Decisions Based on Likelihood, Not Certainty - Big Money's Effects on Trading Cryptocurrency
Puppet on a String
On How Big Money Manipulates Price… And You
As Bitcoin prices continue to fall, if this is the end of Bitcoin, is this the end of cryptocurrencies?
Real Estate, stocks, bonds, currencies, and even blue-chip sporting events, from the Super Bowl to the Kentucky Derby, every event with a market made up of people willing to wager on the outcome, (And yes this includes cryptocurrencies) exposes anyone who places a wager to our natural built-in biases and behaviour patterns.
And king amongst our biases is the behaviour pattern caused by our need to be part of the tribe. The safety of being part of a group relies on cooperation and trust. If you acted outside of the group, in your interests, this would endanger your peers.
And in endangering your peers, you endanger yourself.
We work best in groups. What we hunted was faster than us and stronger than us. If the group expelled you, it would mean certain death, so to survive we worked together.
But what kept you alive as a caveman will kill you as a trader.
A good rule of thumb to use when working with any trend of any market is this…
“When the only way is up — the only way is down.”
Not everyone has the same mixture of strengths and weaknesses.
The perfect speculator is made not born.
One bias, out of many, is you experience financial losses approximately 250% more intensely than financial gains. Think of biases as being encoded into your DNA.
And this causes behaviour patterns to show up, and be exploited, in any liquid market.
What do I mean by a liquid market? Generally, a market that has a large enough volume of buy and sell orders, so it can’t easily be controlled or cornered by groups of actors ranging from individuals to governments.
As Bitcoin loses another 10% of its market value bringing the price down by over 70% from the high, it’s natural, because of your biases, to want to sell. Anything to end the pain.
Just before you pull the trigger, have you ever asked yourself if anyone else feels this way? When you can’t take it anymore, do you ever think if there’s anyone else on the same emotional rollercoaster as you?
Have you ever thought about the price you entered at, and at that price were you part of a group, the herd, or did you act alone?
These things matter.
Markets don’t work the way most people think they do.
Far Right Edge
Take a look at the following chart and ask yourself a simple question. Price has moved up a lot from 1 dollar to a high of $27.87. Now focus on the last bar. (The far right edge) Price has been volatile with 590% of average turnover. So we know a lot of trading has taken place relative to how this market trades typically.
Is this price action strong or weak?
Did you come up with an answer?
What about this chart. Is this price action strong or weak?
Look at the far right edge, the last bar. 320% of average turnover has taken place. At the end of trading, price closed at around 50% of the total high to low range.
Is this market showing strength or weakness?
The Lesson Comes After The Test
The first chart’s price action is showing weakness. Don’t worry if this is confusing or you don’t agree. (I’m not trying to persuade you.)
Remember the useful axiom—
“When the only way is up — the only way is down.”
590% of average trading took place over the time of the last bar, and price closed at about 50% of the range.
It’s helpful to ask—
At this price who’s doing the buying up at the highs? Amateurs or professionals?
At the high, the price had moved up 2,687%. In general, the pros, aka “whales” in cryptocurrency land, don’t buy the highs. They sell them. Whales buy when no one is interested, they buy when the media coverage is terrible, and a clue to the buying behaviour of whales is to look at the turnover.
Blood On The Rooftops
Whales don’t buy when you buy. They buy when there’s blood in the streets. They buy when the news is negative, or there’s no news at all. They buy when social media chit-chat is flat-lined.
The buying pattern of whales is known as accumulation, and it works like this…
To understand the process of accumulation we need to think about why prices go up and down.
Prices don’t go down because of people selling. They go down because there are no buyers. Imagine a lined piece of paper with two columns. The left column lists buyers wanting to buy. The right column, sellers wanting to sell.
At the top of the page, between the columns, write down the last price a trade took place, and let’s say this is $100.00.
The right column lists eight sellers, one for each line. Each seller is represented by a price they are willing to sell at, and the amount they want to sell. The seller’s price is called the offer.
The left column lists three buyers, one for each line. Each buyer is also represented by a price they are willing to buy at, and the amount they want to buy. The buyer’s price is called the bid.
This order book is bearish, and prices are about to go down.
How Price Accumulation Works
The prices at the top of the list get executed if they match. At the top of this order book, trade is about to take place matching a sell order(offer) with a buy order (bid).
