The Uncomfortable Truth Behind Average Joes Playing Markets
When things go our way in the markets, we are invigorated. Our trading account is positive. The multiplicity of hours spent researching new projects feels justified. We see ourselves as capable and our profits feel invincible.
However, as we all know, it is oftentimes a different story.
> Getting burned trade after trade no matter what strategy we employ.
> Somehow late to every buying opportunity and holding far too long past the window to sell.
> The unmistakable feeling that everything we’re reading on Twitter or watching on YouTube is out of sync with what we’re personally experiencing.
> Being late to narratives, while everyone else seems to be ahead of them.
Why is this?
We live in a society where adhering to standards and processes is everything. You have to do this in order to become this. These standards and processes are everywhere, all the time, and they make it seem like failure is not an option.
Because of this, everyone will tell you their good stories but only a humble few will share their failures.
Unfortunately, the human inclination to adhere to these standards is completely understandable. Our society crucifies poor performers. No one can afford the social costs of being revealed as the person who is losing money or struggling some other way when everyone else is successful. Furthermore, material success currently tends to grow your social currency, so we will continue to chase wealth until the paradigm shifts.
These standards cause your perspective to warp how you think you need to behave in order to succeed.
> They cause you to desperately chase positive outcomes as quickly as possible, instead of slowly developing the tools needed for consistency.
> They cause you to compare yourself to others, one of the worst mistakes that can be made.
> They warp your otherwise reasonable desires of “I’d like some additional spending money” into bastardized monstrosities like “I want to make my first million.”
Therefore, when you fail, you feel terrible and demotivated because your desires, and the standards of your society, are not being met.
This framing of the situation is problematic.
The honest truth is that everyone fails. Everyone faces the full spectrum of life’s humbling experiences. Especially those who refuse to let the world see when they fall short.
There is a mixture of both success and failure in the story of every person.
In the markets, everyone both makes and loses money, even the pros. That’s the nature of this industry and eventually, we all learn that.
We all have all given up gains because “what if it goes higher?”
We have all let losses spiral out of control because “what if the recovery starts here?”
Most importantly, after spending the necessary time gaining experience, we realize that the process of wealth creation is not as quick as Twitter and /r/WallStreetBets promised you, (discounting the sensationalized, one-off stories of someone buying the latest “Moondog-Inu SafeToken” and turning a few Gs into a fat million, then almost inevitably diamond-handing their position beyond its relevancy.)
The majority of investors do more harm than good to their finances while playing the markets but most are completely unaware of why this happens.
First and foremost, narratives are dangerous. They’re too attractive to be ignored. Enticing narratives are how most new participants get introduced to a specific category of investment. Narratives are a natural emergence of human storytelling and a desire to create and fuel new trends. This is completely reasonable, and there’s nothing really wrong with that.
In fact, being able to examine a narrative from an unbiased perspective is a powerful tool. However, most people lack the experience to do so.
Narratives are dangerous because people have the tendency to look for narratives that can fulfill their financial desires.
Think of the narratives that have caught your eye in the past year as a retail investor.
Meme coins… NFTs… Manipulated stocks due for short squeezes…
Which narrative was most enticing to get you and the people you know to deploy funds into a new sector of the market?
Was someone in your family -this close- to buying their first dog token at the top?
Did a friend of yours buy a picture of some sort of cartoon monkey on OpenSea?
Did you attempt to sock it to those damn suits at Citadel for suppressing GameStop stonks?
Subscribing to a narrative is one of the most dangerous things an investor can do. Doing so will almost assuredly expose them to the wrong corner of the market, where predators lurk and seek retail noob optimism to fulfill their needs for exit liquidity. Being aware of trending and narratives is useful, but needing any specific narrative to follow YOUR plan is a recipe for disaster.
Plenty of new narratives are emerging in order to trap retail investors like yourself, and others are perpetuating them blindly. “Metaverse” is one narrative. “Crypto gaming” is another. “DeFi options” too.
We’re not saying these narratives don’t categorize good projects and opportunities. We’re merely saying the narrative emerges as a way to draw your attention. If the narrative hooks you, and you allow it to inspire hope in you of fulfilling your financial needs, you will fall for each and every part of it. The good, the bad, and especially the ugly.
If you only give it attention mindfully and recognize it as a narrative before it speaks to your desires, you can examine it from a top-down perspective, instead of a first-person view in the eye of the storm.
The important thing to notice about narratives is that they are created by someone other than yourself, and put in front of you by someone other than its creators. You never know how many rounds of “telephone’” have been played before it was your turn. You can never truly know if you’re late or early when trading the narrative only.
