When a bottom has been hit, or when an asset is soaring toward a high, it can be tempting to buy or sell on impulse due to the “Fear Of Missing Out” (FOMO). Watch out for that.
Buying the dip, buying into a recovery, taking profits high, or cutting losses low are all reasonable moves. This is true for crypto, true for stocks, and true for any investment. However, such things should be done strategically, not done based on impulse driven by emotion.
In the current somewhat bearish market we have in late March 2018, we are likely to see some encouraging bounces at support levels. Likewise, we are likely to see some nasty pullbacks when buying gets too hot and heavy. I say we are “likely,” because we have been seeing this a lot recently and have seen this historically. Please note that I don’t have a crystal ball; or at least one that works.
This push and pull of prices is the natural struggle of buyers and sellers. It results in wave-like patterns on price and volume charts. Waves don’t go up or down in straight lines, they go up and down with an upward, downward, or sideways trajectory.
When the struggle heats up with an asset, prices can become very volatile. Crypto is already volatile, so this is even more true with this asset class. I have seen crypto lose and gains hundreds of dollars in moments more than once in the past week, each event like that is an opportunity to be overtaken by emotion and make mistakes.
The point here is:
- Quick bounces and dips in a volatile market, especially in volatile times, provide us with both opportunities to make good moves, and opportunities to make mistakes.
- When one acts emotionally and on impulse, one tends to abandon reason and logic, and tends to make mistakes.
- We are all human, so we all have this problem. Thus, one has to actively control the impulse if that impulse would go against one’s strategy!
There is no perfect way to play a volatile market, and there is no perfect way to play a downtrend; uptrends are easier, you play them by buying, setting stops, taking profits, etc. Further, the right move for person A is almost never the same as the right move for person B; instead it’s largely about tolerances, goals, and tastes!
However, despite their being no easy answers or even one answer, taking strategic measures to limit risks is generally a smart move (things like averaging in and out of positions), while buying or selling on impulse is generally a risky move.
Risk often comes with a reward, and there is essentially nothing wrong with risk-taking if you have the tolerance for it. However, if you have the tolerance for it, then do yourself a favor and plan out the risks you are willing to take.
The height of the market of late 2017 – early 2018 may be seen as being caused by people FOMO buying crypto. When people FOMO buy (or sell), it throws the market out of wack. The price starts snapping back and forth with as much force as it was pulled in the first place like a rubber band.
If those buyers had waited to buy or sold on the way up, the bubble-like-shape would not have formed the way it did. Likewise, bottoms are formed the same way. The bottoms would not look like jagged “V” shapes if it weren’t for the wave of panic selling.
The more people act based on strategy, and the less they act on emotion, the healthier the market will be, and the healthier those in the market will feel.
No one likes missing out; that is why we have so much fear of it. However, no one likes mistiming the market based on emotion. We should have a healthy fear of that as well. Thus, we should account for those truisms in our strategy, while putting fear aside when it comes time to hit the buy/sell button. 🙂
Bottom line: There is no wrong way to invest, do what suits you. However, when investing one should beware the impulse to act on emotion (especially the emotions that come with the fear of missing out AKA FOMO). We warned of this back when Bitcoin was at $14k, and now we have the same warning at $7k. Specific prices aren’t the subject here (I think there is logic in buying or selling at $7k or $14k depending on your tolerances and strategy and goals), the subject here is human emotion vs. human logic. In investing and trading human logic is vital and human emotion gets in the way. Thus, “just say no to FOMO.”
TIP: The longer you wait for a trend to be confirmed, the surer you can be of a trend. It can be tempting to sell or buy based on the current price, but price over time is a better indicator of the direction of the market and thus the risk associated with a move. One does not want to buy at the top of an upside down “V” or sell at the bottom of a “V,” and a well thought out strategy should help avoid that. The time one needs to wait depends on the asset. With Bitcoin, it can be as short as a few hours, but ideally, it is one day to a few days. With an asset like gold, it can take days or months to confirm a trend, but the logic is the same. Plan a strategy and pay attention to the longer term trends with avoiding the emotional impulses that come with moment-to-moment price action.
On Indicators: Want to avoid selling the bottom or buying the top of the “V,” RSI can give you a hint. If the short term (15-minute candle or so) and longer term (4-hour candle or so) RSI is very low, selling is likely to cool off. If those RSI indicators are high, buying is likely to cool off. The result is often a bounce or a drop and a reversal of the current trend (even if just a very slight and short-term one). RSI is very useful indicator, but it is only one of the countless tools that helps you determine probabilities (it, like any indicator, never predicts the future for sure). Still, if we expect prices to move in waves, RSI can help us to better understand when an asset might crest and trough (which is super useful for getting in and out of positions). Another indicator to look at is resistance and support levels (you can just eye those by looking at where the price has stalled out and traded flat over time). Another useful indicator is MACD. If the short-term average is below the long-term (especially on longer time frames), the trend can be seen as downward (meaning there are some extra risks to consider with both buying and selling). Learn more by checking out TradingView, creating an account, and putting MACD and RSI on your chart and eyeing out some resistance and support levels. You can also check out Investopedia to get some explanations of those terms. Please remember, these indicators are tools in our tool belt; they aren’t working crystal balls. Even when they do seem to function as magic crystal balls, the “the mood of the market” can change on a dime.