The antidote to the big 3 “F’s” — FOMO, FEAR, and FANTASY
Thinking in Threes
It’s all over the internet; it’s all over the news. It’s the next big thing, and it’s going up without you. FOMO, regret, and thoughts of what could have been.
You can’t take it anymore. It’s up again — ten days in a row. But today you’ve made a stand, you’ve funded your account, and you’re just about to hit the buy button.
This is why most people lose. A cacophony of bias in your head, it’s almost like you’re hypnotised, and not in control of your senses.
There’s a way to save yourself. A way to snap you out of the trance you’re in, a way back to the rational you.
To combat FOMO, fear, and fantasy, just before you hit the button — Stop!
And ask yourself this.
Have you got…
Three Good Reasons
Imagine walking into your bosses office with a great idea. You’ve figured out a game plan to make millions in profits for the company. It’s simple, it’s ingenious, and it’s yours.
You picture your boss shaking your hand, he loves the idea, and you’ve made it. You’ve arrived. In your mind you see the recognition, you see co-workers clapping as you walk proudly on to the stage. Arms raised above your head, and the crowd goes wild…
You’re wrenched out of your dream.
He looks up and points at the chair, “I’m busy, you’ve got 2 minutes.”
Giddy with excitement you sit down and deliver the pitch.
Your boss listens, then a pause.
Stone-faced and eyeball to eyeball, “Give me three good reasons.” His voice is monotone.
And this is where you start to unravel.
You had the idea, you’ve done the work, but you’ve not anticipated the response, and blinded by your ingeniousness, it’s clear you’ve not thought it through.
If you’re about to hit the order button, do you have three good reasons to enter the position?
How did you get the investment idea?
Was it in response to all the positive news you’re bombarded with on social media?
Did some crypto guru tell you a small investment today could change your life tomorrow?
And apart from you, who else knows about this “opportunity?”
Imagine you’re invited to a high profile concert, and invites are not easy to come by. Now imagine the show is free, with a small catch. If you leave before the end, you have to pay an exit fee if anyone leaves before you. The exit fee starts off at zero but starts going up as people leave.
You find yourself packed into an arena, along with many others, just like you. Everything is going well, it’s a great vibe, and everybody is in their seats.
An hour into the concert you notice a small plume of smoke to the left of the stage. You look around, and nobody seems to notice or care. You do nothing. Maybe it’s part of the show?
You ignore it too. A few minutes go by, and the smoke is still there. Is it getting thicker?
Someone to the left of you gets up and heads towards the exit.
The smoke is very noticeable now. Why does no one seem to care?
You’re unsettled. Something is wrong.
The voice inside your head starts chattering, “You’ll be alright.”
You look around. Still, nobody seems to care. You try and get back into the concert, but you can’t concentrate. Your instinct is starting to kick in. Get up. Walk out.
If you do, you’ll only have to pay a small exit fee.
You’re in conflict. The voice in your head tells you to get up.
You move forward, and then you hear the voice of reason inside you, “Why are you leaving? Just stay put and enjoy yourself.”
A couple, two rows in front, get up, and your eyes track them to the aisle. Maybe they’re just taking a break? You’re not looking at the concert anymore, you’re looking at the smoke, and you’re looking around the arena.
What’s everyone else doing? You check out your nearest exit and realise that if everyone decides to get out, you won’t make it.
The plume of smoke has turned black, and a few people near you are looking around too. They’re looking for reassurance — the same way you do if you hit turbulence in an aircraft. If the flight attendant doesn’t seem bothered then no problem — but if they do…
Someone in front of you gets up and leaves, but for some reason, you don’t move.
Your eyes turn back to the stage, the plume of smoke changes.
And somebody yells fire!
Immediately, you head for the exit.
The only problem is, so does everybody else. You’re trapped.
Caught in the crowd, you’re scared. You don’t care about the huge exit fee you’re going to have to pay. Rational thought gone, you’ll do anything you can to get out, anything to make it out alive. It’s a full-blown panic.
People are jumping over chairs and each other. The please and thank-yous are gone. No more orderly queues it’s everyone for themselves.
As people fight and claw their way out, the exit fee bumps higher, beep beep beep.
This story is a horrid metaphor, but this is how financial markets wipe out wealth.
Studies have shown how human beings react when faced with danger, and it’s not like Hollywood, at first we don’t panic. Instead, we look for reassurance that everything will be ok. We look to various authority figures and even each other.
There’s a lag time between noticing danger and the onset of panic.
And traders and investors who make consistent returns, the 5% club, understand this.
They understand that consistency comes from being the gatekeeper at the concert, and charging an exit fee to allow others to leave.
If you’re part of the crowd, and if you’re acting on the same instincts as everyone else, how profitable is this trade likely to be? — Given that the crowd loses most of the time.
Crowd behaviour shows up in all markets where we compete for a limited resource.
A good example is investing in real estate.
In western countries, we’re obsessed with property. It’s a good investment over time, but whether or not real estate will be a good investment for you depends on many factors.
It depends on what layer of Maslow’s hierarchy of needs describes you best — What’s your Motivation? — Is the property a roof over your head, protection for your family, or an investment?
Did you buy a second, third, or fourth property to engineer paying less tax? Did you buy an investment property for income in your retirement?
And then there’s timing — The business cycle, the interest rate cycle.
The questions most commonly asked before investing in real estate are…
Can you make the repayments?
