On Black Friday people line up outside of shopping malls, getting ready for the competition bell to go. Then, they run, push, shove and fight for that next possession. There’s anticipation. Triumph. A story when it’s all over. Then the surge of dopamine fades…
Low dopamine is what’s happening in a trading room during periods where most traders aren’t making any money. The days are long, tiring and depressing. Then one trader has a winner, changing the entire dynamic of the room.
Trading plans and decisions are often myopically focused on data and information provided from your market. You get out the charts and look at this moving average versus that one. You look at relative strength, resistance or support on Bitcoin. You might find some value in chart pattern that sounds like a shampoo commercial, like the head and shoulders top or bottom in Ether.
You might have the ability to analyze the flow of capital into or out of a given cryptocurrency or asset. These flows are like a form of energy that infuses or deflates activity in a market.
One form of energy flow that traders can look at outside of the market comes in the form of behaviour. The key is to step back and see the behaviour evolve and play out. Then explore if and where it can be applied to market conditions.
Black and Blue Friday
Black Friday is a good place to get some trading insights on human behaviour and market activity. There are motivated people competing aggressively. There is money involved. The entire event is a demonstration of emotionally charged decisionmaking.
Door crasher sales provide an incentive of scarcity – something the buyer can tell their friends a great story about. The story becomes a triumph and fulfills emotional needs.
Some companies attempt to exploit the pent up demand and anticipation by having their sales ahead of Black Friday. Others cater to the increased trust of digital commerce and the desire to avoid the mob at the store and in the parking lot with Cyber Monday. Yet, the same principles of scarcity, a time limit, competition and emotional fulfillment apply.
Regret is an emotional cost
Missing a good deal creates a feeling of regret. Buyers are fixated on that thing that is framed by a time limit and the price. Their focus eliminates the flexibility for substitution or the patience to wait until later. The thing itself has less value than the perception of scarcity driving activity and the risk of feeling regret.
If this sounds a lot like trading at times, that’s because it is. Various emotional needs are being fulfilled by the activity. Being first, getting the deal (the low for the day, month, year), telling war stories, are all like trading in almost any asset. The emotional needs are more important than rational ones.
Now as Black Friday fades into the rearview mirror, the deals remain. That thing that seemed so crucial will seem less appealing. The chase, since passed, will no longer reward you for the purchase or desire.
There will always be another sale. There will always be another deal. The buy was never about the thing, it was about the chase. It was about the desire, driven by perceived scarcity and the abdication of reason to a sense of need.
As a trader, you will experience a series of internal emotional demands like these at times. These emotional reactions will require acknowledgement and a structure to keep them in their appropriate place. Only then can you use them as informed data points.
So as you look at moves in Bitcoin, or Ether, or hear about some hot ICO or token, think of Black Friday. How many elements of the experience are present? And based on what follows Black Friday, what could the equivalent outcome in your market be?
And more importantly, how can you use a trading plan, rational thinking, and awareness of your emotional responses to profit from this type of situation?
What about quiet trading periods?
Expert for the day
Trading is a mix of volatile and quiet trading periods. In the quiet periods, traders may not be making any money as they try to figure out the new pattern or adjust their strategy.
During a period like this, one trader in the group (a physical or digital trading group) will nail a winner. The other traders in the room, desperate for a win to rebuild their confidence during a slump, will go from depressed to needy.
As a result, the trader with the one win becomes the “expert for the day.” This win in some way appears to provide them with authority to provide their “expert” opinion on the next winner to help their buddies. After all, they may feel a little guilty about having the only winner recently.
Now, bear in mind that the expert for the day never mentioned when they put on the winning trade.
Why didn’t they mention it? Because they were uncertain when they put it on. That meant they kept checking, looking for positives and negatives. They were following a plan or a thought process. The winner was a result of making those observations and executing a plan, and maybe getting a little lucky too.
But their advice to the rest of the room after the winner isn’t shaped just by a method. Now it is shaped by overconfidence from the win. Their next pick and all the decisions around it will be formed by extraneous emotional inputs.
Winning trades are uncomfortable
Unlike their previous winner where they were uncertain and open, their next pick will be confident and certain. As a result, they will now be invested emotionally in the outcome and therefore need to be consistent.
The result? Their next trade will likely be a loser.
The other traders in the room, are now relying on this confidence to rescue them from their slump. By abdicating responsibility for their own trading decisions and results, these traders will lose twice. In the first instance, they will lose money on the trade. In the second instance they will lose because by not following their own thinking, they will get no useful information about the market from the loss.
Although they will be able to derive comfort because since several members of the room all lost together, they didn’t lose alone.
The more certain the call, the less likely it is to be based on analysis and following a plan. Tops occur during periods of maximum confidence, not periods of uncertainty. Bottoms come during periods of maximum pain and uncertainty.
For the trader, it means that big calls, bold predictions, and displays of certainty are comforting. But they fail to respect the necessity of process, thought and flexibility that are the hallmarks of successful trading.
When you are in a digital trading room with people you haven’t met and whose activity you cannot confirm, how often have you seen this? And how have these big calls played out?
Ask yourself if you can really afford to outsource your trading to someone else’s opinion. More importantly, if you do, how will you know what to do when the trade is on? Because the expert for the day doesn’t know either.
Adding behavioural observations from outside of crypto markets will provide you with a wealth of information. Step back from the crowd and observe the underlying decisions. Then use those insights to enhance your trading approach and profit.
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