How NOT to Buy Tops
Markets tend to favour those who can exercise contrarian thinking, by acting in the opposite direction of the herd. Today, we explore how I avoid buying Bitcoin at the WORST possible times.
G’day Folks,
Markets are one of the most counter-intuitive things we deal with, and this is why so many people lose money when they attempt to trade them.
This is a result of our emotional hardware always seeking out information which supports our confirmation bias, and this process often happens sub-consciously.
Confirmation Bias: The tendency to seek, interpret, and recall information in a way that confirms our preexisting beliefs, while ignoring or discounting evidence which contradicts them.
Since we were children, we have been conditioned to avoid risk, with lessons passed down by our parents about how to avoid injury and mistakes…
I recall when I was a boy, I was fascinated when the sizzling hot plate came out at a Chinese restaurant, and my parents said ‘James, do not touch that, it is very hot’…We all have to touch the stove to learn those lessons for ourselves…
My confirmation bias kicked in, and I simply had to find out why the plate was sizzling like that…I also touched the cigarette lighter in the car, but I didn’t tell my parents about that one, it was too embarrassing to have made the same mistake twice…
In markets, we have two primary vectors of fear:
Fear of Loss, which leads to us being extremely tentative to buy an asset in a bear market, because we’re afraid it may keep going down. Our default behaviour is to wait until the market is ripping higher, because it always feels ‘safer’ when everyone else is doing the same thing.
Fear of Missing Out (FOMO), which is often even more painful than our aversion to taking a loss. The pain we experience when an asset we want to own is ripping to the upside makes us pile in when it feels good…usually preceding us buying the exact top of the market.
When you combine these two fears, you get herd behaviour, where the crowd waits until it feels good and safe to buy, often with leverage, which results in a massive wave of top buyers getting rekt.
In today’s post, I want to explore a simple set of tools I use to avoid buying tops. This includes local tops and global tops, because frankly, we never know which one it is until after we have touched the stove.
The idea is to identify a sizzling hot plate for what it is…a bloody hot sizzling iron plate.
📈 Reminder: you can find the charts from our articles on the Checkonchain Charting Website, and a guide in our Charts Tutorial Video.
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