Week 1: The Experiment

We’ve passed a one week mark with our Trader for a Month Experiment. In the Experiment, for one month straight, a real individual, who is not a professional trader, will be opening and closing positions on broker.cex.io with a starting capital of $100. 

And you are in to witness what is going through his mind every trading day! 

How are trading decisions made? What psychological factors play a role? 

If you ever traded, you will certainly recognize some of your own thoughts and emotions! 

And while you have an opportunity to see how others trade, we’ll also make sure you learn a thing or two in the process.

It is a mystery where we will end up in 4 weeks. But the ride is already worth it.

Here are the highlights of Week 1:

The Reality Kicks in Very Quickly

We went into this Experiment, without any anticipation of what is going to happen. Whether our trader, with a code name Alex, will manage to continuously increase capital. Or whether he will swiftly lose the entire deposit and we’ll call it a day. There were no restrictions as to how he can trade: neither times, strategies or position sizes (aside, of course from the total trading capital cap). 

What you read in the daily telegram posts (🔥if you did not see them – be sure to subscribe: https://t.me/CEXIOBroker) is the unfiltered process of making trading decisions. Sometimes these decisions are right. Other times – not so much, as it is the case with anyone who ever traded in their life.   

Tools Used

Week 1 recurring theme in Alex’s trades was Moving Averages crossovers. No wonder – applying moving averages to the analysis is popular amongst both beginners and most seasoned traders. 

Moving Average crossovers represent events when a longer duration moving average crosses a shorter duration moving average.  

A Sell signal is when a short-term moving average (usually 50 EMA) descends and crosses the long-term moving average (usually 200 EMA) to the downside. Traders often call it a “Death Cross”

A Buy signal is when, just the opposite, a short-term moving average crosses above the long-term moving average. Among traders, it is known as a “Golden Cross”

Back to Alex: 

On Day 1, he successfully applied the crossover concept, yet to the shorter duration Moving Averages, in his trades. 

On Day 2 and Day 3, Alex also opened BTC/USD positions based on the crossovers. With not much success this time, though. The prices, initially moving in the right direction, would turn around and hit a stop loss, leaving Alex with less capital. 

On Day 4, Alex was able to recoup his losses and finished the week with a little bit of a surplus to the initial capital

Notably, some of Alex’s traders during the week have generated over 10% ROI on used capital within hours. That’s the power of leverage. 

Style

Alex has opened positions ranging from 1/10th to ½ of his entire deposit, which seems quite risk-averse, compared to some trading styles we’ve seen.

Quite often, we notice traders opening a single position using the funds almost entirely equal to their deposit. In part, this behavior may come as a legacy from other platforms, which only allow one aggregated position open. There, a trader can increase or decrease the size of a position, but the position remains netted out into a single line. 

In broker.cex.io every single position is shown separately, allowing a trader to see how each of them, entered at a different price, is doing. Such functionality allows the trader to open positions in opposite directions as well as to flexibly setup market entries and exits.

Alex tried to follow a chosen Moving Average crossover strategy with consistency and discipline. At the same time, in the face of some trades not going his way, he too could not escape the influence of emotions.  

Psychological Patterns

Familiarity effect: 

Like in many other aspects of life, in trading, we find a lot of comfort in something familiar. Familiar things give us certain expectations about how events are going to evolve. And in chaotic lives, trading being not an exception, this predictability provides us a lot of peace of mind. 

So when Moving Averages crossover worked for Alex once, he chose to stick with the strategy instead of venturing to other analysis tools. 

Like Alex, in trading, we develop a “relationship” with a certain indicator that tends to work for us. In time, we notice how other market conditions fit into it, but more like supporting factors rather than something that can render our favorite tool useless in a particular situation. 

So when our own “magic instrument” does not work for us, we almost feel let down by it, failing to notice that other things were at play in the losing trade too.

As traders, we always need to keep in mind that an indicator never works by itself. It simply points at a probability. And, instead of taking what a pattern shows at a face value, we need to check whether other indicators and trading volumes also point in the same direction.

