Trading psychology and a story of history repeating itself.
Take a look at the chart above.
Now take a look at this one.
And now take a look at this one.
There’s something that all three of these charts have in common and it might not be what you think it is. I'll add before going further that this is probably going to be my most crapped-on post here but it is what it is. I want to talk about the problem of winning early.
During the COVID crash, millionaires were made. Millionaires were also destroyed. In more cases than you may imagine, millionaires were made and then destroyed. During the crash, there were a bunch of savvy investors who profited greatly off of the collapse of the stock market over the course of a month. A huge part of this was due to options and the magnified returns that can be possible with them. During the crash, this became even more possible.
See, while
SPY
was shitting itself over the course of a month, implied volatility exploded across essentially every options chain that existed in the market. Normally, to be successful with options trading you have to have at least some kind of comprehension of how the underlying math works behind building a position. You have to have at least *some* comprehension of the Greeks. During this period, you needed none of that. You could buy a $150 strike put expiring tomorrow at the beginning of March and by market close you’d 10x your initial investment. It was definitionally free money if you were able to capture it and get in early enough.
This led to a huge influx of people jumping into the market because they were hearing their friends just buying puts like crazy. r/wallstreetbets started becoming more and more popular during this time as options use on Robinhood exploded and more and more people started piling in for the free money. After all, if the friend you have who flips burgers just made $1,000 in options why couldn’t you? Tons of inexperienced traders jumped in and made a lot of money.
Then the bottom happened. Volume started to die out, the bleeding stopped, the Fed ramped up their unlimited QE operations, and the market stabilized. What’s more, implied volatility slowly started to creep down.
New entrants into the “easy money” market who were very successful were convinced it was a fake-out. They were POSITIVE that there was no way this was a real bottom. COVID was still rampant, countries were still shutting down, and in this case they were correct. COVID was nowhere near finished. Now more than a year later, we’re still dealing with it in many ways and the world is far from being “back to normal”. What they were wrong on, however, was that the market would continue to care.
The truth of the matter was that none of these new entrants had any clue what they were talking about. None of them had any concept of even what the market’s current valuation of specific assets even meant in the context of COVID. There was no talk of gauging the actual value of stocks against projected success in sustaining COVID. There was no concept of the market being “forward thinking” in terms of how it allocates capital. It was just all “this is bullshit, there’s no way this it the bottom” and reams and reams of conspiratorial tweets and posts about “the coming leg down”. It was all bullshit, the market bottomed, big money was now hunting for bargains because it assumed that COVID would pass and the market would recover.
In addition to this, implied volatility also started to drop. Just buying random options in the general direction you thought the market might go became less and less of a winning strategy. Soon, people were losing their shirts on big bets using money they made during the drop. People were bearish to the point of insolvency. They fought the trend instead of going with it and they kept with a losing options strategy because they used to make money doing it. The amount of money won and lost by retail during the months of March, April, May and June was astronomical.
There’s something that happens to a person when they discover something new, try it out, and become immediately successful at it. There’s a trigger in our brains that leads us to assume that we’re successful because we’ve just discovered some nascent talent that we never knew we had. Instead of looking at ourselves as lucky, we look at ourselves as imbued with innate knowledge that is guiding us toward success. After all, look at your account balance. That doesn’t just happen on its own.
This becomes so much worse in something like the stock market (or, perhaps crypto). The stock market and finance generally are things that people are often led to believe are zones of institutional expertise. They’re things that regular people shouldn’t be involved in. Look at the math used by some quant fund. Listen to the financialized, confusing language. It looks like this monolith of expertise from the outside. Then you become successful in it and you feel like you’re one of the club or, even worse, beating the club.
When we start to win after learning lessons and applying them, we train ourselves to evaluate information and apply it to something in the real world. When we start to win immediately, we train ourselves to believe that we just “know” what’s going to happen.
The biggest difference between these two mentalities in my eyes is what one does when what they “know” starts to be tested and broken. With experience and time, when the play you make starts to falter because what you “know” starts to look like it’s not working out, you take losses and learn. When you win immediately and a play you make based off of what you “know” starts to falter, it’s because of some outside force “manipulating” things or because of a million other reasons. You don’t take losses and learn because there’s nothing to learn. You’re right and everyone else is wrong.
