Week 3: The Experiment

Week three is up for our experimental trader, Alex. It brings some challenges to him. Though typical to a lot of novice traders, these challenges are perceived by everyone individually. And what conclusions each trader draws from them – can affect the future trading results.  

Alex finds himself in a peculiar situation. He’s opened some SHORT positions with a high conviction. On the one hand, there are no more funds left to open new positions (remember – he trades with $100 initial trading capital only). On the other hand, as the market moves up making his positions unprofitable, he is compelled to keep them open and wait for a rebound.   

This situation of “stuckness” is common among traders.

With limited trading capital, when our positions are losing, we have a hard time closing them and accepting losses.

Hence, the positions remain open, sometimes seemingly at the expense of missing other opportunities provided by a change of trend. It becomes a game of patience. 

There is no formula for proper action in such situations. What often happens, though, is that a trader runs out of the patience in the worst moment. Or an unfortunate liquidation “decides” for a trader. In both cases, the quality of decision-making deteriorates.

A fine balance between the ability to wait-out in some cases and to timely accept losses in others might very well be the main ingredient in the alchemy of trading.

But let’s get to Alex.

Style and Tools Used

Alex remains a strong bear, as most of his trades are shorts. He is quite disciplined about using Stop Loss and Take Profit  – something we notice a lot of new traders forget to apply. Stop Loss and Take Profit are at the center of risk management and relieve a trader of the need to continuously monitor positions. Oftentimes they are a real life savior when unexpected price movements happen in the wee hours or during the busy work.

Impulsive trading becomes more pronounced in Alex’s style. He does not see a position opening at a limit price after a while –  he cancels the order and places the market. Or his position closes by a stop loss, he immediately reopens a new one.

This behavior, a manifestation of the desire to recoup losses or FOMO in general, makes traders deviate from the initial strategy into a chaotic set of trades with no particular plan. Though, with enough practice, even this “opportunistic approach” can be a viable trading strategy. 

One interesting feature of broker.cex.io that Alex explores is the ability to open opposite – long and short – trades at the same time. After opening a Short and seeing that the price continues to rise, Alex opens a Long while keeping the prior short open. The idea is to capture the local price movement up while remaining confident in the longer downward trend. 

It is the unique feature of CEX.IO Broker to let traders open simultaneous longs and shorts within the same trading account.

The combinations of the opposite positions can serve as a basis for the whole body of trading strategies, including hedging. We’ll make sure to dedicate a separate post going into details of executing such trades.

Psychological Patterns 

Crowd Effect:

In his notes, Alex brings up an interesting phenomenon, the Crowd Effect in trading.

The Crowd Effect is the collective behavior that traders display together, resulting in self-fulfillment of some common patterns that traders use to trade by. 

Here’s a bit of background. If you are reading this, you know about numerous tools to identify patterns on the price chart. From candles (Doji, Marubozu, Shooting Star, etc.) to formations (Triangles, Pennants, Flags, etc.). Being a common knowledge, it is not surprising that a number of traders identify the same patterns.  

Say you read in a telegram channel a post about a Bullish Pennant currently forming in the market. You know that a Bullish Pennant is a continuation formation (if you didn’t know, now you know!😉) and you anticipate the price to go up…

You enter a Long position. So do the traders who described the Bullish Pennant in that telegram channel. So do the other traders who read the post. And what happens when a significant number of trades long? The price does go up… Just as the Bullish Pennant “predicted”

In reality, since many traders recognize the same patterns and act on them accordingly – the patterns fulfill. And that’s the Crowd Effect. 

Of course, it does not work 100% all the time. Because, in the end, there are still some deviations in traders conclusions and different timeframes and strategies people use. Yet, the Crowd Effect is a powerful reflection of the psychological nature of trading and recognizing it can be used to a trader’s advantage.

The Crowd Effect is the collective behavior that traders display together, resulting in self-fulfillment of some common patterns that traders use to trade by. 

Confirmation Bias:

Another observation Alex makes is that, over a period of time, he, with his shorts open, did not see any market signals for a Long.

And, as his shorts were losing more money with the price of BTC going up, he kept finding more confirmations to maintain the positions. The psychological pattern is called Confirmation Bias. 

Confirmation Bias is the tendency to look for, favor, or interpret information that supports your beliefs rather than disproves them. 

