Market Mechanics 101 - Bitcoin

Market Mechanics 101 - Bitcoin

When you first look at a market (here, BTC in USD), all you see is chaos.

There seems to be no logic or reason for the twists and turns and in spite of your best intentions to follow the news and understand why it is rising and why it is falling, most of the time, the market moves do not seem to be directly related to news you see or read.

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As the market stops falling and recovers and consolidates and turns upward, you wait.

The market moves up a bit more. You wait some more. Your confidence builds up.

You draw lines on a chart, and you use many charts and you end up with many lines everywhere. 

Then you start to talk to other novice traders and most have a story and a reason and are sure of their actions.

The more you talk around in social circles and in chat rooms, the more you get disoriented and lose focus.

Soon enough you don’t know what to think anymore.

Then, the market rises up even more and goes past the second and third resistance.

This market looks really really strong and everyone is so confident and Mike made a thousand and Mary made 50 thousand and Rich is so rich that he bought himself a yacht.

Finally, late at night, as you feel the weight of a lifetime of frustration, of not making a thousand and 50 thousand and not yet owning a yacht…

As you feel that life is so unfair that you had it hard your whole life and you don’t deserve to be treated this way, the pressure inside you builds up and builds up.

Finally at 3 am you can’t stand it and can’t sleep and you give yourself a push and you open your laptop and you keep telling yourself that tonight is the night where your bad fortune ends.

You pull all that you have and use up your life savings, $12K USD, and you buy enough Bitcoins that soon enough, you will be the one who can tell the world that now, you also, you made it big.

Because, mainly, you are a good person and you deserve better than working at Taco Bell and now you need to find a name for your soon-to-be yacht.

You go to bed feeling invincible and sleep soundly.

The next morning, you call in sick and stay at home because this is your calling and you need to be serious at it and from now on it will go better and better.

You log into your trading account and you can’t wait to see how much you are up now, because with leverage, it can double up much faster.

You can’t understand what your eyes are seeing.

$3,182 USD.

OK.

That must be pure profit.

No. You keep looking at it.

That number is beside two words called: “Account balance”/

You feel dizzy and perhaps you are in shock.

This can’t be. 

Feverishly you check everywhere on the internet and sadly it is confirmed.

From yesterday’s peak, it stalled and went lower and lower.

How can this be?

How can the universe dupe you in this way?

How can life be so mean?

You have lost most of your savings.

You are more than discouraged.

You feel empty, helpless, powerless, hopeless and beaten and nearly dead, sitting on the cold floor.

If we take the time to point out what is wrong with the scenario above, it is simple.

All of it, is wrong.

Listening to other people who are trying to become traders.

Buying because someone else made money.

Trading with all your savings.

Using margin when you are not consistently profitable.

Taking a trade and hoping for the best, thinking that because you deserve, it will turn out good.

This entire dynamic is not sound, because your level of knowledge is gravely insufficient and your position sizing is way too big and you have no money management, let alone, personal management.

If you wish to keep going on that path, you will need a reality check, until you become aware that before making money, you will need to be humble and forget all you think you know and you will need to learn, a lot. 

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Here above, a representation, on a BTC/USD chart, with a 15-minute timeframe.

We can see that as the market rises and rises, we reach a point where the market is unable to rise further, and falls.

Right at that peak, lots and lots of traders jump in, because this is the peak of the euphoria.

Conversely, as the market falls, traders get scared more and more.

If we reach a point where on the news, all we hear is doom and doom, then more traders sell, as they give in to panic and despair.

Still, market mechanics would state that a market falls and falls and at some point, the down move will stall and it will turn around and rise.

Historically, the peaks are where lots of novice traders buy, and then have a loss.

Experienced traders know this and profit from it.

Later on, as the market falls, we reach a point where the market is not falling anymore.

Experienced traders jump in and buy at a lower cost.

Meanwhile, novice traders wait and wait for a confirmation that this is really a rise.

By the time they see this confirmation on the chart, so big that no one can miss it, they jump in again and buy.

Soon after the market falls.

Novice traders end up having loss after loss, on and on and on.

Because of the way they perceive the market and because of how they falsely interpret the information and because they end up taking the incorrect actions.

It is the entire pattern which needs to be reconfigured.

The issue is not the market.

The issue is the trader, who thinks he or she knows, but doesn’t, at all.

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You need to take the time in order to learn and fine-tune how you work.

You need to go through your own process of self-discovery in order to understand not only the markets but more importantly, yourself, how you focus on information, which information, which time-frame, which studies, etc.

Here above, we can see, a number 1. on the chart, that as the market has fallen and fallen, some novice traders enter into a sell trade, at number 1.

The problem is that this is way too late.

Soon after, the market stops its descent and rises.

Novice traders have a loss.

Then, after this hurtful loss, novice traders wait and wait.

The market now keeps rising and rising.

Finally, the trader jumps in and buys, where we see the number 2.

Soon after, the market turns around and falls.

The trader then thinks that she or he is cursed, or worse, that the markets are rigged or that the market keeps hunting him or her and runs after his stoploss.

Nonsense.

You are not important enough (nor am I) for the market to only focus on you (or me).

Instead, you need to think that at the peak, because lots of novice traders will jump in and buy, the market could likely fall, then how can you profit from that information?

In order to come up with your own answer, you can make different tests.

Perhaps you will find an indicator which will allow you to see better the twists and turns, the ups and downs, by having a zero line on this indicator.

Then, you can create your set of rules, and tweak them over time, until you arrive at something that makes more sense.

You keep on trading but with very little money, or you paper trade, or trade a demo account.

For months and months.

Until finally you see that the results that you now have, make much more sense.

But as I said, this is a long and arduous process and not for the faint of heart or for the feeble or for the weak or for the one who lacks courage.

Undertake this journey only if you are willing to truly do anything in order to one day make it and become a trader.

This requires total commitment and anything less than that, will only give you less than stellar results.

Francois Normandeau

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  • Becky Hewitt

    People's impatience in entering the cryptocurrency market is exactly what is poisoning it's growth.

  • Steve Coleman

    Calm and mature advice.

  • Pete Jones

    Bitcoin and the alts all look extremely weak I would sell.

  • Carol Kalinowski

    BTC has no future because the technology is obselete, and govts won't even allow it to get off the ground.

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François Normandeau

Finance Guru

François is an institutional US Crude Oil trader with over 18 years experience. He is also working with startups, helping them secure investments. He is an active real estate investor, in Europe and North America and has a special interest in the tokenization of real estate as well as other tangible or intangible assets. He holds a degree in psychology and finance from McGill University. He lives and works, south of Barcelona and north of Boston.

   

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