our competitive world is a complex amalgam of rules and societal norms.
Most people think they’re streetwise and immune from manipulation, but you don’t have to look too far to realise this might not be true.
Anytime this is pointed out to someone, they’ll tell you it doesn’t apply to them, unaware that the subconscious patterns that manipulated them in the first place are hard at work protecting them from themselves.
Have you ever walked into a store and something caught your eye? Discreetly, you check the price, trying not to draw the attention of the sales staff who are hovering around the shop floor.
You reach down and take a peek, it’s expensive, more than you thought, and you smile as you congratulate yourself on spotting something of good taste and style. Your internal helper is not too far away, saying something like this in your mind, “I always like the one thing that’s the most expensive,” and you pat yourself on the back.
For a split second, you imagine yourself owning it. Maybe it’s a watch or a jacket, perhaps it's something for your home, but whatever it is, for just a second, it’s yours.
As you take a couple of steps back and turn to walk away, the salesperson stops you.
“Looks good doesn’t it?”
Reciprocating their smile, you answer back,
“You can have it today for 70% off, it’s not $2,999, it’s $899,”
the salesperson replies, looking at the price tag.
Your brain goes into a confused state, images flash before you, like the animation in a flick book. You own it. You love it, you miss out, someone else owns it. You’re a winner, you’re a fool, it’s a bargain, it’s mine, it’s not mine.
You’ve just been manipulated by the anchoring effect. It’s one of many nuanced biases that affect everyone.
The streetwise you thinks every decision is carefully thought out and planned when you make a decision on the value of something, but, the truth is, brain science has proven otherwise.
That initial price, the high price, the $2,999 price tag is fixed in your mind. The lower price, the contrasting price, seems like a bargain, it’s 70% less. Your brain subconsciously anchors to the initial high price and, overcompensating, you compare the difference and come to the conclusion you’re about to get a bargain. As sparks fly around in your head, you make your choice.
Sold. It’s yours.
Falling for the oldest retail trick in the book, the unrealistic high price, you might be shaking your head, saying to yourself that you’re way to smart to be suckered into the deal.
Being trapped into buying something in a retail environment is one thing, and maybe you’ve been around the block enough times to be immune, but can this behaviour effect other kinds of decisions — like buying cryptocurrencies?
Do you have a plan? What kind of market is it? We’ve talked a lot about the price cycle and the hype cycle. They are tools used by consistent traders and speculators to guesstimate the probabilities and likelihoods of trading strategies.
A longer term trend following strategy isn’t going to have the best chance of success if a market is in either stage two of the price cycle — a sideways accumulation after a downtrend, or stage four — a sideways distribution after an uptrend.
Stepping back and analysing the bigger picture the hype cycle is used to figure out where on the journey from the initial trigger to mass-market adoption cryptocurrencies most likely are.
Using past price action and human behaviour patterns going into the December 2017 high, the best guesstimate is for the cryptocurrency markets to be sliding down the slope of disillusionment and waiting for a catalyst.
If you’re speculating have you thought it through? Are you a long term investor, or a short term speculator? What is your trading timeframe — how long do you expect to be in the trade?
If you’re a long term speculator, what are you using to make your decisions? Are you reacting to someone else’s option? Or, do you figure everything out for yourself? If you do your own research and come up with your own trading ideas, then, do you use social changes and geopolitics to influence your decisions? Do you only use technical charts or some combination of charts and fundamental information?
And most importantly, have you quantified your risk? What is your expectation? How often can you expect to be wrong?
If you’re a short term speculator, what are you using to trigger your entries? What are you using to exit? Are you using supply and demand imbalances in the order book? Do you know what imbalances look like on a chart?
Do you do some of the above, but not in a consistent way?
If you’ve been reading through previous articles, you might notice that the subject of human behaviour and psychology comes up a lot.
Because the truth is, most market participants, the 95%, lose money, and losing money is nothing to do with their IQ or intelligence. Many people, who’ve been successful in business and made money, come to the cryptocurrency markets and other financial market places and fail — sometimes spectacularly.
What is it about investing and speculation that the majority find so difficult? Why is it, that some people seem to have the ability to have near perfect timing, and others, who are far more highly educated, having proved their business acumen in their chosen career by making money, sometimes large amounts of money, fail?
The reason is simple. The market does not beat them. They beat themselves.
In the 1960’s neuroscientist, Paul Maclean formulated his model of the brain. In The Triune Brain in Evolution, MacLean proposed that the human brain consisted of three areas. The old brain, the r-complex or reptilian brain, the paleomammalian brain or the limbic system, and the new brain, the neomammalian complex, also known as the neocortex.
Dr. Carl Sagan the Ph.D. astrophysicist, who over his lifetime published over 600 scientific papers, popularised MacLean’s triune brain hypothesis in his book The Dragons of Eden, in which Sagan explores the origins of human intelligence.