Confirmation Bias is very pronounced among traders. They see everything as proving that their conviction is right, from macroeconomics to specific candles in the chart. At the same time, the factors supporting the opposite become literally invisible. 

The confirmation bias in trading can lead to prolonged maintenance of money-losing positions. And it does not necessarily mean that the trader’s logic is actually wrong. But, as famous economist John Maynard Keynes said, “The market can stay irrational longer than you can stay solvent.” 

Recognizing the confirmation bias, we accept the possibility that we can be stuck in seeing one side of the argument rather than both.

Understanding that it is in human nature to get hung up in proving we are right, we allow ourselves more flexibility and become less attached to our positions. This helps us move from “I am right and the market does not see it” to “Market is right, and I need to listen to what it tells me.”

Confirmation Bias is the tendency to look for, favor, or interpret information that supports your beliefs rather than disproves them.

Overall, Alex did well for 3 weeks in a row! Can he also finish the experiment with a surplus? Stay with us to find out! 

Before we go to the Week 3 trading notes: 

  • Subscribe to our Telegram Channel and get trading tips, market analytics, CEX.IO Broker news delivered to your phone: https://t.me/CEXIOBroker (you also want to be there for all the cool contests we hold!)
  • Week Two and Week One recaps of the trading experiment are worthy of your time and will help you be a better trader. So check out Week One and Week Two

And the best way of learning is doing, so get to practice on the trading platform with real funds or in DEMO format: 

And now, onto Alex’s notes:

​​Day 14

​​​​(we go from Day 11 to Day 14 as Alex does not trade on weekends)

📊 On Friday night 🗓 my short position closed according to a stop order ✖. I chose a bad time to sell… 😞 But I immediately opened another short – a little less in volume and without a stop order this time 🤭.

💭 Although there were a lot of household chores at the weekend, I still found a little time 🎥 to watch some trading gurus on YouTube. Info is vague and has many buzzwords 🙈. But I realized that 💬 “I need to look for a situation after which the market is more likely to move in the direction I need.” It sounds logical to me 🤔. I need to look into statistical analysis. 📖 I read a little about Price Action.

The trader wrote that all these flags, triangles, peaks work only when everyone sees them and everyone trades them. That is, in fact, a conspiracy of traders. When an upward flag appears, they start buying and the price starts to go up 🤷‍♀️🤷‍♂️. But there is another category of traders who use this flag for their own purposes, for example, to sell their large volume. In short, there’s always a trickier one🙊 for any tricky trader, so all these shapes and patterns do not always work 👉👈. Many patterns have funny names, such as “Three Crows”, “Shooting Star”, “The Hanged Man” 😅.

💭 To be honest, I already got a little confused…How to trade..? According to Moving Averages? Trading Oversold? Looking at Shapes? Using all together is not going well 🥺😤.

📊 On Sunday evening, bitcoin fell and I decided to close my short and open long. It fell significantly – there should be a rebound 👌. I bought a bit of bitcoin for EUR and for USD 💰. While I was drinking tea ☕ the price went up and I closed the positions 💵💶. Turned in greater profit 🤩🤑😎.

_______

​​Day 15

📊 I placed a limit sell order yesterday and the price did not reach this order. The price lacked only $18… 😐 When I logged in to check my order I was very upset 😩. So I immediately sold it at the market price 🙈. I sold, set take profit ✊ and continued to work 💻. The day was really busy so I did not have the opportunity to monitor the price 🙇‍♂️.

📊 After my sell, the price immediately went down 📉. Cool! 🥳 Again, I did nothing, but the price fell and my take profit worked at the very end of the movement 😱! What good fortune. Great feeling 🤩! Already 4 profitable deals in a row! 😎😎😎

💭 I really like the dynamics, I am delighted with the results and the fact that I started to trade 😏. And the most important thing – I can combine work and trading 👨‍💻. Why haven’t I started earlier… 🤷‍♂️ Great day, good mood 🤗! Nothing to add here. 😇

​​_______

Day 16

💭 I missed the impulse up 🙄, but actually, I wouldn’t buy there 🤔, but I don’t want to miss such movements further 😒. So I should always be in the market 🤭. To buy even the smallest amount when 📉 the price falls sharply. And to sell even a small amount when it 📈 grows.

