Overview:

As many know by now we are conservative and patient when it comes to issuing trades.  Even our more aggressive trades have a conservative side to them.   In life there are few variables we have control over.  We have no control over the weather, or what another car driver may do in the next moment.  There is no control over a forest fire, or, or a late cold front from the North.   Anyone that has been through a divorce or breakup knows that as much as you want to control the situation, you have no control over the actions of others.  In life and in trading there are more things out of our control than within it, but one thing we do have control over is our emotions.

Impulsiveness is an emotion that is difficult to break as it is so entrenched within our DNA.  Advertisers and salesman prey on this emotions, which is why the timeshare industry is huge.  This is why people go into debt buying cars, and items they simply can not pay for in cash.  If you are ever going to be successful in trading or in life, controlling the emotional tendencies that are deep within you, is a must.  I learned from my grandfather who grew up in the great depression that repeated over and over again  “if you can’t pay for something in cash, you simply can not afford what you want”.  So how does this relate in trading?

 

 

Controlling Your Impulsive Nature

Impulsivity is the tendency to act without foresight, and it is often, like many emotions, put there by nature for a reason.  Herd animals must respond rapidly when confronted with danger, or take advantage of unexpected opportunities.  There are advantages of being impulsive and why we are designed by nature to be impulsive.  Quick decision making is key to survival, as when danger approaches we must react quickly.

However the downside of being impulsive by nature is we prefer to choose a small reward immediately, rather than holding out for a larger one in the long term.  This is why people buy those timeshares and cars they simply can not afford.  Why we often jump into relationships quickly, in lieu of taking the time to see if we are compatible in the longer term.  They are looking for acceptance.  Unfortunately society places value on immediate rewards and needs, discounting the longer term consequences of our actions.

As important as it is to react quickly to a changing environment, or when danger confronts us, the same impulsive nature is a burden to most in the form of instant gratification.

In our recent survey a couple people put in the what would you like to see, was “more trades”.  This is the epitome of the impulsive nature of most traders.  “I want a trade now”, completely discounting the consequences of forcing trades.  Controlling this emotion is the first step in becoming a successful trader and investor.

Impulsiveness discounts longer term goals for immediate gratification.  I want a new boat now, and am willing to finance it.  This simply discounts my longer term goal to save for retirement.  As a trader many take a bad setup, discounting longer term gains for the shorter term reward of being accepted.  Unfortunately, like financing a car and a boat, taking these trades results in opportunities missed in the long term.

 


The Ever Impulsive Bitcoin Trade

Nothing more is representative of the impulsive natures of the herd as the Crypto space.   I can not count the number of times I would post an article on TV, about long term, only to be hit with a barrage of wannabe traders, bragging about how they are killing it day-trading. Many of them no longer post or have a new identity at this point.  So what about the current Bitcoin setup?

Bitcoin is in a very difficult place to take a long even with the formation of a pin-bar off a shallow support level.  The structure is not indicative of a bullish setup, it is a structure of an indecisive market.  It is also an obvious pattern and the long consolidation will have more impulsive traders looking for any reason to take a trade.  This in itself creates the potential for a fake-out.  Though we can move higher, the more conservative approach is to wait.

As we mentioned in our trading room, we are passing on this setup, and will simply wait for a better one.  Where is the better setup?  The 3650 area would be a place to look or anywhere below this.  If Bitcoin rallies from here, then you just have to be patient and wait for another setup.


Litecoin

Litecoin’s structure is more defined, but again this is at a major resistance area were a double top has formed.  Couple this with taking out the 54.0 area, and Bitcoin being in an unfavorable area.  The lack of follow through at a major resistance level resulted in us trimming off positions trades we opened at lower levels.

In this situation we where not really fighting the impulsive nature to close out the position, but the emotion of greed, of wanting more.  We gave it an opportunity to push through the 57.5 level, and once it failed to do that, and gave us a sell signal, we decided to exit.

Though there is the potential for a rally to 62.5 or even the 75.0 area here, short of a major news event, the opportunity is in waiting for better pricing.  Even if we push to 75.0 we likely get an opportunity to buy back at these levels on a pullback.  The best area for a trade setup in our opinion is in the low to mid 40’s.  This is where we will look for a trade.

 


Stock Market

The S&P rally has been simply incredible off the recent low.  There is a lot of money sitting on the sidelines, that missed this move,  and is waiting to get back in the market.  Because of this, there is often a “buy the or any dip” mentality.  The current chart pattern is indicative of this herd mentality, and though there is the potential for a swing higher, the opportunity is in waiting.

We are closer to resistance than support and this is an area where the overall market is poised for a selloff.  There is evidence for a potential selloff with the weekly.  The engulfing candle is our first indicator we may have started the process of topping.  Of course momentum is still bullish, but like a 100 ton ship, it takes time to turn around.  We saw a similar pattern at both previous tops.

There are some clear differences in how the market approached the top, as in early 2018 it was a strong rally towards our 3000 area resistance level.  This resulted in a steep pullback.  The subsequent rally came at a slower pace, and it is indicative of the topping pattern which formed over the course of six weeks.

We have trimmed out positions into this rally and are simply sitting on cash.  Even if the market rallies another 100-200 pts, the opportunity is in waiting.  Between 2800-2920 there are many bag holders that bought at these levels previously.  Any sign of weakness they will be quick to minimize losses or lock in a small gain.

In my opinion the 2600 area is fair market value, and I will start selling options around this area.  We have not made an options trade in over a month, and though we would have made some profits, we would have been giving in to the impulsive nature of following the herd, instead of waiting for a better opportunity.  This is an abominably in markets, as they seldom recover this quick this fast, this late into an economic cycle.

The irony is the same friend that in December was asking if he should be selling his stocks, is now asking if he should add.  Here’s your sign.  There are always trades in the stock market, but we have a strategy that is based on the overall market similar to how we base trading cryptos on Bitcoin.

Different Strategies:

The question may be, what about long term investing and dollar cost averaging?  This is a completely separate strategy from trying to time markets.  Traders look to time a market, investors not so much.  This does not imply buying into highs, but if you add monthly to an ETF or dividend paying stock, some months you are buying highs, others you are buying lows.  Long term investing requires even more patience as you seldom see the fruits of your investments for years.  Few have the emotional control to think long term and stick to a plan.

There are numerous studies that suggest buy and hold strategies out perform active trading strategies over the long haul.  This is why it is difficult for most professional fund managers to beat the S&P on a consistent basis.  The fear is that by lump sum or adding a portion of your income to a market periodically, that the market may take a dive, and that the market works against you.  This is far from the truth, as markets are working for you in the long term, and if you buy dividend payers, during dips your money is really working for you.

If you believe in the long term viability and growth of Bitcoin, and are thinking 3-5 years out it will be higher, is there any harm in adding monthly?  Not really, as long as you weigh the risks, and understand cryptos can go to zero.

However with trading or market timing, the strategy is different.  The excitement of being in a trade raises the emotions of greed and impulsiveness on a daily basis.   Giving into these emotions in the near term, can often have you missing out on long term opportunities.  This does not imply one trading strategy fits all.  There are more aggressive strategies that have descent returns, but with more aggressive trading strategies risks should be predetermined, and the aggressiveness of a strategy does not imply impulsiveness.

Whether your strategy is more conservative or more aggressive, the point is do not let emotions your emotions control your trading.  Even with the most aggressive strategies there is not always a trade.

 

 

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