Taking advantage of day gamblers and bagholders
Day Gambling & Bagholding makes up most of the activity in stocks I reckon.
Not as big with Forex but still here. They allow people to optimise their returns.
If markets were always fairly valued you couldn't really make more than 5% a year.
And I say 5%, but to get there you'd have to not make any mistake. Perfection ==> 5%. No thanks!
Day & swing gamblers, and bagholders, are here to transfer wealth. I describe how in this idea.
I cut to the chase, I try keeping it as short as I can, but the subject does take a bit of explaining and I try to not skip important things.
What do day gamblers do?
- Exacerbate short term moves, move the price away from its natural longer term trend for example.
- Hope to make money while paying to their brokers 25% of the money they risk as spread or commission. Roulette wheel takes 2.5%.
What do bagholders do?
- Sell out of their winners very quickly. The behavior of holding losers goes in pair with getting rid of winners.
- And of course hold their losers. Bagholders that bought near the top do not add sell pressure to the pullback.
- Bagholders also love to "buy the dip", when the price of something goes down, they buy.
- Finally they sell at breakeven both when they hold a loser recovering, or when they are in the green and it pulls back.
Can't really say for a fact this is what happened, but that's how I see it in a concrete example:
FXCM says its traders average risk-to-reward is 1-to-0.57, on EURUSD in the period 2014-2015. That takes into account all those that have a high RR.
FXCM typical gambler risk to rewards is probably closer to what I see on myfxbook, something ridiculous like 1-to-0.25.
Even on Bitcoin that goes down 80% and up 8000% I can bet the typical gambler risk to reward is poor.
People also "average down", sometimes they call it just that, sometimes they call it "dollar cost averaging".
When they average down they increase their risk, all they care about is getting their money back.
This is what we call a Martingale strategy. And yes, it is very stupid. And wipes out life savings once in a while.
Academics polled people and found that in the general population - or maybe it was in a population of students - about 85% of people would rather take a small guaranteed win than a chance to get a much larger win (with of course odds multiplied by the amount were bigger than the flat win), and the exact same percentage would rather risk an enormous loss than simply take a loss. Prey ruminant mentality. They go for leaves (small wins), and they want to avoid losing at any cost because that means likely death. Compare this to a tiger that has a win ratio of 5 to 10% but gets huge meals providing several orders of magnitude the amount of calories he spent to hunt it, and they don't take silly risk, you'll never see a tiger jump in the violent river to go after prey.
And this is why you have the famous:
Wave A: A pullback with the majority still bullish (Mainstream media in the case of a bubble...).
Bagholders that got in late are in complete denial. Bagholders that got in early enough often breakeven.
Not an exact science, they do all kinds of things. I don't know many things that are 100% true in trading.
Wave B: Bagholders are quite stressed out. You hear them scream things such as "DIAMOND HANDS", "LAST TIME THEY SAID", "THE BULL MARKET IS BACK".
Price does not simply continue up in the presence of bagholders. It tops usually at 78.6% to 100% fibonacci retracement.
Wave C: Most bagholders admit we are in a bear market. By the bottom of C, nearly everyone realizes (even the slow ones) that WE ARE IN A BEAR MARKET.
Typical extensions are of 1, 1.618, 2, 2.618 (commodities).
Wipes out the bagholders, in mainstream markets this is very often "the little guy" and they whine about manipulation
(natural selection => great traders end up rich)
It has always been like this and data shows they are the ones selling. But they still cry "manipulation" and whine and never learn.
This is very typical. Not that entries matters that much, but avoiding getting sucked in "back to normal", and expecting lower prices, can help.
I can point out plenty of other examples:
Wave C has many names. Capitulation, "AAAAAAAAAAAH", make it stop god oh make it stop, this is BS, as well as when will it stop?
When it stops is when it finds the majority of bagholders breaking point.
Take a slow trend that went parabolic, the breaking point of the baggamblers will often be spread between the top and the start of the vertical move.
This is not precise at all but to get an idea:
In theory if 71% of the market is made up of bagholders and 71% of those "take their profit" we can estimate a retrace of 50% (71% of 71%).
90% of people are bagholders I think, but survival selection means the number will be lower in the markets.
Day gamblers also have their trends and ABCS. No need to repeat what I already said about bagholders, much of the same applies to day day gamblers.
So with much research, knowledge, practice, in theory one should be able to take advantage of day gamblers to get really good precise (enough) entries and exits. Thank you day gambler! Not only do they feed brokers ridiculous amounts (10 times the roulette wheel amount) allowing MY costs to go down, they also improve MY bottom in another way which is with better entries and exits.
Thank you day gamblers! You truly are altruists.
In this case...
We can note that the price after bouncing between 1 and 1.618 dropped and bounced again on the "1" level. Bagholders breaking even?
Rather than just buy at a vague price, it is in theory possible to use swing bagholders and day gamblers to have a very good entry.
Does not always work. And no point being greedy here, it's already tight enough. Enter at a likely reversal price = better entry = better RR.
Stop can be put way way far, further than the day gamblers capitulation, and even the swing bagholders, giving it many chances, and on a high timeframe it will still be a high payout for a small risk.
The goal is not to look for perfection, but to progressively improve risk rewards thanks to others mediocrity and gambling mentality.
On top, I repeat, of already all being at an advantage compared to decades ago, thanks to daygamblers taking the volatility in the teeth and cratering spread costs.