The key is to understand what happens next. Once the trade at the top has executed, it’s removed from the order book, and nothing happens until the next sell order is matched to a buy order.
The next sell order is 500 at $100, but the subsequent buy order is 500 for $93.
If the seller wants to sell, they’ll have to drop their sell order (offer) to meet the buy order (bid). If they do, the price will drop $7.
What happened to the prices in between?
Nothing. No trade took place between $99 and $94. Think of this as an “air pocket.” And this is how prices can go down with minimal volume or no volume of trade taking place.
(Of course, there could be more buyers than sellers, the buyers could raise their bid to make sure they get their order executed, and this would mean higher prices.)
But for now, we are talking about accumulation.
Price accumulation happens after a significant move down. At some price, buyers will start buying and this causes prices to rise.
If prices have been trending lower, how can you tell if a low has been made?
Let me save you years of frustration. Let me save you hundreds or even thousands of hours of time.
There is no magic key. There is no “secret.” No software, no guru, (and this includes me) can tell you.
Although no one can tell you if a low has been made, you can assign a likelihood to a low being made.
If you can do this, you can promote yourself to the next level in your understanding of how markets move.
The Ugly Truth
Remember your biases? Out of the many we are all afflicted by, two are regularly used by professional traders to accumulate a position.
The first is your instinct to pause and wait before you take action. This is because of your need for security and clarification from your tribe or peers. Remember, inbuilt into you is the behaviour pattern of working together to bring down the hunt. Acting alone could have you cast out. If you rush in, you could get yourself injured or killed, and you could endanger your fellow hunters. So you wait.
Have you ever paused and waited before buying? Real estate, a vehicle, stocks, or anything that required a definitive choice.
If so why did you wait? Did you second guess yourself? Did you wait so you could mention it to your family and friends to gauge their reaction?
It’s ok if you did. You literally can’t help it.
The second bias used by whales is based on your default emotional settings.
You experience loss 250% more intensely than you experience gain. If you did something in the past, and you lost, it hurts. And this hurt is something you will avoid in the future at all costs. Like Pavlov’s salivating dogs, you can’t help it. You are conditioned to behave like this.
If you’ve ever purchased a property at or near the peak of a boom, then you’ll know how it feels. If you bought Bitcoin as it moved over $10,000, you'd know how it feels.
This bias short-circuits your brain.
The world we live in today is based on winning. Be the best. Don’t lose. Don’t make a mistake.
And the pressure and competition are immense.
Get your degree.
Get a good job.
Support your family.
And around we go.
Same with sports. Winning is everything. Second place - Nah. That’s for losers.
Competition is so great fierce, having a good degree is no longer enough.
Because everyone else also has a degree, instead of standing out, you are just part of the crowd. A degree has been relegated to a prerequisite.
Once upon a time, a degree was enough. Now it’s only the beginning.
To get ahead, you need a masters degree. I studied art history and business at Sotheby’s, and I can tell you London has more art history M.A.’s working at Starbucks than in Mayfair art galleries.
How many people do you know have earned their doctorates?
There’s been a massive increase in the number of people gaining a Ph.D.
We live in a competitive world.
Most people approach financial markets the same way they approach life.
They work hard and want to win.
And this is a mistake.
Because in financial markets—
Best Loser Wins.
And this goes against the conditioning that life, in our modern world, has programmed you with.
How Market Professionals Accumulate a Position
As price moves down, bargain hunters move in. Buyers step in and buy, and price moves up. As price moves up, how do you know if more selling is going to take place and drive prices lower again?
This is why we discussed how prices move earlier. You now understand that prices can move from one price to another price without any trading taking place between the two.
As prices start to move up after a down move, professionals enter sell orders in the order book, so they can test if there is any serious selling pressure above the current price.
Supply and Demand
It’s all about supply and demand. If the professional’s orders are matched, then this is direct market feedback. This is signalling overhead supply above price is being absorbed by new demand. And if this is sustained a low will be in place and prices will rise.
Occasionally a low will be “V” shaped, but this is not the highest likelihood.
Most often prices will rise off of a low and then be driven back down by orders placed by professional traders.
This behaviour is called testing. It gives pro traders direct market feedback on the likelihood of overhead supply still being present in the market.
If after entering sell orders at or below the previous low, the market goes down on low volume or prices rise, then this is a “tell” that new sellers are not present and therefore prices should rise.
