The Hot Hand Fallacy as Bitcoin Grinds Higher

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As Bitcoin continues to grind higher, many are jumping back into the trading atmosphere of a bullish market.  The risk here is not a retrace or a swing higher, but it is the “Hot Hand Fallacy” which many fall into during these periods.


As Bitcoin continues to grind higher, many are jumping back into the trading atmosphere of a bullish market.  The risk here is not a retrace or a swing higher, its one’s emotions and the “Hot Hand Fallacy” which many succumb to during these periods.

The last thing you want to do is make good money and then give it all back.  More often then not this is the case with those new to trading and many experienced traders as well.

The question is understanding the environment, how different trading strategies work in a particular environment,  and risk management.

If you have ever been to Vegas or seen the movie “The Big Short” it explains well the psychological challenges humans have in getting wrapped up in the next “Hot Hand”.  I recommend watching “The Big Short” as it really gives a sense of how emotional markets can get.

“Hot Hand”

If you have ever played any sport, poker, or sat at a craps table, you probably experienced the “Hot Hand Fallacy”.  You are running hot, so you think it is not going to stop.  This leads to confirmation bias that the next hand will be a winner too.

We have all had our winning streaks, but nobody has ever had a winning streak that has not had a losing streak.


Bitcoin has pushed through resistance area after resistance area as if the road to 24k was clear of pot holes and speed bumps.  This often gives traders a false sense of security and psychologically there are two risks that arise.  The “Gambler’s Fallacy” and the “Hot Hand Fallacy”.

Bitcoin and the space in general has been bullish for several months.  Currently Bitcoin is attempting to take out the top of the upper resistance area and has the potential to push to 12500-15000.

In my opinion, I think Bitcoin is setting up for another leg higher, but the market does not care about my opinion.  The risk of retrace is real, and as we mention over and over it is important to not let personal biases enter your trading and investment decisions.

Technical Areas:

Initial support is found at 9500 and again my opinion is that anywhere below 9500 is an area to add for a broader move.  However this would be a shallow retrace as the main support area is between 8050 and 8850.

Lower support is found at 7150 & 6200, and though probable it is not likely we see these prices.  We can however, and the important thing to take away is to be prepared for any scenario.

The next major level of resistance is 12,500 and this is a major level.   Yet shorts are piling in as if the market is bearish and clearly it is not.  This sets up for a potential short squeeze which could push into the 15k area.  Especially if people think the market is getting away and they jump in.

This makes the outcome a coin flip and no technical indicator or chart pattern is going to provide some secret insight into the next market move.  All we can do is prepare for any scenario and realize the risks.

The market does not care about my wave count, my Fibonacci levels or anything else I or you think.  It is the determining factor in the end and if you think you are going to outsmart the market, you likely have a long hard road ahead.

We have no control over the market, all we have control over is our risk.


Investing & Managing Risk

I never want to be completely out of the market.  Those that try and time the market with 100% of their portfolio are often disappointed to see it continue to rally, or take a huge hit when it corrects.  This can lead to panic mode buying and or selling at the wrong time.  This is why we balance “risk on” with our bank roll.

With investing you want to remove some risks into highs, but not everything.  Markets can continue higher, so the risk of missing a potential higher swing can diminish returns over time.

This is exactly why most investment advisers tell their clients to just stay long.  After all markets tend to trend higher in the longer term.  Yet when a market is pushing significant highs or is overly bullish trimming out some profits and building up some cash, puts you in a position to take advantage of a selloff.

With many coins up 100-400% this year already, we decided to start removing some risk going to 20-30% cash in our model investment portfolio.  This puts us in a position that if the market continues higher, we are getting the bulk of the move.

In the event of a selloff, well we have cash to take advantage of those attempting to time the market with 100% of their portfolio and panic out.  Having cash on the side diminishes the impulse to cut during a significant correction.  It gives you some peace that you are in a position to hold, making you a strong hand.

Trading & Risk

Trading is a different animal as there are numerous trading strategies each with its own positive and negatives.  The environment often dictates the type of trading strategy a trader will employ.

With the market at an 18 month high and Bitcoin trading in a tough area of resistance, swing trading becomes less profitable and more risky.  There is no short signal, so shorting here would be silly as momentum is clearly bullish.

Yet since the area we are in is susceptible to a quick pullback, decisions must be made quickly, and this is not one of the strengths of swing trading.  Often the spread between stops, entry, and targets are wide.

Since the environment is risky, you have the potential of taking a number of  losses with a swing trade, so you must adjust your risk, and be picky with the trades you take..

This is an environment where day and scalp trading are more successful.  It is easier to make profit on a 50 pt move than a 1500 pt move here.  Smaller trend cycles on the 5 minute to 1 hour, are quickly identified allowing the trader to make quick decisions.  You are trading small momentum trends, 50-100 pts.