How much profit will you make in the next 5 to 10 years?
How much profit will you make a month?
How much tax will you save?
All good questions. But these questions are related to your built-in biases. When the only way is up — the only way is down.
(If you use leverage to buy property and the property market goes up slightly or sideways then in financial terms you are losing. It’s to do with relative returns and what your leverage or buying power could have been used for. It’s known as IRR — Internal Rate of Return)
A better question is how much leverage did you use up, and how long will it be before your leverage is restored?
When you purchase real estate at the same time as everyone else you are using up your future buying power.
And when you use up your buying power, you won’t be able to react to changes in the future. Instead, you’ll be a victim of them.
Before you hit the order button, stop and ask yourself why.
What is your motivation?
How much buying power will you use up?
If your idea doesn’t work, when will you get out?
Thinking in threes. Do you have three good reasons?
The art of gatekeeping is the art of asking the right questions.
Most traders use standard technical analysis to ask questions of the market. They’re inconsistent with the technical tools they use, and they use them the wrong way. They back-fit the indicators to past price action that visually gives the best results.
It’s called Confirmation Bias. And it’s another sneaky way you’ll fool yourself into believing your idea can’t fail.
The majority of traders and investors don’t understand the math behind the indicators they use. And that most indicators, MACD, stochastics, RSI, and OBV, are all attempting to tell you the same thing. They’re all trying to tell you when the price is diverging from momentum.
The theory is that momentum turns before price and so when price and the momentum indicator diverge, it’s an advanced warning of a change of trend.
Most don’t realise you can do the same job as all of the above tools by drawing a line connecting the lows for a down move and the highs for an up move. In fact, you don’t even have to draw it. You can just use your eyes.
It’s a simple way to measure momentum, but it’s not obvious.
A lot of traders use moving averages combined with price to figure out the direction of a market. They use moving average crossovers, moving average direction, and where price is, relative to the moving average.
What questions are most traders and investors trying to ask? And what answers does the market give them back?
Using moving average crossovers and the relative position of price is like asking a general question — It’s asking the market if it’s in an uptrend or a downtrend?
Knowing the likelihood of what state the market is in is very important, but it’s a general question.
Let’s get more specific.
Trading and investing are about timing. You can have a great idea, and you could be proved exactly right over time, but if your timing is off, or you use the wrong trading strategy for the specific situation you’ve uncovered, then you’ll struggle to make a profit.
The Key to being a gatekeeper is being able to drill down and ask the market clearly defined questions.
And clearly defined questions come from translating the price action into behavioural conditions.
You are looking out for three of them. Thinking in threes.
Plus One Days
Asking the right questions also depends on what the market is doing. It depends on the timing.
In 2018, Bitcoin and the top alt-coins are in downtrends. No prizes there. But the trend also depends on the timeframe. There are those who argue Bitcoin bottomed on the 29th of June 2018.
Although it’s possible to short bitcoin or bet its price will fall, let’s assume you are looking to buy Bitcoin. Let’s examine the likelihood of the June low in Bitcoin being a long-term low.
So far, Bitcoin has made higher highs and higher lows, and yes, this means that a long-term low could have been made.
How does this information help you?
How do you know if Bitcoin has made a long-term low?
The answer is you don’t. And here’s the thing, if you get this, reading this article will save you years of frustration.
Lean in, let me whisper a little secret. Nobody knows, but a market will leave clues, and from the clues, you can figure out the likelihood.
In previous articles podcasts and videos we talked about the MIT blackjack team, and how they made millions playing blackjack. They won because they understood their edge.
Using a mental counting system, they assigned cards a value. 2-6 cards had a value of +1, 7-9 cards had a value of zero, and 10 through ACE had a value of -1. Each card played generated a cumulative count.
When, for example, the count reached +6 it gave the MIT players direct market feedback. They knew, at that moment in time, there were six more high-value cards to low-value cards remaining and the chances of the dealer going bust increased. This condition swung the odds of winning the hand in MIT’s favour — a moment in time when the game became less-random.
And that’s what the 5% club, the 5% who are consistently profitable understand. It’s not about spending mental energy trying to decide if a long-term low has been made.
It’s about knowing when the odds of a successful position have swung in your favour. It's about recognising when the market has become less-random. It’s about finding “Plus-One” days.
And to find "Plus-One" days, you need three good reasons.
Thinking in threes.
What does a Plus-One day look like?
You’re on the lookout for this…
A fast and aggressive move down.
A way above average turnover of volume (+300%)
A wide range bar with a close at around 50% (or higher) of the total range.
When you see these three characteristics, it’s a Plus-One day.
Three conditions. Thinking in threes.
(Remember: This is not the only signature of a Plus-One day — there are many others — and we’ll be covering them in future articles.)
Plus-One days are so powerful because they give you feedback on the state of the market, exactly like the count did for the MIT blackjack team.
When a market puts in a Plus-One day, it leaves a buying tail. A buying tail is the difference between the absolute low of the day and the close of the day. A Plus-One day has a close near 50% of the total day range or higher, and only one phenomenon can make this happen.
This dance, like a snap-back in the Tango, is caused by the 95% panicking and getting out. The 5% club steps in and takes the other side of the trade. This is how most down moves end and the setup for most uptrends begin.
The 5% club can Tango. And if you learn the steps, you can too.
The process begins with thinking in threes.