Most traders never get to this level of understanding. Most undertake training in technical analysis. They get sucked into the world of moving averages, moving average convergence divergence indicators, stochastic indicators et al.
Look at the chart below. Price moved down from $27 to $4 and bounced back to $17. It then fell back to $6. This was the test. At $6, there was a very high turnover of trade. Price opened at $9, moved down to $6, and closed at $7.50. Price rallied 50% of the bars range.
All this happened on 320% of normal trading volume.
If the order book had been full of sellers, then prices must have moved lower closing near the low of the range.
If there had been no buyers prices would have been much lower, because as you know, prices can move from one price to the next without having to trade at the prices in between. So on 320% of average volume, if there were no buyers present, this would have caused air pockets, and prices would be much lower.
But this isn’t what happened. Instead, prices closed at 50% of the range. This is direct market feedback. It’s the market signalling the likelihood of higher prices has increased.
What happened next? Price started to trend and eventually traded at over $19,000. Yes, this is a Bitcoin low.
The only (and real) secret to trading and investing is this…
Find a place to enter where you can receive direct market feedback as quickly as possible.
If your analysis is wrong, then you can exit quickly. If your analysis is correct, you can continue to build a position.
Doing this is no guarantee of a successful outcome. There are no guarantees. This is not a business based on certainty. It’s a business based on likelihood.
It's all about this—
Over “n” number of trades, it’s not about getting 8 out of 10 correct, because this is next to impossible over the long term.
Instead, you look to take a position at prices where you risk one to make three. One what? This is the subject of another article, but for now, it’s enough to know you can create units from your available capital.
If you can risk one unit to make three is it possible to make a profit if you get less than 50% of your trades correct?
The answer is yes.
Let’s say you’ve completed ten trades— and got six wrong!
This, in your winning highly competitive world, is useless. Right? Wrong.
Intuitively you might be thinking you’d do better with throwing darts at a dartboard blindfolded.
But think about this…
If you can unitise your trading and investing capital and enter positions at places where the likelihood of success has just shifted, you’ll be able to get out if the market behaves in a way that nullifies your view.
4 out of 10 at risk to reward ratio of 3 to 1 means that over 10 trades you’ll make 12 units total profit. You’ll also get 6 trades wrong, and each trade is a loss of 1 unit. You’ll lose 6 units leaving you with a net profit of +6 units.
This is how professional traders think. This is how professional poker players think. This is how computerised trading algorithms work. This is how your pension fund is traded.
The algos sniff out air pockets. They test if overhead supply is likely to be exhausted. If it is, they buy.
This is how professional speculators and hedge funds make their money. This is how they accumulate their positions.
They use the 250% emotional intensity spike of how you feel when you lose compared to when you win. They use your built-in nature to herd and wait for peer confirmation. And they do it religiously.
The process of driving prices lower and testing for overhead supply is called accumulation.
As prices rise and fall, testing previous lows, the professionals accumulate a position— without putting the price up on themselves.
Signature of Accumulation
We’ve talked about how the cryptocurrency market has a high positive correlation with Bitcoin. This means we can use Bitcoin’s supply and demand dynamics to help determine the overall direction of not just Bitcoin, but other coins and tokens.
We’ve talked about the accumulation process, and how big money exploits your natural biases. We’ve talked about how prices move, how 99% of small speculators don’t fully understand this process, and how, by following the process, it’s possible to see the clues big money manipulation leaves behind visually.
Here’s the accumulation in 2015.
After the second test of the 790% turnover at $192, Bitcoin started its run to $19,666.
And in 2018.
What if the test fails?
If the test fails, then the market is giving you valuable information. It’s telling you supply is still present above the current price, and this means the likelihood is for lower prices in the short term.
You can see this behaviour visually. Once price action has soaked up the available supply, prices start to trend.
When prices start to trend, this is where the news becomes positive. The media starts writing about it, and more and more people start getting interested.
As the new lambs buy, ask yourself, who is doing the selling? Who’s on the other side of the order book?
If you can understand this, then yours is the world and everything in it.
If you’ve tried to understand what’s going on in the cryptocurrency world, or if you’ve attempted to understand blockchains and how they work then you’ve come to right place.
Blockchain technology is about the change the world. Don’t sit on the sidelines and watch the opportunities leave without you.
We’ll be talking about price action, supply and demand, blockchains, alt-coins and Bitcoin to get you up to speed as quickly as possible.