Charts, however, can give you some insight. (Sorry NFT collectors, we’re not really sure how to properly eliminate the risk of your trades, yet.)
This is why retail investors’ deliverance comes only from understanding price action. Onto the next lesson.
What influencers and traders have taught you as “high-probability trading patterns”, in reality, have much lower odds of success than you think.
We know how people say chart patterns work. — “Wait until you spot the pattern. Play the retest of the breakout with a stop-loss under your entry.”
Supposedly, everyone will see the same pattern. Then there will be a common consensus to the same direction, and we will collectively fulfill the prophecy.
But in reality, these patterns are highly unreliable.
If these patterns were as reliable as popular culture claims, we’d all be multi-millionaires many times over within a few months.
Consider that finding the same patterns as one another offers no way to really gain a competitive advantage.
We know what many are thinking when a chart pattern fails.
It’s the “whales” who are depriving you of juicy gains on a perfectly spotted trade, manipulating patterns to their advantage. They trap you in a bad trade and you’re forced to puke your position… only for it to continue in the direction you initially thought it would go! Blatant manipulation!
Completely unfair, right!?
The reality is, there are no traps. Market makers (whales) aren’t behind the screen waiting for you to buy so they can sell. In fact, they probably left to play golf. But they almost surely left hundreds of limit orders at price levels that matter in order to protect the macro trend they’re playing.
These levels can be discovered, but the “how-to” knowledge isn’t as readily available as the basic chart patterns the average investor usually looks for.
Whales are just playing the game at an extremely high level. You’d lose in 1-on-1 basketball against an NBA star and he wouldn’t have to cheat.
Throughout our upcoming content, we will show you how to place orders at key levels like a whale.
So, about those chart patterns… here’s just how ineffective they are:
These statistics dictate that you’d have a better chance of success tossing a coin rather than making consistent use of these patterns.
Shocking, right? How is this possible?
Most people will self-realize these results after years of trying the same strategies over and over, expecting to have positive outcomes each time, only to continue stacking up L’s. Repeat the process N number of times and you have the perfect recipe for going bankrupt.
Here are some recent failures of common-knowledge strategies on Bitcoin.
At the leftmost “flag” structure, a trader might have discarded their position at ‘1’ where the structure failed, only to then see a continuation to the upside.
At the new all-time high marked at ‘2', traders felt euphoric and invincible. Many added to their position because the narrative was extremely bullish and difficult to ignore. Many sold at a loss.
Then they waited until new ATHs at ‘3' before entering back into positions, but demand wasn’t strong enough to find continuation, not only losing the support but falling dramatically off a cliff.
Anyone who was long at ‘2’, ‘3’, or ‘4’ was now rekt and the price has yet to recover. This is why so many traders express frustrations over -5% moves to the downside. Their entries were so poor that they had no buffer zone. They either cut their bag at a loss or continue deeper to the downside.
The price action at ‘3’ and ‘4’ proved to be an upthrust action, but many hailed the breakout as the beginning of price discovery. This was not the case.
Either way, if you had a bullish plan based on playing the breakout, you were bound to lose some capital. And if you didn’t have a stop-loss, you were in even more trouble.
Price later consolidates within in a “bull flag” pattern under resistance marked at “5", which kept the bullish narrative alive.
Those who hoped for a breakout possibly added to their position or held their bag, but were then rug pulled, with price plummeting well below the bottom of the structure.
In reality, anyone searching for this pattern was just attempting to keep their bias for the bullish narrative intact. The entire flag structure was actually just a downtrend, a series of lower highs and lower lows.
It’s almost as if charts behave completely the opposite of what popular teachings tell us.
Once again, whales aren’t leaving traps in your path. It is in fact our bias toward narratives and our own financial needs that are the biggest traps.
> “I need this to do 10x, so I see a bullish pattern.”
> “I missed out on the rally, so I see a bearish pattern.”
What market makers see is usually way different than what most people see. They don’t need anything. They see price action for what it is. That’s why they’re not only able to make money, but preserve it too.
We plan to help you build the foundation to see price action for what it really is. In future articles, we’ll help you spot key levels without the need for patterns. We will show you how to trade like a whale.
But please, don’t be too hard on yourself for your losses. Don’t give up. We’ve all been there at some point. We can only strive to learn from our mistakes and be better.
On to the next lesson.
People have poor to no understanding of what risk management is, its purpose, and how to apply it.
Risk management can be a sensitive topic among traders and investors. It’s like God. They know of it, and they talk about it. They preach it. But no one has seen it or knows how to explain it properly.
