Stereotypes and misconceptions about cryptocurrency trading. Recommendations from Pavel Gromov
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You can find stereotypes in all areas. These stereotypes are seen as things that do not require any evidences. If these stereotypes are not about law of physics or geometry theories, they are worth questioning, as they are often based on misconceptions.
Let’s consider some stereotypes about trading, which are presented as axioms, but they are actually erroneous and mislead the ones, who try to follow them.
Content:
1 “Stop Loss” and “Take Profit” should have a ratio of 1:3
2 Not allowed to «retrace»
3 Not allowed to be in average
4 Not allowed staying in losses. You have to close it and reinvest it with the better price
5 It is necessarily to put limitations and stops
6 How does the ordinary crowd trade?
“Stop Loss” and “Take Profit” should have a ratio of 1:3
For instance, your Stop Loss is about 100, and Take Profit — 300. It means, that such a system allows you to gain with minimal risks.
As an experienced in different markets person I can say, that it is not working like that. To trade in this manner with cryptocurrency means to lose slowly all deposits you have.
It is obvious — such an approach is not going to work. The same is happening with profit. That is why, in this system «stops» will work always, but «profits» — rarely. Of course, you can have a chance to be successful. However, it can happen only if there is a trend, and the 70% of the market is flatting. In this way, short stops will always work.
It is impossible to succeed by trading in this way, although, in theory, it looks as a good strategy (it’s clear, that this theory exists only for people who have never traded in the markets).
Nevertheless, it is precisely such a “strategy”, that is taught by all market specialists, both at courses and in private workshops.
Not allowed to «retrace»
This term refers to buying, when the price goes down, or to selling, when it grows. So called actions against the main trend. Although, buying cheap and selling expensive is exactly what you need to do to trade successfully.
It’s logical: as the longer the price goes in one direction, as more chances you have to reverse and to go in the opposite direction. Well, there are many things that can affect the results: at what levels to do it, with what volume to do it, how to deal with risks, how to buy cheap actives and how to sell them with the better price. Imagine, for instance, that Bitcoin declines drastically in price till 6400. The purchase at this level will lead you to success more, than if you decide to sell it.
That is way, doing retracements sometimes is a part of successful trading.
Not allowed to be in average
You bought Bitcoin per 7000, and it fell down in price to 6600. Is it logical to buy it, taking into consideration, that there are no significant changes in reasons for buying it per 7000?
Sure. If you hold this position, then it is reasonable to use the opportunity to make the entry price even cheaper.
However, «gurus» say, you can’t do it. They recommend you to do what is considered to be a stereotype.
Not allowed staying in losses. You have to close it and reinvest it with the better price
Remember the example with Bitcoin mentioned above. «Guru» will advise you to stop trading with losses and to buy it with a cheaper price, below the 6600. For example, per 6500 or 6400.
It seems to be logical. The same as the ratio 1:3 of stop and loss. It is clear, that this theory was designed by the person who tried the pilot version of its online account. In real world the price won’t reach the point of 6500 or 6400. It will go up, and you will stay in loss.
If you think, that the price will continue to grow, you can keep your positions and even duplicate your level, of course, if you have enough funds. If the situation is the opposite, and the market is going down, you have to stop long-term trading and to start the short-term one. Keeping the position with losses is not smart and illogical.
It is obvious, that looking at the loss growth is also not necessary. If your plan A is not working, you should implement trading plan B. Closing the current position in loss could be an option. However, if you keep going down, it means you are not smart enough.
It is necessarily to put limitations and stops
Stop is a useful tool to limit losses. But not each deal requires them. Moreover, their incorrect use simply and slowly eliminates your deposit.
Technical analysis is the main tool to trading decision-making. This is the same as prescribing a treatment for a patient’s fever. Efficiency is also equal.
But who popularized these stereotypes? And why? Is it really done in order to purchase even 0.1 Bitcoin from some Joe Blow, when this person comes to the market and opens a position, putting a stop at a profit of 1: 3?
The whales, the Masons, or the Rothschild clan have nothing to do with it. The question is how the industry of trading educates people about financial markets generally and about the cryptocurrencies particularly.
Professional traders are those ones who income from trading. They have their own business, investor accounts, funds … This is concentration, irregular working hours, constant tension. There are no possibilities to serious engage in training for those, who wish, and there is no motivation. In order to income from training and to be comparable with trading, it is necessary to set a price, which hardly anyone is able to pay.
Therefore, training is not a deal of professional traders. It is a deal of qualified masters of trading. They are the best traders in the past, however they did not succeed. Someone lost and didn’t try again. Someone seemed too risky to trade. Someone just realized, that 100–300$ from each one without any risk could be the hypothetical possibility of super profits in trading, which still needed to be received.
The industry of mass training of how to trade in financial markets started with Forex, in the late 90s and early 2000s. At that time, large Forex exchangers, primarily Teletrade, launched networks of branches in Russia and the CIS countries. Training was an important step to attract customers, because many of them had no idea about Forex and financial markets. So, bringing money to Forex meant for these people to give a simple and understandable picture, even if it had to do nothing with reality. This is how the theories about mandatory stops in each trade, about the ratio of stop to profit 1: 3, and about the importance of technical analysis were born.
Reducing the complexity to simplicity, when you need to convince the client, that everything is simple and understandable about the market, and the client will definitely generate money if he follows simple rules. Every two weeks, dozens, and then hundreds of branches, issued future Soros, armed with the knowledge, that stops should be placed on each transaction, stop to profit with the ratio 1: 3, because the decision to enter the transaction was made on the basis of technical analysis.
After facing the reality, most of people left the market. The most cunning and unprincipled decided to become the Teletrade teachers or managers in order to recover their losses.
I was sent several lessons about crypto evaluation. After reviewing all of them, I realized that their authors either studied at the Teletrade courses, or, more likely, their teachers studied there.
My friend was not the last person in Teletrade. I learned a lot from her. The main profit of Teletrade is the profit of the company due to losses of client deposits. However, if you can see the details: 70% of the losses are triggered stops.
So to say, a tool, that is designed to minimize losses, becomes the main source of these losses.
How does the ordinary crowd trade?
He enters the market and opens a position. The direction, as ruled, is determined either by his own interpretation of technical analysis, or by the analytics of some teacher, which he assumed on the basis of technical analysis.
It sets stop and profit. In 90% of cases, a stop is working. He repeats the procedure several times. Then he realizes, something is going wrong here. He starts to do the same, but without stops. The price works against him. He is waiting for a reversal until the moment, when it is too late….
Then he begins to look for signals. He begins to realize, that he was taught something wrong, and creates his own trading system.
As we said, in the market the crowd (the majority) is always in the red zone. The minority wins, taking the money of this crowd. Therefore, in order to succeed, one does not have to do, what the crowd does. One must do the opposite. And all that the crowd does in the market are based on the stereotypes listed above. Therefore, for success it is important not to understand these facts as axioms. Moreover, you don’t need to include to your trading system only the issues that you think can bring money.
The way the big sharks play, I am going to explain you in the next article.
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