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Faulty, Bias-Oriented Approach to Investing: Premature Selling and Untimely Purchasing of Cryptocurrencies
The Hidden Hand
The first public performance of “Happy Days” was on February 23 1930, just after the 1929 Wall Street Crash.
Altogether, shout it now, There's no one who can doubt it now, So let's tell the world about it now, Happy days are here again. Your cares and troubles are gone, There'll be no more from now on, from now on!”
— Happy Days Are Here Again by Jack Yellen & Milton Alger
It’s in our nature to follow the crowd, and it’s also in our nature to look to “experts” for guidance. We want to know it’s safe before we act. This behaviour is one of a group of biases that causes herding.
And there are people out there who not only know all about this collection of biases, they regularly exploit them.
Every day, markets move. And every day the media reports why it happened and attaches a reason. The headlines are proportional to the magnitude of the move — especially on days when markets crash.
“It was the bad weather during X…”
“Prices are down because of Y”
Media outlets reporting on extreme market moves use a simple device to get our attention.
Have you ever checked the news just after you purchased a property?
Did you google “cryptocurrency prices to go up,” or something similar, after you purchased Bitcoin or any other cryptocurrency?
Did you check to confirm you did the right thing? Did you search for someone to reassure yourself you didn’t make a mistake?
Statistically, almost everyone does this, but if you are sitting there saying, “I don’t,” then maybe, just maybe, you are a natural. But most likely, you’re just a victim of another bias, that’s closely related to the one you're denying.
Why so certain? Because most people lose.
Most people read the news to look for a confirmation of their actions, yet it’s natural to do this because it’s a built-in bias.
Few are aware of the side effects.
The “Roaring” Twenties ended with the infamous Wall Street Crash on October 24 1929.
Stocks took a sudden hit, crashed, but then started to recover.
Prices stabilised and the social mood improved, supported by media stories of the return of the good times.
Most thought normal service had been resumed.
Then this happened.
The “real” Wall Street crash didn’t happen in 1929; it happened between April 1930 and July 1932.
The US stock market lost 89% of its value.
When it was over, wealth had been evaporated, and millions were left with nothing.
In response, the US government executed Executive Order 6102, and confiscated its citizens gold, devaluing what was left of their savings by 70%— all without their permission.
This was the time to buy. The economic news was terrible. Unemployment was at 25%.
But this is not the way most people behave. They do the opposite. They buy in 1929, and they sell in 1932.
When the only way is up, the only way is down, and conversely, when the only is down, the only way is up.
How do you know if the only way is up?
A quick way is to check mainstream media for a glut of positive (bullish) articles.
The kind of headlines heralding the dawn of a new age, a new beginning. A story of an ordinary Joe who got started just a few years ago and changed his life. An outsider gets smart, by doing X, and in doing so changes his life and becomes an insider...and how by inference, you can do the same.
When you see this, it pays to stop and think.
If the news that attracts your attention is in a mass media publication who else is it exciting? Who else is thinking the same as you?
If you take action, a useful check is to ask yourself, “If I do this, am I part of the crowd?”
And if you are, ask yourself, “What is my edge?”
If you don’t know what your edge is, or the reason behind your actions, you are the consensus. You are the herd.
As the poker great, ‘Texas’ Amarillo Slim, said, "Look around the table. If you don't see a sucker, get up, because you are the sucker."
And if you are the herd, dig down deep and figure out why because…
Bulls Make Money, Bears Make Money, Pigs? They Get Slaughtered
"Bulls make money, bears make money, pigs get slaughtered"
"Bulls make money, bears make money, pigs get slaughtered" Is an old Wall Street saying that warns investors against excessive greed. The use of the terms "bull" and "bear" to describe market outlook is derived from the manner in which these animals attack.
Often, valuable life-changing lessons are hidden in plain sight. Symbols, motifs, and themes are all used, as a tease, in popular culture, especially inside Hollywood, but sometimes they just come out and say it.
Hidden in this Gordon Gekko quote from Wall Street: Money Never Sleeps— “Bulls Make Money, Bears Make Money, Pigs? They Get Slaughtered”, is how the system works. The public does the wrong thing at the wrong time. They buy at highs and sell at lows. Like clockwork.
In Puppet on a String, we discussed how prices move. This is important because understanding how prices move is key to understanding the tell-tale signs of big money being active in the market.
We discussed how markets, including cryptocurrencies, move down. The tell-tale sign of the move nearing its end to the downside is when the masses panic. This shows up on a chart as a wide range price bar that closes at around 50% of the overall range, accompanied by a massive volume of turnover.
At Alt-coin Sidekick we call this kind of price action an “Emotion” bar.
It works like this. If there are no buyers on the bid side of the order book, the sellers have to drop their offers to meet the bids. Remember, prices don’t have to trade at every increment. If the last traded price is $479 and there are ten sell orders for every buy order, and the next buy order is at $470, the seller, if they want out has to drop to $470 to get the trade done.
What happened at the prices between $479 and $470? Nothing. It was an air pocket. Air pockets are the most reliable signature of an imbalance between supply and demand.
Because no trade was transacted in the air pocket. Think of it as the market, telling you loud and clear that supply is overwhelming the demand. And if supply is overwhelming demand, you can expect lower prices.
This is why turnover is important. If you see unusually high turnover, above 300% of normal, on a wide range bar down (after a sustained down move) then if all the turnover were selling, prices would close at or near the low of the range.
But what if the price rallied back up and closed at 50% of the range or higher?
This is direct market feedback. It’s telling you that big money has stepped in and taken the other side of the order book. It’s telling you they have become buyers.
As prices move down in a panic move, the masses do not stop and ask the question, “Who is on the other side of this trade?”
They panic and get out. The reason for this is another built-in bias we discussed in Puppet on a String. It’s enough to know that you experience and feel the effect of a financial loss 250% more intensely than you feel the effect of a financial gain.
As masses panic and get out to end the pain, the professionals (whales), in the cryptocurrency market, step in and buy.
The pros start the process of accumulation. After you see an emotion bar, generally, all the selling in the short term is done. The pros enter buy orders, and this moves prices back up.
Back up to where? Remember the air pocket, and that it’s a tell-tale sign of supply overwhelming demand. Air pockets do something else too. They act like magnets. As pros buy after an emotion bar, they move prices back up into the air pockets above where they purchased.
If there is still dormant supply (sell orders) at this price level, they will trigger and drive prices back down. This is the market providing direct feedback and telling you there is still active selling at higher prices.
The pros will aggressively enter sell orders in an attempt to see how desperate the existing sellers are. If this aggressive selling does not drive prices lower, the pros know that the overhead supply has been used up.
Like an old-school game of space invaders, think of the supply as the alien ships overhead and the demand as the bunkers you hide behind as the bombs are falling from above. Each bomb hitting the bunker eats up or destroys your protective barrier, in this case, demand. Each alien you kill is the overhead supply.
If you destroy all the overhead supply (aliens) before the ranks of aliens move down to the bottom of the screen (demand), you win the level (price range) and move on to the next level. (price range)
This is how the game is played.
This is how the pros accumulate a position, without driving the price back up.
The accumulation shows up as a base. The beginning of the base is the emotion bar, and the process of price moving up to the air pockets above and back down again is known as testing.
This is Ethereum testing its August 2016 emotion bar.
CAUSE AND EFFECT
When the overhead supply is depleted, prices can move up on much less activity.
Because, if you remember how prices move, price does not need to trade at every price level. The pros have built up a position during the process of accumulation. They buy when the media coverage is terrible. They start buying from the masses when the masses panic and build a position during the testing process, just like a game of space invaders.
Simply put, they hold the inventory. So, if they don’t flood the order book with sell orders, it will take fewer buyers to move prices up.
This is when prices break out of a base. This is when the media and the public start getting involved.
This is when prices start to trend.
And this is what Gekko meant when he said, “Bulls make money, Pigs? They get slaughtered.”
Bulls make money by using their knowledge of human behaviour. They start buying and testing the market as the masses panic. Once their position is built and the overhead supply is removed, they stop driving prices lower at air pockets, and this is when prices start trending up.
And as prices move up, the pros who have been bullish when the masses have been bearish sell into the trend, and take profits.
How do the Pigs get slaughtered? The Pigs are the greedy and uninformed public. They generally only start buying when prices have already moved up (a lot), and they think it’s safe to enter the market because of the positive media coverage.
They buy what they think is an easy money “no-brainer.” It's not.
This process happens in stocks, forex, and bonds— any market with a reasonable amount of liquidity. And the best news of all is this process works in the cryptocurrency market too.
How do Bears make money?
In the next article, we’ll cover how the pros make a profit and what happens when they’ve sold all of their holdings.
If you can understand the process of how pros build a position, how they make a profit and what happens after they’ve left the building — you’ll have an advantage because very few people understand this process.
It sounds easy, but it isn’t.
It’s a process hidden in plain sight. It works by going against your built-in survival biases and the competitive environment you’ve been conditioned in, the environment that prizes winning. Be the best, get the best education, don’t come second.