February 1, 2023

Stereotypes and errors in cryptocurrency trading

Stereotypes and errors in cryptocurrency trading

In any professional activity, there are stereotypes that are mistakenly considered axioms, i.e. statements that do not require evidence. But if this does not apply to the laws of physics or theorems of geometry, then many of these stereotypes should be called into question, since they are often based on errors.

Consider some trading stereotypes that are presented as axioms, but in fact are erroneous and pull to the bottom of those who follow them.

Stop loss and take profit should have a ratio of 1: 3

That is, for example, a stop loss of 100 points, and a take profit of 300. Allegedly, such a system provides profitable trading with minimal risk.

As a person with practical trading experience onvarious markets, I say that it does not work at all anywhere. And trying to trade like that on crypto is a 100% way to unhurried and I would even say comfortable, draining the deposit in a mode sparing for the psyche.

The reason is obvious - the probability of a stop triggeringdirectly proportional to the distance to this stop. The same goes for profit. Therefore, in such a system, stops will be triggered often, and profits are rare. There are some chances of success only in a pronounced trend, but the market is 70% of the time in flat. And here short stops will work almost always, because a short stop always appears in the area of ​​the crowd stops, and the crowd stops almost always take off.

It is impossible to succeed in trading by such rules, although in theory it looks good (it’s clear that only for people who have never traded in the markets, well, they are presented with this theory).

But it is precisely such a “strategy” that is taught by all kinds of market gurus, both at courses and in private.

You can not "catch knives"

This term is called buying on a slide orsales on growth. That is, actions against the main trend. Although buying cheap and selling expensive is exactly what you need to do for successful trading.

And this is logical - the longer the price went into oneside, the greater the chances of a reversal and movement in the opposite direction. Yes, there are many important points that affect the result - at what levels to do it, how much, how to manage risks, but cheap assets should be bought, and expensive ones should be sold. If, for example, Bitcoin now falls to 6400, then buying it at this level will lead to success with a much greater probability than selling.

Therefore, “knife fishing” is often part of successful trading systems.

Can not be averaged

You bought Bitcoin at 7000, and it fell to 6600. Is it logical to buy it, provided that there are no significant changes in the reasons for buying it at 7000?

Of course. If you hold this position, then it is reasonable to use the opportunity to make the entry price even cheaper.

But the "gurus" say that it’s impossible. And they recommend doing what is the next stereotype.

You can’t stay out of the loss, but you must close it and then re-enter at the best price

If we take the example that I gave above (with Bitcoin at 7000 and 6600), then the “gurus” recommend closing a purchase with a loss of 7000 and buying cheaper, below 6600. For example, at 6500 or 6400.

It seems to be logical, only this is from the same series,that stop to profit 1: 3. It’s immediately clear that this ... theory was invented by those who traded except on the demo account. Because in practice, the price in most cases will not reach 6500 or 6400, but will soon go up, leaving you at a loss and out of position.

If you think that the movement will be upwardkeep long and increase position if deposit allows. If you think that the market is going down, close the long, open the short. But to close in a minus position, in the hope of opening it below, is silly and illogical.

It’s clear that sitting and looking at the loss growthalso not necessary. Your trading plan should answer questions when plan B comes and what you do in this case. Closing a losing position, in whole or in part, is a completely working option. But it’s stupid to do this just to enter below.

Be sure to put stops

Stop - a useful tool to limit losses when used properly. But not every deal needs them. And their incorrect use simply slowly eliminates your deposit.

Technical analysis as the main tool for making trading decisions. This is the same as prescribing treatment for a patient according to a schedule of his temperature. Efficiency is also the same.

But who and why popularize these stereotypes? Is it really all in order to squeeze 0.1 Bitcoin from Vasya Pupkin when he comes to the market and opens a position, putting a stop at a profit of 1: 3?

The whales, the Masons, or the Rothschild clan have nothing to do with it. The question is in the industry of trading education in financial markets in general and in the cryptocurrency market in particular. Professional traders are those who live on the income from trading. They have their own trade, investor accounts, funds ... This is concentration, irregular working hours, constant tension. There is no opportunity to seriously engage in training for those who wish, and there is no motivation, because in order for the income from training to be comparable with trading, it is necessary to set a price that hardly anyone will pay.

Because training is not professionaltraders, and professional teachers of trading. They at best traded in the past, but did not succeed: someone leaked the depot and didn’t try again, someone seemed too risky to trade, someone just realized that 100-300 bucks from each without any risk he is interested in the hypothetical possibility of superprofits in trading, which still need to be received.

Mass Learning Industryfinancial markets began with forex, in the late 90s and early 2000s. At that time, large Forex cuisines, primarily Teletrade, scattered networks of branches in Russia and the CIS countries, and training was an important step in attracting customers, because the bulk of them had no idea about Forex and financial markets in general. And for these people to bring money to Forex, they had to give a simple and understandable picture, even if it did not coincide with reality. This is where the theories about mandatory stops in each trade went, about the ratio of stop to profit 1: 3, and about the importance of technical analysis.

Reduction of the complex to the simple, primitivism andSimplification works when you need to convince the client that everything is simple and clear on the market, and he will definitely make money if he follows simple rules. Every two weeks, dozens, and then hundreds of branches, issued future Soros, armed with the knowledge that stops should be placed on each transaction, stop to profit 1: 3, the decision to enter the transaction was made on the basis of technical analysis.

After facing a brutal reality, most of them left the market. The most cunning and unprincipled went to Teletrade teachers or managers in order to recover losses.

I was sent several crypto lessons for evaluation. After reviewing, I realized that their authors either studied in Teletrade courses, or, more likely, their teachers studied there.

My girlfriend was- not the last person inTeletrade. I learned a lot from her. The main profit of Teletrade is the profit of the company according to book B (plum of client deposits). But this without insider was understandable, but the details: 70% of the plums are triggered stops.

That is, a tool that is designed to minimize losses becomes the main source of these losses.

How does a typical crowd trade?

Enters the market and opens a position. Which direction, as a rule, is determined either by his own interpretation of technical analysis, or by the analytics of some guru, which he did again on the basis of technical analysis.

It sets stop and profit. In 90% of cases, a stop is triggered. Repeats the procedure several times, realizes that something is wrong here. Starts to do the same, but without stops. The price goes against him, he is waiting for a reversal until the moment when something is too late to do ...

Then he begins to look for signals or remote controls, and merges the rest there, or begins to realize that he was taught something wrong, and creates his own trading system.

As we said, there is a crowd in the market (most)always in the red. The minority wins, taking the money of this crowd. Therefore, for success one does not have to do what the crowd does, one must do the opposite. And all the actions of the crowd in the market are based on the stereotypes listed above. Therefore, for success it is important not to perceive them as axioms, and to include in your trading system only that which brings money, and does not take them away.

How large players trade, I will tell in the next article.

Posted by Pavel Gromov, author of the Crypt Chief channel.