The Subjectivity Of Trading…
If you ask the question ‘where is Bitcoin going?’, you will get a wide range of predictions based on traders individual interpretation of the charts. This article will break down why trading is subjective, and what influences the predictions of traders.
Confirmation bias
Confirmation bias is a mental barrier that is very hard to overcome. Put simply, confirmation bias is where we seek outcomes that coincide with our beliefs. If I love a car, I will naturally seek articles / videos that reaffirm this belief in me, rather than oppose this view. It’s human tendency, we want to be right and hate admitting when we are wrong. This is the biggest reason why people just “hold” their way to the bottom and never capitalise on any gains or hold on to losing investments, waiting for them to skyrocket. It is a dangerous trap, and being ignorant to it will hurt you massively.
Guess what? The market does not care about your opinion. Let me repeat that because it is so important…
The market does not care about YOUR opinion.
Many investors get trapped in communities that are created around an individual crypto; do you really think you’ll get balanced opinions in there? It is very important to follow a few sources that have completely opposite points of view to you and judge them from a neutral standpoint. Understand exactly what and why they are saying it. I follow several investors who HATE cryptocurrencies, and I completely understand where they are coming from in many respects. I don’t agree with what they are saying most of the time, but at least I am aware.
I always consider the reasons not to invest in an asset class or individual asset before investing. In fact, I consider this the most important phase of due diligence. Find someone that disagrees with you, find the facts and evaluate your decision from a neutral standpoint. This alone has saved me thousands.
Right before I was about to jump into a project because of the fear of missing out (FOMO), I would make sure to seek alternative viewpoints on that project, and I would often see red flags that have stopped me investing in many projects (thankfully).
When you form an opinion on something, you steer away from the unbiased facts, and twist information to match what you are thinking. Sometimes your belief will be right, and you’ll feel great. Just know that you will be wrong, and sometimes it is better to accept the fact that you are wrong and cut your losses short than to try and wait to prove that you are right. Trust me, I’ve lost a lot of money in the past trying to do this. Being stubborn will only lose you money!
Back to traders…
Trading is subjective as it is, the chart can often signal many things at once. One of the biggest mistakes I see many traders making is that they use too many signals at once, leading to conflicting signals. This ties in with confirmation bias… if a trader has signals indicating equal probabilities of a move to the upside or downside, they will likely favour the move which confirms their beliefs. I have made this mistake many times, I wanted to be bullish even during an obvious bear trend, which came back to hurt me. It’s somewhat ironic that traders use confirmation bias to protect their ego, just for them to be wrong and it hurt their ego more… (speaking from experience).
So, what do you look for in a trader?
- Less than 3 indicators. Anything more than this will give conflicting indications, which will lead to guesses based on what they ‘think’ rather than what the charts are indicating.
- Explanation of the probabilities. All traders know that trading is all about probabilities and risk management. Nothing, absolutely nothing is 100% probable. I’ve learnt this lesson painfully before. Indicators can bring a higher level of an event happening, but there is no certainty, a good trader will be able to communicate this to you AND have a alternative plan to mitigate loss.
- Is able to change their mind. This is why confirmation bias is so important, good traders are masters at controlling their emotions. Distancing yourself from confirmation bias is one of the most difficult things to do, but it is vital to be a good trader.
“George Soros is most famous for his single-day gain of $1 billion on September 16, 1992, which he made by short selling the British pound. At the time, England was part of the European Exchange Rate Mechanism, a fixed exchange-rate system that included other European countries.”
BUT, what is left out is that they day before this trade, he held the complete opposite view. His detachment from confirmation bias led him to change his mind / trade and profit massively from doing so.
3. Is able to admit that they WILL be wrong. There is no trader in the world that is right all the time, but that is fine. Traders have the skill to cut their losses short, and let their profits run. While this skill is hard to get extremely good at, this is the reality of trading. You will lose money, but as long as your winners far outweigh your losers then you will make a significant profit.
Trading is subjective, and no-one knows with absolute certainty the future. Traders use indicators to predict what the likely outcome will be. Sometimes they will be right, sometimes they will be wrong, that is the reality of trading.
Final word of warning.
Be VERY careful of traders that selectively promote their successful trades, but neglect their losing trades. I see this all over, they will make a good trade, and share it everywhere, but when it comes to their losses, they will keep it quiet. I get where they are coming from, I don’t use my losing trades as marketing material, but I am honest when it comes down to admitting that I have made many losing trades. That’s what you need to look out for, if the trader is honest, or just trying to get you in a ‘signal group’…
I hope you’ve enjoyed this article.
All the best,
Devin
P.S. Find out the 7 Crypto Investing Mistakes That YOU need to Avoid! (Completely free, just click the link).