Now we see this playing out again in the crypto world. Every other post seems to be about manipulation in the crypto market. Duh. Crypto is the most manipulated market on Earth. When 1,000 wallet addresses control 40% of the entire market cap of something, you don’t get to call it decentralized. It’s centralized, just in the hands of anonymous strangers or groups instead of alphabet soup agencies you can put a face to.
We see new entrants to the market flooding $DOGE and $BTC, enraptured by the story behind the crypto revolution and captured by early initial success. Look at my account. It’s up 1,000% I must know what I’m doing. I can’t imagine I just now found out about this. Look at the innate knowledge I have and how I can read these markets. If the market goes down, it’s not because of anything other than people not knowing what I know.
It’s going to make me sound like an asshole but it has to be said: if you are up 1,000% on an investment and you haven’t sold anything, you aren’t an investor. You’re not “beating the market”. You’re not on the vanguard of a new wave of investor shaking the establishment. You’re not “doing battle with the hedgies”. You’re a rube.
Everyone starts somewhere. Unfortunately (or maybe not) for some people, that somewhere is in the middle of a period of mania leading to euphoria in a specific market sector. It’s a period where you just can’t lose money. The good ones get crushed and learn from their mistakes. They lick their wounds and decide to stick with it. I mean, the population of r/ThetaGang must have EXPLODED of the past year with people destroying themselves with options buys. The bad ones get crushed and disappear, further angered at a system that “manipulated” them out of their money.
The moral of the story here is that we should all be suspicious of everything in the markets. Above everything else, we should be most suspicious of ourselves. Are we trading for the right reasons? Are we missing something? Are we really as smart as we think we are? The second you start to believe you know something the rest of the market doesn’t, well you’re screwed. Just remember that the second you look at a chart like the BTC or DOGE charts above and blindly think they look good you have turned a corner into trading on emotion or hope. What goes down isn't required to come up.
Now take a look at this one.
And now take a look at this one.
There’s something that all three of these charts have in common and it might not be what you think it is. I'll add before going further that this is probably going to be my most crapped-on post here but it is what it is. I want to talk about the problem of winning early.
During the COVID crash, millionaires were made. Millionaires were also destroyed. In more cases than you may imagine, millionaires were made and then destroyed. During the crash, there were a bunch of savvy investors who profited greatly off of the collapse of the stock market over the course of a month. A huge part of this was due to options and the magnified returns that can be possible with them. During the crash, this became even more possible.
See, while
SPY
was shitting itself over the course of a month, implied volatility exploded across essentially every options chain that existed in the market. Normally, to be successful with options trading you have to have at least some kind of comprehension of how the underlying math works behind building a position. You have to have at least *some* comprehension of the Greeks. During this period, you needed none of that. You could buy a $150 strike put expiring tomorrow at the beginning of March and by market close you’d 10x your initial investment. It was definitionally free money if you were able to capture it and get in early enough. This led to a huge influx of people jumping into the market because they were hearing their friends just buying puts like crazy. r/wallstreetbets started becoming more and more popular during this time as options use on Robinhood exploded and more and more people started piling in for the free money. After all, if the friend you have who flips burgers just made $1,000 in options why couldn’t you? Tons of inexperienced traders jumped in and made a lot of money.
Then the bottom happened. Volume started to die out, the bleeding stopped, the Fed ramped up their unlimited QE operations, and the market stabilized. What’s more, implied volatility slowly started to creep down.
New entrants into the “easy money” market who were very successful were convinced it was a fake-out. They were POSITIVE that there was no way this was a real bottom. COVID was still rampant, countries were still shutting down, and in this case they were correct. COVID was nowhere near finished. Now more than a year later, we’re still dealing with it in many ways and the world is far from being “back to normal”. What they were wrong on, however, was that the market would continue to care.