Furthermore, we find opposing narratives surrounding risk management. Conflicting viewpoints from “scared money doesn’t make money” and more conservative philosophies such as Warren Buffet’s basic rules of investing:
“Rule 1: Don’t lose money.
Rule 2: Don’t forget rule 1.”
How could you do anything but lose money if you don’t know which narrative is correct? Especially when everything that is taught to you has abysmal odds of success? Are there even any steps the average Joe like you can take to consistently succeed in the markets?
Well, to start, you could deduce that you don’t really see or know of any consistently profitable trader or investor making use of popular culture investing theories. We could discard our favorite influencers on Twitter and YouTube from that category as well, as we’ve all been burned by their signals, proving they’re either inconsistent (like everyone else) or malicious.
The problem is not necessarily the analysis behind a potential investment. We already know that the abundance of strategies out there have varying probabilities of success.
The real problem is what we choose to focus on. The average retail investor focuses too much on potential gains rather than capital preservation.
Professional investors always focus on risk management since losses are the only thing we can control.
Everything else is too dependent on odds and probabilities.
For example, there’s nothing wrong perse with locating and examining chart patterns to see how the asset behaves when confronted with them, but finding patterns to support a predetermined bias is very problematic.
The special sauce most people are missing is proper planning.
Proper planning can help you feel comfortable with temporary unrealized losses, which are inevitable. We don’t need to catch the bottom. We need to develop confluence for an emotionless plan that we are going to stick to.
It’s important to create plans in order to avoid all cost permanent loss of capital. The goal is to ensure that “the probability of the unacceptable is nil”, quoting David Iben and Ray Dalio.
When you hear traders on Twitter saying they’re out of fresh powder to deploy during dumps, a huge red flag should be raised. That is not good risk management.
In a future article, we will show you how to prevent losses larger than you’re comfortable with.
Now we know most trades will lose money, but as long as we“catch” the right ones, we should be profitable over time, right?
A popular trading philosophy is that every trade should not risk more than 2% of a total portfolio, so let’s start from that figure, taking into consideration what we calculated about the success odds of chart patterns.
If this seems conservative, we completely understand, but we still recommend small positions like this to inexperienced and experienced traders alike.
Remember, if you succeed in finding consistency over time with small trades, when the time presents itself to go big, you’ll be able to do it without getting rekt in the process.
On average, the patterns from earlier had 4 winning trades against 6 losing trades in a sample set of 10. If you were to do trades with a stop loss of 2% and they fail, the accumulated loss of the 6 losing trades would be 12%.
This means that the last 4 remaining trades have to earn you at least a 14% return just to break even.
This is where losses start getting out of control. The required return to break-even increases exponentially, and no one is exempt from eventually getting pulled into a devastatingly negative trade.
But our uphill battles don’t stop there.
Market behave in specific ways. (But probably not the way you currently think.)
You can spot the behaviors and become consistently profitable while reducing your risk of downside.
This has rung true since first The Dutch East India Company stock was created back in the 1600s. Even before financial markets, all trade was merely a joust between demand and supply in an endless battle.
Supply and demand always behave the same way, regardless of the asset, its nature, or its unit of measure.
This fight is shown by The Trend and its structure. Spotting and dissecting the supply and demand imbalance that rules The Trend.
You can say, “yeah, I know what the trend is”, but in reality, even experienced market participants can’t define nor spot what the trend really is nor when it is starting to develop or change.
Everyone uses popular oscillating indicators and diagonal lines in an attempt to spot it, yet fail because they ignore educating themselves about its true nature.
We will show you how to spot The Trend and see it as it truly is in our next article, Trends 101.
Every consistent trader makes use of and has studied until exhaustion the same following things:
- The Trend, its nature, and its structure by definition — The succession of highs and lows as a consequence of supply and demand
- Trading ranges — Trends inside larger Trends
- Horizontal levels as liquidity zones
- Trend Invalidations — When supply overcomes demand or vice versa and the imbalance is shifted
- Trade risk management, based on the perpetuation or invalidation of the trend.
- Other relevant topics such as Long Term Credit and Debt Cycle, referencing Ray Dalio.
All of the topics above require an article of its own, which we will certainly be releasing and presenting in the future.
The truth is, once you learn them, the first thing you’ll probably do is to unfollow most of the noisy people who have steered you wrong. You will develop the foundations to trade successfully per your own ever-growing talents, reduce your chance of loss, and let go of the need for signals from outside sources.
/ Hearts Crypto & Markets