📊 Now the price has grown a lot and sold a small amount at $9118.7. The price wasn’t falling and I thought that traders were buying a lot, so I bought at $9142 more than I sold before. The tactics are as follows: if the price rises – I will close the purchase, if the price drops – I will close the sale 🙊. The only question is what to do with the other position 🧐. I’ll figure this out later 😅)

💭 I kind of like shorts, but the fact that the price does not fall is confusing 🙃. I need to be flexible and be able to change my opinion 🤸‍♂️. The market is contrary to my opinion. Not even that, it moves regardless of my opinion and I need to adapt to that 🧠. I’m trying to be flexible 🙈. Meanwhile, everything is wonderful, I’m waiting for Friday to sum the things up 👻. And I need Bitcoin to go up, I will close the purchase then and let it fall further 😇)))

💭📖 I also need to sort out how limit orders, orderbook, supply and demand work. It’s difficult, but possible 💪! There is a lack of theoretical base and I understand that I have to devote some time to learn 👨‍🏫. But this makes me feel motivated. I am in the flow I wasn’t in for a long time. It’s even easier to wake up now 😎😎.

_______

Day 17

​​📊 At night I set take profit and stop loss for my purchase. I woke up and the first thing I did – took the phone 📱 to see what was happening with bitcoin 👁. Seems like nothing has changed, but when I opened the chart, I saw that the price first went down to 👉$9,300 and then fell back, so my $9,250 take profit worked 💪. Then I went to the computer and checked everything 💻. This is one of the biggest profits 🤑)) Everything worked like a clock ⏰! The profit was already in my pocket and 💲 the price did everything that I needed. It first went to my take profit and then began to fall ↘. I decided to wait until it drops even more to close my sell 🤙. Already 5 profitable trades in a row!!! Five 🖐! Once there are 10 in a row – I’ll tell my friends what I’m doing 🕺💃.

📊 During the working day, I had a couple of minutes to see what was happening there and 👀 the price changed by $300 ✈ before my eyes. It is a pity that I did not close my sell at a little loss. 📔 There was info in the channel that the price could fly above $9,300. I was not taken aback and sold another 0.02. But the price did not stop ❌. I placed another limit sell order 🛒at $9,492. 💵 The price touched $9,500 and did not turn around for a long time. Let’s see what will happen next. But I’m a little scared 😕. I already think if I have enough deposit to wait out the growth and how long it will be. And what to do if it does not stop.. 😐 But if it turns around, then I will earn well 💰.

💭 I looked at the history on the chart and saw that the price can even go up by $1,000 📈. Shorts are dangerous now 🙄. But I’m not going to close positions, it immediately eats up 😰 all the profit for the week. Now, if I sold more and higher volume, then I would already be back to zero in total according to the results of all transactions. This is by the way a good idea for the future 💡. I need to make notes of such insights! 📝

​​_______

Day 18

😶 Today I’m in a waiting mode…Have some shorts open – nottin’ new here. No unused margin to open new positions either… Some things can stretch. Margin ain’t one of them.

🙄 Placed another SELL order at a higher price, but it did not execute yet… So far, not sure about stop losses and take profits. Man, I wish the price just dumped to $9,000, or lower )). There are PLENTY of sell signals, just gotta let market do its job.

😤 But waiting is hard! Weekend is coming and I’m stuck with my losing positions. Will be worrying and monitoring the chart all Saturday. Well, at this point, things are not up to me.

😅 Noticed one thing: when you are in a money-losing position, all you see is confirmations that your position is right. ))) I swear, I have not seen a single BUY signal the last two days! 🤷‍♂️They just did not exist!

But my stats are looking OK. I closed my last 5 positions with decent profits. And before that – also pretty good!

✅ So week 3 results:

Last week I 0.01212877 BTC on balance.

Now my balance is higher 💁‍♂️, BUT I have unrealized losses. So I’ll look at the Equity instead. My equity is 0.01261.

So plus around 3.9% this week!! 🍾

😎Week 1: +1.2%, Week 2: +4.1%, Week 3: +3.9%.

🆙 Nice dynamic! Three weeks and plus +9.3%.

I am definitely adding more funds to my account next week! As I promised myself, with good results – I’ll add more trading capital to make bigger $$ gainzz. Because what looks nice in percentages better start looking good in absolute numbers too! 🤑

And that’s it for Week 3! See you later, trader! 

The post Week 3: The Experiment appeared first on CEX.IO Official Blog.

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