Bitcoin Breakout – Human Emotions & Planning

Overview:

There was a long signal and trigger a couple days ago, but we opted not to take this trade.  One reason is position and the potential for a fake-out.  Marc often mentions that he is always looking for a reason not to take a trade.  When those reasons are exhausted, a trade signal is issued.  This means we miss out on many moves, but it also keeps us out of a lot of bad ones.

Human Tendencies to Forget:

The human memory seems to dismiss bad things over time.  Ever been in a relationship that failed, only weeks or months later getting back together again? Many times this is because the bad memories in a relation is quickly forgotten.  You see someone out and about, and you start focusing on the good memories with your former ex.  So you get back in the relationship, and a couple weeks or months later you break up again.  This is part of human nature.

The same happens to traders.  You forget the bad times, and focus on the good ones.  So as those memories of Lambos and champagne dreams start coming back, how do you keep yourself from falling into a 2018 repeat?  Planning, but first the chart.  

BTCUSD:

There was a long signal off an inside bar that triggered two days ago, as it took out the previous high of 5071.  So why didn’t we take it long?  Well simply this is near a resistance level, and the market is still pessimistic, leaving it susceptible to a pullback.

Well so far the trade seems to be working out, and most are thinking, boy wish I went long right?  What I see here is the potential for a fake-out, and if the current candle closes as a pinbar it would be a short signal.  This is actually what I look for in a chart for a potential short setup.  I say potential because it has not formed and there would still need to be confirmation.  Why short here into a bullish move?  It is all about position and structure.

Nothing like a double top off a bullish continuation into a resistance area.  Perfect position and price action for larger players to squeeze out longs.  In addition the market sold off here on the initial rally as evident by the two long wicks off the initial swing.  Often larger participants, sell slowly into a rally like this, giving them time to unload a large position.  Those candles could be evidence of this happening.  This is why it is important to look for reasons not to take a trade, instead of just piling into the FOMO.

Where many see a breakout, we see the potential for a fake-out.  Because of this, we did not issue this trade.  If this candle forms a pinbar and takes out the low, shorts will pile in, those taking the long signal will get stopped out, and the market will pullback quickly to the support zone. At least this is a good possibility.  How it plays out is irrelevant it is all about probabilities.  We do not care about missing a trade, we are more concerned about staying away from potential risky ones, especially when the reward risk ratio is just not there.

Reward & Risk:

If a full candle ends up forming by the end of the day, then a continuation higher may push us towards 5500.  So the target is 5500 the stop is 4700 and the trigger was 5075. Slightly above an R:R of 1.  We don’t mind taking trades with low reward to risk ratios, but not in this position and not where the probability for a fake-out is elevated.  

Sure it can swing to 5800-6000 and only those with crystal balls know for sure.  Since we do not have a crystal ball all we can do is plan for either scenario.  Decisions to trade are based on probabilities and risk not just a trade signal.  Regardless of how it works out we have a plan.

Plan:

The key to being successful in trading and investing is having a plan.  What is your plan moving forward, or do you even have one?  If you are trading, what areas are you looking to trade out of whether we move higher to 6k or lower to 4500?  If you are investing, at what areas do you start stepping in and where are you trimming out?

Having a plan and longer-term strategy takes the guess work out of trading and or investing in markets. It is not about being right or wrong 80% of the time, it is about managing risk 100% of the time.  Where do you not mind taking the risk and out of what areas or levels?  What are you looking for when and if prices gets there?

This should all be determined ahead of time putting you in a position to act upon a market move, instead of reacting to the moves of the markets.  This week we started putting together our plan and strategy for our portfolio moving forward.  Levels we are looking to add, areas we are looking to trim. This does not mean we won’t change or have some flexibility.  We absolutely need to be flexible.  What we are doing regardless is taking the reaction mentality out of the emotional swings markets create.  We know what we are looking for at pre-determined levels and how we will act.

Summary:

Failing to plan is planning to fail.  If you are dependent on weather forecasters for positioning or taking  trades, you are exposing yourself to the market.  It is important to have a plan and or strategy in place on where to buy and where to sell.  Where to enter and where your stop is.  After that it is all about discipline and sticking to your plan.

Just looking at a pattern and saying, yep that is a long signal I’m going in, is not the type of analysis that makes for successful trading in the longer term.  Look at reasons not to take a trade, be patient and let the market evolve.  The best setups are ones that require patience. 

 If you do not have a plan or strategy moving forward, you might be thinking of the good times in 2017.  Ohhh yeah the big rally, here we go again.  What you should be focused on is the memories of the pain you felt in 2018 as the market fell apart and you had no exit plan.  How quickly those memories are subsiding huh.

During periods like this it is easy to remember the good times, and forget about the bad.  This is simply human nature and is one of the big obstacles for traders and investors for long term success.  Your plan may have you missing out on the Full Monty, but will help prevent you from losing your money, and keeps your emotions in check.

1 Response
  1. jlhequities

    Not sure why you don’t like ETH. The entire crypto space was born from 2 coins. BTC and ETH. If I’m not mistaken, ETH has grown in users by 300-500% just in 2018 while price is down 90%

Leave a Reply