I was reading another trading book today and much like watching the dumb money movie the other day, it prompted me to write another post.
So, you may have heard the expression "the market is an Algorithm" whilst this is somewhat true, it's actually more a sequence, Ralph Elliott, Richard Wyckoff and Edward Jones knew this.
In simple terms, the larger operators or what's known as sophisticated money - chase liquidity pools that are often areas Dumb Money have taken entries or placed stops. Now if it was as simple as this, you could simply write an indicator or be on the winning side 100% of the time. Unfortunately, there's a lot more to it!
When I say the smart kids are taking the dinner money of the dumb kids, you need to appreciate the fact that winning whilst playing against retail traders is like putting the Patriots against your local under 12's side. Or like having the New Zealand All Blacks play against an old people's home in Pakistan. (I am not sure if Pakistan even have a 1st team in rugby).
To gain some understanding, you need to appreciate there's such a thing as "pain trading".
A "pain trade" refers to a situation in financial markets where a significant number of investors or traders find themselves on the wrong side of the market, leading to losses or discomfort. In other words, it describes a scenario in which the market moves in a way that causes the most amount of pain or financial losses to the largest number of participants.
For example, if a majority of traders are positioned for a market to go up, a pain trade would be a sharp and unexpected decline in prices, catching those traders off guard and causing them losses. The term reflects the idea that markets often move in ways that inflict the most damage on the greatest number of participants.
Understanding pain trades is important for investors and traders, as it highlights the potential risks of crowded trades and the importance of risk management strategies to mitigate unexpected market movements. Investors and traders often use various indicators, market sentiment analysis, and risk management techniques to try to avoid being caught on the wrong side of a pain trade.
This type of move happens over and over again - creating cycles (But not always the same).
In this image above you can see it's likely to have swept long stop losses and then rallied hard.
You probably know about the Gamestop Saga.
I wrote a post on that film recently.
I talked about being on the wrong side - I can't get over how someone could be up $500,000 and still go broke? But it's all in the mindset. Liquidity is the name of the game.
How do these things fit together?
Well, Bitcoin is a prime example - retail mindset is "HODL, Buy the Dip, Diamond hands & Lambo" - whilst as a professional trader, it's enjoying your profits and buying/selling at the expense of the dumb money. These moves are shown as the last post, buy momentum.
Here is the summary image from that post.
Since we had a move up - retail seem to think it's up only, they seem to put all the eggs in the hope Blackrock and a halving will make them rich...
I have read articles like this recently.
After watching the Dumb Money film - you know where following the crowd goes.
----------------------------------------------------------------------- Why is this an important lesson?
It's all to do with pain, where is the maximum pain? Retail sentiment would suggest pain comes in the form of little movement, grinding prices in up moves and fast aggressive drops.
Some context from Blackrock themselves: What is Blackrocks Biggest ETF?
So again, let's add a little logic. Where is liquidity sitting?
If and it's a big if - Blackrock get an ETF approved and it's half the size of their biggest ETF to date, let's then assume Retail flood in and match it dollar for dollar. That market cap would still put us roughly at the current ATH, given coins in circulation.
This again just amplifies, why we are simply - NOT READY, YET!!!
The move I didn't want in 2022, looks to be the biggest liquidity grab we are likely to see in the Bitcoin chart.
We are very, very likely still in an A-B move up for the slow pain of coming back to build sustainable momentum.
Have a Happy New Year all!
Stay safe and see you in 2024!
Disclaimer This idea does not constitute as financial advice. It is for educational purposes only, our principle trader has over 20 years’ experience in stocks, ETF’s, and Forex. Hence each trade setup might have different hold times, entry or exit conditions, and will vary from the post/idea shared here. You can use the information from this post to make your own trading plan for the instrument discussed. Trading carries a risk; a high percentage of retail traders lose money. Please keep this in mind when entering any trade. Stay safe.
I understand the concern in terms of liquidity and I would agree with you for niche related stocks like CVNA, GME and AMC, but the scope of BTC is much bigger that functions as a form of currency, and commodity. Stock liquidity cannot be compared one to one with BTC liquidity. No doubt BTC will go through volatility and pain price action as we approach Blackrock ETF and the halvening, but IMO not in the same way as those stocks.
The halvening itself is a global event (more fundamental than the Blackrock ETF) which permanently sets the flow of newly mined BTC by half, essentially shrinking liquidity. As an analogy imagine a water tank in a desert with its tap pressure permanently halved, whilst at the same time the people (or ETFs) wanting water from this tap increases. This event is set in stone in the code and cannot be changed (you would have to change the code in 51% of the world's BTC mining nodes, across many countries, all at the same time) the flow of newly mined BTC is permanently cut in half and no known single power can intervene.
Meanwhile stocks can be split, un-split, de-listed, newly issued, etc, upon the powers of the exchange hosting it.
legalBeer41910
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@EdC indeed, this dinosaur guy doesn't get crypto. I had many arguments like this last cycle on stocktwits
Mayfair_Ventures
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@EdC i think some people mistake me for being anti crypto or bearish. Couldn’t be further from the truth. My Bitcoin buying days go back to 2011. Put it this way I’m sat pretty. The main thing is the momentum and sustainable move. Without it we are unlikely to go too far. The market needs a real flush followed by regulation to give it steady and sustainable increase and that’s the true value.
I sold a lot of my initial holdings at $250 as it was a very nice run for me. I ended up holding some back and sold a lot more at 4K. It wasn’t until 30k you could see the main transition to institutional players.
So my sentiment is not negatives. It’s just not fully confirmed yet as to up and only up. Until then I am more than happy. 👍
JaviDLG
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Happy New Year! Love your post, I'll be waiting for the next one!
Bane1306
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Max pain will be the likely near the corona low with a lot of sharp pullbacks
confidentCloud26974
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Happy new year Lewis. Thank you for all the efforts.
yaki-kadafi
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In 12 months bitcoin has gone from 15k to now 47k , the whole time you have been saying ''nothing has changed''. You are wrong but your ego will not allow you to admit it because you just to repeat how you have 20 years market experience ''buy my book, buy my trading course'' etc.
Mayfair_Ventures
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@yaki-kadafi, Still nothing has changed! The reason it has not changed is we are still not ready to moon! I bought my bitcoin under 200 dollars bud. So for me, not stressed or looking for muppet moves. If people want to trade good on them, they hold and lose it all later. Stress get's the better of most. I am one happy, wealthy and content individual. Can't ask for more than that. I try to share the knowledge with people who are not yet on the same line. The reason for me NOTHING has changed, is since saying it back in 2022 - ZERO has convinced me we will see 100k before grabbing downside liquidity.
Mayfair_Ventures
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@Mayfair_Ventures, So when your stressing on the pullback, unless we go under $1,000 (doubt it) For me I care ZERO what we do ;-)
The halvening itself is a global event (more fundamental than the Blackrock ETF) which permanently sets the flow of newly mined BTC by half, essentially shrinking liquidity. As an analogy imagine a water tank in a desert with its tap pressure permanently halved, whilst at the same time the people (or ETFs) wanting water from this tap increases. This event is set in stone in the code and cannot be changed (you would have to change the code in 51% of the world's BTC mining nodes, across many countries, all at the same time) the flow of newly mined BTC is permanently cut in half and no known single power can intervene.
Meanwhile stocks can be split, un-split, de-listed, newly issued, etc, upon the powers of the exchange hosting it.