Warren and me, deep down we do the same thing:
In a concrete example, a trade I posted recently:
Not as big with Forex but still here. They allow people to optimise their returns.
If markets were always fairly valued you couldn't really make more than 5% a year.
And I say 5%, but to get there you'd have to not make any mistake. Perfection ==> 5%. No thanks!
Day & swing gamblers, and bagholders, are here to transfer wealth. I describe how in this idea.
I cut to the chase, I try keeping it as short as I can, but the subject does take a bit of explaining and I try to not skip important things.
What do day gamblers do?
- Exacerbate short term moves, move the price away from its natural longer term trend for example.
- Hope to make money while paying to their brokers 25% of the money they risk as spread or commission. Roulette wheel takes 2.5%.
What do bagholders do?
- Sell out of their winners very quickly. The behavior of holding losers goes in pair with getting rid of winners.
- And of course hold their losers. Bagholders that bought near the top do not add sell pressure to the pullback.
- Bagholders also love to "buy the dip", when the price of something goes down, they buy.
- Finally they sell at breakeven both when they hold a loser recovering, or when they are in the green and it pulls back.
Can't really say for a fact this is what happened, but that's how I see it in a concrete example:
FXCM says its traders average risk-to-reward is 1-to-0.57, on EURUSD in the period 2014-2015. That takes into account all those that have a high RR.
FXCM typical gambler risk to rewards is probably closer to what I see on myfxbook, something ridiculous like 1-to-0.25.
Even on Bitcoin that goes down 80% and up 8000% I can bet the typical gambler risk to reward is poor.
People also "average down", sometimes they call it just that, sometimes they call it "dollar cost averaging".
When they average down they increase their risk, all they care about is getting their money back.
This is what we call a Martingale strategy. And yes, it is very stupid. And wipes out life savings once in a while.
Academics polled people and found that in the general population - or maybe it was in a population of students - about 85% of people would rather take a small guaranteed win than a chance to get a much larger win (with of course odds multiplied by the amount were bigger than the flat win), and the exact same percentage would rather risk an enormous loss than simply take a loss. Prey ruminant mentality. They go for leaves (small wins), and they want to avoid losing at any cost because that means likely death. Compare this to a tiger that has a win ratio of 5 to 10% but gets huge meals providing several orders of magnitude the amount of calories he spent to hunt it, and they don't take silly risk, you'll never see a tiger jump in the violent river to go after prey.
And this is why you have the famous:
Wave A: A pullback with the majority still bullish (Mainstream media in the case of a bubble...).
Bagholders that got in late are in complete denial. Bagholders that got in early enough often breakeven.
Not an exact science, they do all kinds of things. I don't know many things that are 100% true in trading.
Wave B: Bagholders are quite stressed out. You hear them scream things such as "DIAMOND HANDS", "LAST TIME THEY SAID", "THE BULL MARKET IS BACK".
Price does not simply continue up in the presence of bagholders. It tops usually at 78.6% to 100% fibonacci retracement.
Wave C: Most bagholders admit we are in a bear market. By the bottom of C, nearly everyone realizes (even the slow ones) that WE ARE IN A BEAR MARKET.
Typical extensions are of 1, 1.618, 2, 2.618 (commodities).
Wipes out the bagholders, in mainstream markets this is very often "the little guy" and they whine about manipulation
(natural selection => great traders end up rich)
It has always been like this and data shows they are the ones selling. But they still cry "manipulation" and whine and never learn.
This is very typical. Not that entries matters that much, but avoiding getting sucked in "back to normal", and expecting lower prices, can help.
I can point out plenty of other examples:
Wave C has many names. Capitulation, "AAAAAAAAAAAH", make it stop god oh make it stop, this is BS, as well as when will it stop?
When it stops is when it finds the majority of bagholders breaking point.
Take a slow trend that went parabolic, the breaking point of the baggamblers will often be spread between the top and the start of the vertical move.
This is not precise at all but to get an idea:
In theory if 71% of the market is made up of bagholders and 71% of those "take their profit" we can estimate a retrace of 50% (71% of 71%).
90% of people are bagholders I think, but survival selection means the number will be lower in the markets.
Day gamblers also have their trends and ABCS. No need to repeat what I already said about bagholders, much of the same applies to day day gamblers.
So with much research, knowledge, practice, in theory one should be able to take advantage of day gamblers to get really good precise (enough) entries and exits. Thank you day gambler! Not only do they feed brokers ridiculous amounts (10 times the roulette wheel amount) allowing MY costs to go down, they also improve MY bottom in another way which is with better entries and exits.
Thank you day gamblers! You truly are altruists.
In this case...
We can note that the price after bouncing between 1 and 1.618 dropped and bounced again on the "1" level. Bagholders breaking even?
Rather than just buy at a vague price, it is in theory possible to use swing bagholders and day gamblers to have a very good entry.
Does not always work. And no point being greedy here, it's already tight enough. Enter at a likely reversal price = better entry = better RR.
Stop can be put way way far, further than the day gamblers capitulation, and even the swing bagholders, giving it many chances, and on a high timeframe it will still be a high payout for a small risk.
The goal is not to look for perfection, but to progressively improve risk rewards thanks to others mediocrity and gambling mentality.
On top, I repeat, of already all being at an advantage compared to decades ago, thanks to daygamblers taking the volatility in the teeth and cratering spread costs.
Warren and me, deep down we do the same thing:
In a concrete example, a trade I posted recently: