Almost all cryptocurrency players know a widely circulated statistic: 95% of people are losing money. If you dig deeper, you will find that some research shows that this number may be higher. This field has emerged at an alarming rate with countless people with ideal ambitions.
So why are so many talented people attracted by a cryptocurrency with a very high failure rate?
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6 amazing data shows: cryptocurrency trading is facing a difficult situation
The reason for the entry of many cryptocurrency players is obvious – there is no need to work for others, and you can "get rich overnight" by wearing a T-shirt sitting on the sofa all day . The false promise of “easily making big money” and independent wealth bring great appeal.
But the fact is that it is extremely hard to conduct intraday trading, and psychologically needs to bear tremendous pressure. Not only does it not necessarily lead to a better life, it is more likely to ruin people's lives.
Let's talk about some key statistics from the online education resource Tradeciety:
- 80% of intraday traders resigned in the first two years of their work;
- Nearly 40% of all day traders have only lasted for one month;
- Within three years, only 13% of people continue to trade intraday, and after five years, only 7% remain;
- The average performance of individual investors is 1.5% lower than the market index each year;
- Active traders perform 6.5% less than expected each year;
- Traders with a negative record of 10 years are still continuing to trade;
The last point shows that when day traders receive negative signals about their abilities, they even choose to continue trading.
What is shocking is that almost everyone is losing money and losing money quickly. They make simple and blind investments and continue to trade even after they prove to be unprofitable. Why is this?
The truth is that most prospective players are not fully prepared for the challenges of the future. They use their real money as a price to learn the painful lessons. They underestimated the psychological challenges brought about by the transaction and were unable to eliminate emotional factors in the transaction to be completely rational.
They cannot trade on a certain system. When faced with a clear system, they often trade outside their established rules. These are all obvious reasons.
What is "random reinforcement"?
One less obvious reason for players to fail may be the "random reinforcement" principle. This concept also explains why they still have to continue trading even after repeated defeats.
According to Investopedia's definition, “random reinforcement” refers to the use of arbitrary events to define (or unqualify) a hypothesis or idea; to attribute skill or skill deficiencies to essential non-systemic outcomes; to be essentially inconsistent from financial markets, etc. Find support for positive or negative behavior in the results.
The market tends to reward bad habits while punishing positive behavior, especially if the sample size is small. Let us explain this principle with a theoretical example.
Bob wants to quit his job and become a full-time cryptocurrency player. He set aside some of the start-up funds, and always pay attention to some "big cows" in the market and Twitter. He saw that the big cows were talking about a cottage currency, and opened the chart to see that the price of this altcoin is rising rapidly.
He bought the altcoin and went to take a shower. After he came back, he sold it and quickly made a fortune. He repeated this operation before lunch, and after completing several successful transactions, Bob began to confidently think that he was a talented trader.
So where is the problem? Bob trades without a system or plan, and blindly believes that the function of several random transactions indicates that the next success will continue, and the market rewards his bad behavior. Needless to say, Bob's outcome is likely to continue with impulsive trading and eventually lose all capital.
There is another version of this story. Suppose Bob learned the lesson and spent months developing a trading plan that included risk management, appropriate portfolios, and trading rules.
He identified the right trading opportunities and perfectly grasped the opportunity to enter and exit the trade. He tried again and again, but lost 7 times in a row. The market is punishing Bob for his good behavior. Bob began to doubt his system and took a high-risk transaction against his system, this time he succeeded. To his surprise, he tried again and made money again. Bob is now back to the point where he started trading unsystematicly because the market has already rewarded him for bad behavior.
Through random reinforcement, the market re-adjusts the way he trades by dispersing Bob's trading plan. He acquiesced to follow a trading method based on impulsiveness, high risk, and revenge.
Not everyone is a genius
The concept of random reinforcement has never been as obvious as in the 2017 encryption bubble. In this parabolic bull market, it is easy to mistake luck for skill.
Amateur traders simply throw cash into the altcoin and then sell it after getting huge instant returns, making it easy to make money. In the 2017 encryption market, everyone is a genius. Then came 2018 – the bubble burst, and these amateur traders were not prepared to deal with the stock market down. They failed to sell the assets and held them blindly until they lost everything.
The key to profitability is to understand that the market is dynamic and constantly changing. Traders must learn to determine when certain losses or profits can be attributed to their skills and when they are attributed to randomness. This is achieved by trading for a long time following a defined plan.
Each trader should have a well-tested (through paper transaction) plan, including written rules for market entry, exit and stop loss, position size and risk. Traders should never trade outside of the plan.
Cryptographic currency trading is not the best policy
The risk of any single transaction should not exceed 1% of your portfolio, which is the key to sustaining a continuous loss. They should test and adjust their plans for a long time (hundreds of transactions). A good system will allow you to maintain an advantage over a longer period of time, as randomness will become less important as the number of samples increases.
Good deals should be defined as transactions in the trader's plan, trading their plans and managing their risk – these are factors they can control, not defined by the outcome of the trade.
On the other hand, a bad deal is a trade that a trader fails to follow its rules and violates their better judgment. Even if the deal happens to be profitable, it will always be a bad deal.
By developing a well-tested program, traders can overcome the trap of random reinforcement, eliminate emotions and impulses, and learn how to make a profit. This is the key to helping you become the 5% player.
But in other words, how easy is it to do this? So in the end, it is still the case, don't be the cannon fodder of the cryptocurrency. Look for the application scenario of the blockchain to solve the problems in the real world and the industry, instead of always thinking about "getting rich overnight" is the right path.
Source | Cointelegraph Compilation | Fire Sauce