If the market goes against you 10-20 points you blow out the position.  With Bitcoin this could be in a couple minutes, so you have to be in tune with the chart and ready to act.  Trying to provide signals via Text or Chat Group can result in a time delay that turns a loser into a big loss.

Generally for day and scalp trading there are no Buy Stops, Stop Loss and Targets, you are looking at price action and when you see a change in price action you exit and quickly.

Risk Management

Many new to trading confuse the different strategies and do not understand when an environment is prime for the type of trading.  When using a trading strategy like Swing Trading in an unfavorable environment, risk must be adjusted.

Adjusting your risk to 1% or less is important even though the market is still pushing higher.  It is also important that the reward to risk is greater as well.  Out of support in a bullish market we do not mind taking a 1.05 R:R as the probability of success is greater than 50%.

Taking a continuation trade, in an area of resistance, lowers the probability of success so the potential R:R must be above 1.5 for us to take a trade.  Because these have a higher probability of failing, we also reduce our risk from 2-3% to 0.5-1%.

The adjusting of risk and taking higher Reward to Risk trades offsets a series of potential losses.

This is a critical part of risk management as the higher R:R and lower Risk Model gives some cushion if we hit a losing streak.  This brings us to the “Hot Hand” fallacy.

Hot Hand Fallacy

I believe this initially came from a research paper on Basketball where a player has a “hot hand”.  The assumption made is the streak will go on invoking excitement and over confidence.

If you ever sat at a poker table you probably have experienced this.  You get a run of hot hands where you are just hitting card after card and winning.  This provides the illusion that you are controlling the outcome leading to overconfidence and increasing your bet size.

This is where many traders get in trouble!  Also many poker players as well.  Good poker players will get up and leave in the middle of a winning streak.  I learned the hard way in both poker and trading that failing to leave in the middle of a hot streak often leads to giving your winnings back and more.

Hot Table

If you have ever been to Vegas there is nothing more exciting than a Hot Craps Table.  Boy someone is just hot hot hot, and it attracts a crowd like no other.  Money is just flowing onto the table as the streak and excitement continues.  This excitement attracts more and more participants risking more and more money.

Wow I put that $100 in and I’m up $200, let me double down boom again you hit.  But Then!

The Hot Hand turns into a Cold Hand, and this is where hindsight bias often enters.  “Well he was running hot I’ll place another $100 and win back that money”.  Eventually you are doing the walk of shame to the ATM only to be followed up by “daily limit hit”.

This happens in trading all the time.  You hit a winning streak and you deviate from your rules concerning risk and like that your money evaporates into a market that does not hand out participation trophies.

It happens at the poker table too, and anyone that plays knows this is real.  You start with $100, you hit a streak, your up $200 and then in one hand you give it all back.  You throw in another $100 and lose that to.  No participation trophies at the table either and you have to look at the guy with your chips, or was your chips.

At the end of the night, you took a $200 profit and turned it into a $200 loss.  The ole “I’ll just get back to even” mentality which is hindsight bias.  The same goes in trading.


It is important to understand what trading strategies are conducive to the current market environment.  Many that make money in bull runs often give it back because they do not realize the environment has changed.

They fail to adjust their reward risk or switch to a strategy suited better for the current environment.

Overconfidence and confirmation bias wrapped in the false assumption that you have control of the market can often lead to over trading and over extending your risks.

Get Up or Step Aside:

I never lost any money getting leaving the poker table early up $100.  I never lost any money taking a profit or waiting for the environment to be more in line with my strategy.   I have lost a lot of money, thinking because I have a string of winners the next trade or hand will be a winner too!

These losses often result in trying to get them back, doubling down, and taking higher risks trades.  “This next trade is perfect I will increase my risk to 10%”.  Yes people do this and is the reason most lose their money.

Emotional Discipline:

In the end the most difficult obstacle to over come in being a successful trader is yourself.  Lack of discipline and letting your emotions take over in lieu of following the rules you set.

Many just want the excitement of winning, and jump from strategy to strategy no different than jumping from relationship to relationship thinking this time it will be different.   It will not, and most likely the flaw is not in the strategy or the other person, but you, your expectations and you being able to control your emotions.

Successful poker players and traders, know when to play and know when to throw hands away.  They understand risks, position and stick to their strategy.  They do not allow emotions to enter their decision making.

I never lost money throwing away a hand or not taking a trade.  I have lost a lot playing hands and taking trades that broke my rules.  Calling a 4 bet with 56suited, or risking too much in a trade, when the market was in a risky area.

Of course some end up winners, and the risk is it sucks you into the “Hot Hand Fallacy” and this is the fastest way to lose your capital.


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