The truth of the matter was that none of these new entrants had any clue what they were talking about. None of them had any concept of even what the market’s current valuation of specific assets even meant in the context of COVID. There was no talk of gauging the actual value of stocks against projected success in sustaining COVID. There was no concept of the market being “forward thinking” in terms of how it allocates capital. It was just all “this is bullshit, there’s no way this it the bottom” and reams and reams of conspiratorial tweets and posts about “the coming leg down”. It was all bullshit, the market bottomed, big money was now hunting for bargains because it assumed that COVID would pass and the market would recover.
In addition to this, implied volatility also started to drop. Just buying random options in the general direction you thought the market might go became less and less of a winning strategy. Soon, people were losing their shirts on big bets using money they made during the drop. People were bearish to the point of insolvency. They fought the trend instead of going with it and they kept with a losing options strategy because they used to make money doing it. The amount of money won and lost by retail during the months of March, April, May and June was astronomical.
There’s something that happens to a person when they discover something new, try it out, and become immediately successful at it. There’s a trigger in our brains that leads us to assume that we’re successful because we’ve just discovered some nascent talent that we never knew we had. Instead of looking at ourselves as lucky, we look at ourselves as imbued with innate knowledge that is guiding us toward success. After all, look at your account balance. That doesn’t just happen on its own.
This becomes so much worse in something like the stock market (or, perhaps crypto). The stock market and finance generally are things that people are often led to believe are zones of institutional expertise. They’re things that regular people shouldn’t be involved in. Look at the math used by some quant fund. Listen to the financialized, confusing language. It looks like this monolith of expertise from the outside. Then you become successful in it and you feel like you’re one of the club or, even worse, beating the club.
When we start to win after learning lessons and applying them, we train ourselves to evaluate information and apply it to something in the real world. When we start to win immediately, we train ourselves to believe that we just “know” what’s going to happen.
The biggest difference between these two mentalities in my eyes is what one does when what they “know” starts to be tested and broken. With experience and time, when the play you make starts to falter because what you “know” starts to look like it’s not working out, you take losses and learn. When you win immediately and a play you make based off of what you “know” starts to falter, it’s because of some outside force “manipulating” things or because of a million other reasons. You don’t take losses and learn because there’s nothing to learn. You’re right and everyone else is wrong.
Now we see this playing out again in the crypto world. Every other post seems to be about manipulation in the crypto market. Duh. Crypto is the most manipulated market on Earth. When 1,000 wallet addresses control 40% of the entire market cap of something, you don’t get to call it decentralized. It’s centralized, just in the hands of anonymous strangers or groups instead of alphabet soup agencies you can put a face to.
We see new entrants to the market flooding $DOGE and $BTC, enraptured by the story behind the crypto revolution and captured by early initial success. Look at my account. It’s up 1,000% I must know what I’m doing. I can’t imagine I just now found out about this. Look at the innate knowledge I have and how I can read these markets. If the market goes down, it’s not because of anything other than people not knowing what I know.
It’s going to make me sound like an asshole but it has to be said: if you are up 1,000% on an investment and you haven’t sold anything, you aren’t an investor. You’re not “beating the market”. You’re not on the vanguard of a new wave of investor shaking the establishment. You’re not “doing battle with the hedgies”. You’re a rube.
Everyone starts somewhere. Unfortunately (or maybe not) for some people, that somewhere is in the middle of a period of mania leading to euphoria in a specific market sector. It’s a period where you just can’t lose money. The good ones get crushed and learn from their mistakes. They lick their wounds and decide to stick with it. I mean, the population of r/ThetaGang must have EXPLODED of the past year with people destroying themselves with options buys. The bad ones get crushed and disappear, further angered at a system that “manipulated” them out of their money.
The moral of the story here is that we should all be suspicious of everything in the markets. Above everything else, we should be most suspicious of ourselves. Are we trading for the right reasons? Are we missing something? Are we really as smart as we think we are? The second you start to believe you know something the rest of the market doesn’t, well you’re screwed. Just remember that the second you look at a chart like the BTC or DOGE charts above and blindly think they look good you have turned a corner into trading on emotion or hope. What goes down isn't required to come up.