Familiarity can cause a trader to over-rely on one indicator instead of noticing a combination of market conditions.

The need to recoup the loss: 

Encountering losses has an undeniable emotional effect on traders, especially the novice ones. 

Some studies even show that the emotional impact of gaining is always smaller than the emotional impact of losing. So losses, in a way, alter the behavior of a trader, oftentimes not to the trader’s benefit.

As Alex had to face the results of a few trades that did not go as he planned, the inner pressure to recoup the losses was becoming more prominent. Getting back the losses was driving him at times harder than the need to continue the planned strategy execution. 

Falling into a mousetrap of recouping one’s losses is common in trading. In such a mindset, driven by a desire to catch up, we often make irrational and rushed decisions.

More so, we start thinking in terms of “could have, should have, would have.” We almost have a separate mental accounting of our trades, if only we would have done “that other thing” differently (put a stop loss, opened a position earlier, did not have the news come out). What gains we would have had then! 

And while we spend a ton of time contemplating how things could have evolved, what really happened is the only result we have. For traders, focusing on “what is”, instead of rushing to recoup the losses back, often presents quite a challenge.

The desire to recoup trader’s losses can often lead to rushed and insufficiently reasoned decisions. 

And now, so you can see how Technical Tools, Trading Style, and Psychological Patterns all played out in real life, here’s the copy of the first 4 days diary:

Day 1

Theoretical education.

💭 I read on a forex website about the strategy of two moving averages crossover 🤓. Found on broker.cex.io EMA – these are exponential moving averages. I think it’s good 🙄. I added it to the chart and also added Full Stochastic oscillator with standard settings to filter deals, again on the recommendation of the article’s author 🤷‍♂️

📖 The idea is very simple. When the average with a period of 5 (red on the chart) crosses from bottom to top the average with a period of 21 (blue on the chart), then this is the point of entry into the purchase. Preferably for the stochastic to leave the oversold zone at this time. For sale – the exact opposite. Looked at history. Running like clockwork 💪.

💭 I think I will succeed and trading may become an extra income 🤑. I’m a little excited and I want to start trading ASAP 🤭. They say that Bitcoin price will grow after halving.

📊Here is the first deal. I missed a little the moment right after the signal. So I came in a bit later. I tried the smallest volume to enter. 0.01 bitcoin – so I needed about $9 taking into account 10x leverage. But then something confusing happened, the stochastic appeared immediately in the oversold zone 😳. I set stop loss and take profit. Waiting for a million 😜.

📊 Whoo, first profit after 6 hours.

💭 Cool, made a purchase and placed a sell order, it grew and was sold itself to me. Now I’m one step closer to Lambo 🏎🤩. I should have taken a bigger volume – would earn more. But that’s OK for the first time. I feel inspired, a little bit each day and I’ll be good at it 💸. On this positive note, I’m done for today. In fact, I did nothing and earned $1.3 – seems not much, but this is 14% return on investment! This is really cool 🥳.

_______

Day 2

📖 In the morning, before the meeting with the boss, I looked at the chart and saw the entry point 👨‍💻. Averages crossed, red crossed blue from top to bottom. Or, to seem more competent, the fast EMA has crossed the slow one downwards – it’s also called the “Death cross” (I am studying slang 💪🤓). This is a sell signal.

📊 I decided to try to enter with 0.02 volume – about $18 given leverage (position size is about $180, used $18 of personal funds with 10x leverage). I missed the crossing itself, but the price did not go far. As most articles on broker.cex.io say: “Stop / take is a must” 🤲. For now everything is simple, I’m glad I looked in early, otherwise, I would miss the signal 😌.

💭 Then I had a meeting at work and got loaded with tasks and there was not much time to monitor the market. During the dinner, I had a chance to check how the things were going and saw this… 😰 (the second screen).

💭 At first, the price went well in my direction, and then sharply turned around. It’s good that there was a stop order, I lost a little. Upsetting 🙁.

But what is even more upsetting, I missed the signal to enter! There was a point to buy. And according to the strategy, you need to close the previous deal if the opposite appears 😧. It’s a pity, because if I saw it, I would practically lose nothing on this deal and earn on the purchase… The amounts are not big but still 😤.

