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Money Illusion 3
Overly Focusing on the Number
I thought it once again timely to write an article relevant to where we find ourselves in a market that is heavily correcting. Naturally, the volatile price action seeks to precipitate in us a variety of reactions. Of course, it is the function of TA to mitigate our all too natural reactions - exuberance to the upside, and [in our immediate case] anxiety to the downside - and instead to look at the price action with a measure of detachment; that is, to view the market through a more rational and distanced lens. It’s a general observation of psychology that in order to ally anxiety it helps to look at cold hard reality in the face. Indeed, anxiety may be that natural and intuitive response to our first having neglected inconvenient and messy facts [a neglect that makes it possible to elaborate a set of illusions in the first place that we might be more comfortable with]. But seeking comfort is a sign of decadence. Intrepid traders should instead wrestle with the surrounding elements which actually exist and within which they find themselves immersed. It’s in looking at these realities full in the face that we often find our anxieties diminishing, where those anxieties come to be seen as the flip-side of the elaborate and unreal illusions that we fabricate for ourselves [or have had fabricated for us] - our instinct for the real [and the rational] is strong. One such example of an anxiety-inducing illusion is the trader’s focus on the arithmetic and nominal numbers on the chart at the expense of focusing on the geometric and real values. It will be the contention of this article that a re-focusing on the real values on the chart will lead to a lot less anxiety in the trader. And of course this has to be a most desirable outcome as traders are only too aware [often in hindsight] that a major factor contributing to poor performance is that of emotional decision-making, where those ‘decisions’ are hardly decisions at all, but more like reactions [read anxiety] as opposed to rational deliberations. I’ll briefly look at three charts - LINK, OMG and NEBL - as examples of which a re-focus/ re-interpretation [there are no observations without interpretations] puts the price development in quite a different light.
At first glance, the chart of LINK has to be alarming and indeed anxiety-inducing. Here you have an asset recently at $53 plunging over 70% to a mere $15.But all is not what it seems. The problem with the chart, as presented here, is there’s next to no interpretation and context, what we call TA. Zoom out a little, measure the real values of appreciation and depreciation, and the story becomes quite different as per the following chart.
On the longer-term time frame [context], you see an asset that has first appreciated by an incredible 35x over 1.5 years. And then that within an even longer-term channel that is appreciated at 3x per annum [compounding] in the aggregate. Price has of yet not even corrected 38% of the 35x move. Given the longer-term trend here, it could correct a full 50% of that massive exponential move and still remain bullish. The TA gives you your strategy, and your confidence, where, far from a walk in the park, trading becomes akin to warfare. It is not for the faint-hearted, or for those reacting to price developments of the day. Of course, it is only natural to chase the price on the spike, and sell again on the dip, but it is not rational… or any part of rational TA. TA, like comedy [or tragedy] is all about the timing.
Similarly, OMG on first sight looks awful [and it’s not even on the linear scale]. An even worse collapse from the $15 range to the $2 range represents a full 80% decline. Surely, enough to put anyone off investing in Crypto [or at least alt coins] forever. But the story is not so simple [it never is]. Once again, the TA is lacking, without which one would be all at sea without a compass. Remember, the TA serves as your navigational instruments, and so with the TA, quite a different picture -
First of, notice it is on the weekly chart - the longer the time-frame, the more effective the TA will be. In this chart, a very basic TA is overlaid onto the chart in order to measure real values, which should of course be the focus. We see first a phenomenal rise of 44x, and so far a 38% correction of that exponential move. A further fib correction to 50% would still be compatible with an ongoing ‘cyclical’ [longer term] bull market in this asset. And again, the comparison of the above chart, stripped to the bones, with the more fully fleshed out current and continuous chart on the alts page with both essentially telling the same story -
A chart consists of both time and price. Of the two, price is always the primary data point to consider over and above time. So far example, in the above chart, I’d start to get more concerned should price sink lower than the level identified than I would if price continued sideways to fall below the curve/ mean of prices as sketched. In other words, I’m not going to be too concerned about seeing $100 in this asset at a slightly later date. The primary objective is to see this target price in the relatively near future, where I’d be exiting. It is this aspect of time/ duration that is essential for the trader. Most traders perish, or rather their accounts, for a lack of patience.
Lastly, the NEBL chart. After a complete collapse of price [itself after a previous 100x rise!], you’d not blame anyone for running a mile from this one. And yet notice that the recent parabolic run [yes, there was an alt season as fully documented on my alts page^^] reached a full 50% retracement of the previous all time high. The asset [and a manic market] has shown what it is capable of. And yet once again this super-volatile coin has collapsed in price to near a 78% retracement of its recent move [notice without these fibs measuring geometric and real values/ the y axis, this asset would be near unanalyzable]. Where I was once underwater in my position trade of this asset [subsequent to my entry/ the orange arrow], I’m expecting price to now bounce off that level as support. Here is one that I didn’t swing trade, preferring instead to sit on it for the longer term, looking for the larger and eventual 100x.
In summary, I’ve hoped to illustrate the way in which the number, of itself, can easily lead us astray from our trading goals, and that, if we don’t have our eyes fixed instead on the real values as portrayed by a more critical and comprehensive TA, we’ll soon fall victim to market sentiment. Keep in mind that it’s the trader’s competitive advantage to keep aloof of mass market sentiment [hype and fear] through the critical use of technical analysis. Indeed, much of the time, you could think of those fib levels as measuring the cooling off and heating up of that sentiment as reflected in price action, for markets, far from efficient, reflect the mass mood of participants, we are social animals after all. Also keep in mind, the greater appetite of speculative excess which will sooner or later over-whelm the corrective selling to see price once again swing to the upside. And then, at a later date, just as we are layering in and buying on the downside presently, we’ll in turn then be in a position to layer out and sell on the upside to realize profits into real assets, which is what it’s all about. Though TA can in no way provide certainty [purge from yourself the desire for such], it can provide confidence [con-fide, with faith]. Lacking certainty, you’ll not be over-exposed; having confidence, you’ll make sure to have a reasonable and decent amount of exposure.
Until next time,
Stay [relatively] safe out there,
Dave the Wave~~