Earlier today the Federal Reserve presented a more dovish stance than expected. The markets ran wild while the U.S. Dollar sold off. Even Bitcoin nudged higher into the 4K area. Is the weakening Dollar the catalyst this space needs to finally break free of the slow grind range environment? It can certainly help as a weakening Dollar is bullish for all currencies and commodities, BUT it is not a good enough reason to overlook the most important decision making element: reward/risk.
We get asked the question very often near highs: is this a good place to buy Bitcoin? How about Litecoin? Our goal is to help our members develop the confidence to answer this question for themselves. One way we look to achieve this is by providing the elements of our decision making framework through our posts and recent webinars. Everyone gets it UNTIL the market gets wild, which is when rationality goes out the window.
With today’s unexpected Federal Reserve announcement there seems to have been yet another “throw your rationality out the window” moment. Is Bitcoin a buy here? What about Litecoin? The real question is: what kind of risk are you willing to take? Rational risk or dumb risk?
Bitcoin Is High. Are You?
Wholesale prices are where professionals take the most risk. Why? The reward vs. risk is most attractive at those prices. If you can risk 1 dollar, to make 3, that is a winning situation. Would you risk 3 to make 1? Buying Bitcoin at the 4K resistance area is doing just that. Why? you ask, It’s going higher and I am missing the move!
Resistance levels are often where selling activity is the greatest. Buying Bitcoin between 4K and 4150 means you are buying where the traders and investors who bought near the range lows are locking in some profit (or at least they should be). Buying into range resistance levels means you are buying from smart money. They are smart because they are reducing risk, while you are entering the market with increased risk. You are risking 3 to make 1. You would be accepting “dumb risk”. It may work once or twice but over the long run, it is not profitable.
Wouldn’t it be better to risk 1 dollar to make 2 or 3? The current prices do not offer that ratio. Highs are usually a better LOCATION to lock in profits, and reduce risk especially in a RANGE.
Although what I am writing here seems like common sense, when the emotions take over, these concepts go out the window. And this is why having a well defined decision making process and sticking to it is key to navigating any market. If you regularly face this obstacle, the simplest way to overcome it is to ask yourself just one question: Would I prefer to risk 3 to make 1?
Bitcoin support levels are currently around the 3600 to 3500 areas. It may seem like price will never get back there but all it takes is a little piece of unexpected drama. If you want to be successful in this game, recognizing when the market is offering better reward/risk is key. You don’t need to be a math genius to figure out that buying highs generally offers lower reward vs. risk than buying near lows.
This is why those who have the ABILITY TO WAIT manage to get the better prices. Think of it like this: if the market runs away, what are you losing? NOTHING. Smart money WAITS, while emotional money gives in to the impulse to chase. When the smart money sells, where do you think they sell? At lows? In order for them to profit, someone has to take the other side of their trade.
So now you tell me: Is this a good place to buy Bitcoin?
New member? Check out our recent interactive trade review where you can see how we recently bought into a Bitcoin low. Watch it here.
What About Litecoin?
What about Litecoin? Bitcoin may be in a range, but Litecoin is in a trend, right?
Litecoin may have developed a better structure, BUT once again notice the location. Even though in the face of the weakening Dollar, this market is also in a resistance area. Does the reward/risk make sense at these levels? I hope you said no.
So where then? Litecoin is ripe for a larger degree retrace which can easily take price back to the mid 40s. That is where the reward/risk makes much more sense. When will it pull back? No one knows, the question is will you be prepared when it offers that opportunity? Or will you be regretting buying it at 60 because you could not contain yourself?
There is no doubt that Litecoin is strong, but the current situation does not offer attractive reward/risk. Would you risk 3 to make 1? Or risk 1 to make 3? What do you think investors who were willing to take the risk at the 34 break out are doing now?
Want to improve your trade decision making? Learn Texas Holdem’. It is not just a card game for compulsive gamblers. In order to win consistently, it requires constant decision making in the face of imperfect information, which is very similar to facing the constant uncertainty of a financial market.
I actually spend time learning the game from a probability and strategic perspective because it helps to sharpen my decision making skills as a trader. There are times to push, and times to avoid. It is all about adjusting to your environment as variables change during each round of betting that occurs.
Just like in trading, you have to interpret patterns and evaluate the context of your environment in order to make smart bets. And even when you think you have the best hand, the element of randomness will step in at times and you will still lose. Just like when you have the best looking setup on a chart, and it fails.
You don’t have to become a Poker pro and risk real money on the game, but as an exercise in decision making, it is certainly worth a trying out as a way to improve your trading skills.
I have found that playing for real money invokes emotional responses that are similar to the ones we face in the trading environment. In this way, Poker provides the means to further develop emotional intelligence which is a key trait when it comes to trading successfully.
All Markets Retrace.
In summary, do not get sucked into another Bitcoin high. If this market is really going to build a broader recovery, it will offer many opportunities along the way. It is just a matter of WAITING for a situation that offers better reward/risk.
When markets get wild, it is easy to get caught up in the excitement and throw rationality out the window. And the smart money knows how to capitalize on those who are willing to risk 3 to make 1. Let Bitcoin and Litecoin go higher, and let everyone else jump in and take the high risk. These are the same people who will supply the coins at the bottom of the next pull back. It will come, it is just a matter of WAITING.
Questions and comments welcome.This is a Free Member article. To receive email notifications when new articles are available, click here.