💭 And it’s also sad that yesterday I took a small volume and closed it. II should have set higher take profit yesterday, I read that the price should rise after halving 💰. So it is rising. Why did I sell today… 🤦‍♂️

💭 Apparently, I won’t succeed using moving averages only so I need to add one more strategy 🤔. One unprofitable signal and I missed another one and that’s all, there are no more signals, and the market has grown quite well 📈.

📊 I’ll try to play short again. The whole day it was in the oversold zone and now the movings are practically crossed, I’ll act proactively (the third screen), maybe I will cover loss at least 🤞.

_______

Day 3

💭 To begin with, yesterday, before going to bed, I looked at the bitcoin price and realized that my attempt to play short failed. Amazing, why am I trying to sell when everyone writes that Bitcoin will grow after halving 🥴. And a signal of the price lowering wasn’t formed. My proactive work did not pay off 🤷‍♂️.

💭 In the morning I thought, “why am I waiting for a signal only on BTC/USD pair?”. After looking at other pairs, I found a strong oversold on ETH/BTC. I’ll try to buy and see how it works. Trading is cool and interesting, but it’s not as easy as I thought at first 🙄.

📊 Something happened on Bitcoin market and everything went down sharply. What happened with my yesterday’s position? Price got to my stop order and turned around. I am angry – it got to my stop order so accurately and went back in the desired direction. I shouldn’t place stop orders carelessly. 🤪

📖 At the lunch break I read about another indicator – Parabolic, it helps in determining the reversal. Let’s try it.

📊 Here’s another good place to short. This time it’ll work out. Both the point, according to Parabolic, appeared and the averages crossed. Took a larger volume. I have to work off the losses.

💭 Looks like I’m playing too much. The market did not go down but up again. Well, once it must fall – I have to earn on its fall! 😤

📊 Went short again on BTC/USD. This is the last one for today, I’ll look tomorrow with a fresh mind. Definitely need to change something. But today I learned a valuable lesson: I need to wait for clear signals 🧠. I’ve lost a little, but this is still an experience that’s gonna be worth it. Tomorrow everything will be different 🤞

_______

Day 4

…My yesterday’s notes finished with an open BTC/USD short. So right before getting to bed, I decided to check the charts. And right before my eyes, the market made two perfect green candles and closed my position by the Stop Loss 👀.

😡I did not let it get the best of me and reopened the position. Short again, open price $9,832. Wanted to short 0.1 BTC, but did not have enough. So went for 0.05 BTC. And the price went my way almost immediately…🤞🏻 Placed a Stop Loss order and went to bed, happy. 🛌

🌤 In the morning, no time to check the positions. Only get to look at them after the first meeting. And the price did drop 😎! But I forgot to add a Take Profit!!!! Dammit!!😫 I ALWAYS put a Take Profit before, but forgot this time, or whatever it was. 🤦🏻‍♂️.. So the price came back up and my profit was times smaller than it could have been!

Had I placed a Take Profit at least at $9,300, I would have made $27. It’s a 27% increase to my starting capital. Overnight! 🤯Trading does give some nice opportunities. But I need to trade more responsibly. So far, I am excited.

Sold some more during lunch! I am going to drop this BTC on its knees! ))

Well… the price kind of stayed there and did not move much. Decreased a little bit, and I earned back all my losses for the week. Closing the week with net profit (plus 1.2% to my initial deposit, at least something 😅). I’ll do some studying over the weekend. Get some more trading instruments in my “toolbox”.

Closing the positions…

✅Overall, I was holding up ok the first week. Without trading knowledge even managed to make some, by simply following the strategy. Of course not without hiccups (forgetting my take profits 🤷‍♂️). Would have had a 10% surplus overall. But it is what it is…

_______

This is it for Week 1. 

Tune in for the next post of the most real trading experiment, and join the channel: https://t.me/CEXIOBroker 

And if you are ready to put your knowledge to a test of the real world, start trading! 

The post Week 1: The Experiment appeared first on CEX.IO Official Blog.

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