In MacLean’s model of the brain, the oldest part, the r-complex, deals with your base instincts. Fear, fight or flight, aggressiveness, dominance, and territoriality. When you are startled, and you react, perhaps you detect a wobble in your stomach, some describe a vibration in the lower back — that’s your r-complex preparing you for survival. Will you run, or will you fight?
The middle portion of the brain, the paleomammalian complex is the part of the brain that deals with status. The part that deals with tribalism, belonging, and what others think of you.
The third portion, the neomammalian or neocortex, is the newest part of the brain and it’s the rational thinking portion.
The triune brain has its critics, claiming that it’s an oversimplification, but even if this is true, the three brain model is useful for traders as a way to understand their behaviour and motivations.
The new brain, the neocortex thinks and rationalises, sending its deductions down to the other two brain sections. The middle brain, the paleomammalian, processes emotions and gut feelings, and it too sends its output to the other two brains. But it’s the r-complex or the reptilian brain that takes as input information from the other two brains, and controls the decision-making process.
Who else knows about this model? Advertisers use this model to target their advertising message. Using knowledge of how you think and react, it’s like the advertisers are attaching their message to a laser to guide it to its target.
Companies that produce everyday products, or non-luxury brands, direct their advertising to the neocortex, the newest part of the brain that deals with logic. A motor vehicle company that produces a workhorse “get the job done” vehicle typically advertises the fuel efficiency, the durability, and the comfort — the features and benefits, but companies that manufacture luxury brands do something else.
Instead of targeting the neocortex, the logical brain, they target the part of the brain that deals with emotions. The paleomammalian brain is all about tribe. It’s the wolf pack. Are you in or out? And if you’re out…
If you’re driving a car with a BMW or Mercedes badge, it signals to everyone, that you have a higher status in life. It’s tribal. Luxury brands advertise to the paleomammalian brain, implying that by owning the product you belong to a high-status group.
Luxury brands don’t target the features and benefits, they target how it feels to own the product. They don’t tell you about the carbon discs and the rear wheel drive; instead, they show you how it feels to brake late into a corner, on an open road, accelerating away at high speed.
Some companies hit the sweet spot. They manage to produce a high-profit margin product and sell it as a premium luxury item, when it’s actually not. Do you own an iPhone? Apple targets its products to the paleomammalian brain.
If you live in a city or large town, next time you’re sitting in a coffee shop, take a look around. What is the person in the coffee shop working on? A high-status MacBook or a utilitarian windows PC?
It’s a bit like property. As soon as a local property developer advertises and releases for sale the newest batch of properties, pushing the prices ever higher, everyone thinking of selling pushes up their prices too.
Same with computers running Windows. Have you noticed the price increases in the latest Microsoft Windows laptops? If Apple can do it, so can they.
It’s all aimed at your paleomammalian brain.
Let’s talk about the decision maker. The r-complex.
It’s inside the oldest part of the brain, the r-complex, where your inner secrets and deeper darkest instincts live. Carl Jung talks about every person literally having another person inside of them, the hidden person inside — the shadow self.
When people have problems in their lives, they push their problems deep inside their subconscious mind. It’s an ego defence mechanism that stops you going into meltdown. The shadow self lives in the r-complex and has to process all of these repressed emotions that your neocortex conscious brain can’t handle and that your ego defence system has pushed down deep inside your mind.
It’s the shadow self that deals with the repressed problems. The shadow is your lower more base self. Everyone has things they’re ashamed of. The way you have treated others, the betrayals, the hurt — all pushed down. The shadow is the base you, and you’ll go to great lengths to hide it, sometimes at an even greater cost.
You might think that the triune brain, Carl Jung, and your shadow, is complete mumbo-jumbo, and more importantly, you might also be asking yourself what has this psychobabble got to do with trading, speculating, and investing?
This is where the rubber meets the road.
The vast majority of people, the 95%, who attempt to trade cryptocurrency markets fail, but it’s nothing to do with their intelligence. Consistency and success begin with knowing yourself.
The newest part of the brain, the neocortex, is the logical centre. It’s where you rationalise your decisions. It’s the voice in your head, whispering,
“Why does this always happen to me?”
You think it’s your best friend, keeping you safe, protecting you from harm, but as Julius Caesar said,
“Your greatest enemy is in the last place you would ever look.”
Losing sucks. It’s especially difficult because from the cradle you’ve been indoctrinated to win.
In life, we are brought up to prize winning above almost all else. Get the best grades, be the best at sports, achieve the best university placement, have the best C.V., and win, win, win.
“We live in a competitive world,”
the voice inside of you, rationalising your effort, sacrifice, and commitment.
There’s only one little problem. Win, win, win, works out there; out in the world of employment and business, where the competition is fierce, but when speculating in financial markets, a win, win, win attitude is going to send you to the poorhouse.
Outside of trading and speculation, it’s not too difficult to succeed, as long as you put in the effort. Yes, you might be from a privileged background, but for most, getting a degree, while working a couple of jobs is the norm.
The thing with speculation and trading though, is it’s got nothing to do with how hard you work. You can spend months or even years becoming a world-class analyst, but if you’ve not got a handle on who you are and how you behave, you’ll almost certainly be beaten by the comparatively lazy trader who not only understands who they are but also understands who you are too.
Poker is seen by many as a game of chance, yet why is it that of all the people that play, the same small group of players consistently achieve success?
As the great Amarillo Slim said,
“If you can’t spot the sucker in your first twenty minutes at the table, you are the sucker.”
Financial market theory, as espoused in the book A Random Walk Down Wall Street suggests that stock picking and timing is a waste of time because markets are efficient and almost instantly react to new information, pricing it in before you can take a profitable position.
If that is true, why is Warren Buffett one of the world’s wealthiest people? Is Buffett an anomaly? According to the efficient market hypothesis, Buffett shouldn’t exist. But he does.
Here’s what happens to most traders and investors who enter into the world of speculation.
They fund their account, and they do some research. Perhaps they have a technical background and understand why one blockchain is superior to another, but most likely they have read something on social media, or they’ve learnt how to read charts using technical analysis.
They bring with them the winning attitude that gave them the capital to speculate in the first place.
The first problem they encounter is not knowing what they are doing. Are they investing for the long term, expecting to hold their investment or investments for years, or are they speculating in the short term, looking to enter today and get out tomorrow?
A lot of short term speculators become long term investors because they can’t lose.
Why? Because winning has got them to where they are. It’s given them success in professional life or business, and because they are not used to the idea of being wrong. In the world outside of speculation being wrong is failing and in a world of win, win, win, failing is losing, and they’ve built up a mental image of themselves as winners. Losing is what other people do — not them.
Some traders enter randomly after reading their favourite guru’s opinion and can’t stand the thought of being left behind. Others have done the work, they’ve learnt technical analysis, and they have chosen an entry. They wait patiently for their entry signal, and they press the order button.
Rarely can a trader, especially a new trader, trade without constantly checking the price action and watching every tick. Rarer still is the trader who has learnt not only the entry but also the expected behaviour of the entry. Few know with any accuracy how often the signal they used to enter a trade works, and how often it fails. Even less know how to find the answer to this vital question. The ones that do invariably backtest to find the answer but have no knowledge of how to backtest correctly, ignorant of the implications of biases and data corruption by curve fitting their results.
After staring at a screen, willing the price to do what they assumed it would and wasting vast amounts of emotional energy doing so, many traders find themselves holding a losing position. It’s now, in this situation that the default win, win, win attitude does the most damage.
Yes, some traders use a stop and get out for a loss, but the majority either adjust or remove their stops and hold on, expecting the market to give them back their losses.
Sometimes they’re lucky, but most of the time, a small loss, that should have been taken, is now a large account damaging loss.
The 5%, the consistent group of traders, investors, and speculators, like winning poker players, fold their hand and live to fight another day.
The 5% know this. Paradoxically, in financial markets, lose, lose, lose = win, win, win.
Knowing how to place orders at market, on stop, or at limit is essential as is protecting your investment capital while you are waiting for an entry signal.
Cryptocurrency exchanges provide all the tools you need to succeed, but in the wrong hands, these tools are weapons of financial suicide.
You can subscribe to the most expensive data service. You can study technical analysis until you’re a world-renowned expert on the subject, or you can be a technically gifted computer programmer who understands the edge one coin has over another, but if you don’t understand yourself, and how you react when things don’t go your way, consistent returns will be forever out of reach.
The journey to consistency begins not with understanding the trading tools, like how to enter positions, how to place stops, and how to read charts. These skills are critical, and you’re expected to know how to move stops, enter and roll positions at a minimum. Same with knowing how to sweep capital into stable coins to protect yourself from excessive volatility when trading cryptocurrencies.
Success in speculation is nothing to do with how hard you work, it’s to do with how well you know yourself.
Only you can answer the question. Yes, you hear stories of punters who made millions, buying something they didn’t understand for a few hundred dollars and selling up for millions. In the future, someone will make a fortune buying something that doesn’t yet exist for pennies and selling for thousands.
Knowing yourself is so important because success in speculation comes from expectancy. How often you win and how much, against how often you lose and how much.
If you are trading with someone else’s plan, do you know, at a minimum, the expectancy of the method you are using? Do you know what kind of drawdown to expect? Do you know, if you are trading multiple positions at the same time, what your total portfolio risk is, and are you aware of the log return correlations of the positions? Are you aware of the equity curve of the system you’re using?
If this sounds like a lot, it’s because it is. Success in any form of speculation looks so simple, just like watching a world-class golfer drive off the tee, reinforcing the belief that trading consistency is easy, there’s always someone who got lucky, that’s used as an example by the system sellers to sell you the “system” too.
Across all forms of speculation, the most valuable asset is not the course you bought online or the trading system that’s advertised as your ticket out of the rat race, it’s you, and how you behave when your trades aren’t going as expected.