Bitcoin Price Speculation – Lessons Learned From Trading Stocks
Joris de Ruiter 28/07/2014 Bitcoin Analysis, Bitcoin Trading, Investment, News 1 Comment
Bitcoin price prediction and chart analysis are among the most popular topics on Bitcoin. That’s okay, nothing wrong with a little speculation. But there’s a lot more to making a profit than ‘reading the charts’ and following the news. I certainly learned in my days as a day trader in the stock market.
For a year, I was possessed with finding a way to make a profit in day trading. I frantically read the news and analyzed charts looking for clear patterns. Some strategies worked for a short time. Then the price level suddenly changed direction, and I was at a loss. Theoretically and psychologically, I just wasn’t up for this. But in all the efforts I learned the following:
1. 70% – 90% of traders are losing money
If only I had known. Whether trading gold, commodities or currencies, most traders lose money. Why is this? Because in the trading game, you are betting against all other traders, and many are smarter than you. They have more years of experience in trading, they have access to colleagues with more experience, and they have access to the news before you do. It’s like fighting Mike Tyson in boxing. You can give it a try, but please know what you’re up to.
William Eckhardt describes it as follows in the book “The new Market Wizards”:
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If a betting game among a certain number of participants is played long enough, eventually one player will have all the money. If there is any skill involved, it will accelerate the process of concentrating all the stakes in a few hands. Something like this happens in the market. There is a persistent overall tendency for equity to flow from the many to the few. In the long run, the majority loses. The implication for the trader is that to win you have to act like the minority. If you bring normal human habits and tendencies to trading, you’ll gravitate toward the majority and inevitably lose (The New Market Wizards).
Being different by leaving your fear and greed behind has often been mentioned as necessary in trading. I have experienced how psychologically difficult that is. Ignoring your instinctual human emotions and habits is really hard.
Even then, with everything in check, you are betting against more experienced traders. In the Bitcoin world there are enough beginners to profit from, but eventually professionalism will reach the Bitcoin trading market too. You are currently betting against Bitcoin enthusiasts reading every thread on Bitcointalk. Soon you are betting against market professionals with 5+ years experience in trading. Good luck. For me, day trading it out for sure.
2. Prediction is impossible
It is shown to be impossible to consistently and accurately predict a market weeks or months from now. Many studies show that banana picking monkeys — or blindfolded dart-throwing humans for that matter — are as good in predicting stock movement as financial experts. Yes, you read that right. Here is study one, two, three and four to back it up.
Truth be told, investment managers also manage risk and diversify their clients’ portfolio, so there is some legitimacy to their services, but when stock experts don’t know any better than monkeys if prices are going up or down next months, there is some serious questions to ask.
Being an Artificial Intelligence student, I figured it would be possible to create a market prediction model. Of course I wasn’t the only one with that idea. Predictive analytics are now used by investments firms as a new tool in predicting prices. For these algorithmic traders it is by no means a golden bullet, but rather an added tool. Even twitter is used for predictions and ‘beating the news’.
With all the Bitcoin data publicly available it would be perfect for the Bitcoin world. There is recently an attempt done on the Bitcoin market: Bitcoin Price Prediction Tool.
While I cannot vouch for the accuracy of it, the comments have spotted at least one beginner mistake:
I’m hugely impressed indeed – by the inaccuracy of this tool.
Currently, for the 5-day chart, it predicts a rise from $614 to $637
For the same 5-day period in the 20-day chart it predicts a decline to as low as $540. Sounds legit …
I have learned that a Neural Network can be amazingly accurate in learning anything, but they easily overlearns, being too specific about the past to make accurate predictions for the future. A trend line would be more correct, to put it simply. But the biggest problem is that results from the past offer no guarantee for the future. At times its easy to predict the market, at other times markets are acting irrational.
3. Technical analysis is challenged
One redditer ironically commented on a charting article: “Because charts determine future price. You just have to draw enough lines. Apparently”. We all know the technical analysis articles: Lots of lines, Elliot waves and Fibonacci retracements. They usually leave me drawing more lines, because lines can be drawn in so many ways. Then the next day, the price goes into a different direction. Many technical analysis articles anticipate this by giving both a down-trend and uptrend possibility. But this catch-all doesn’t help a trader make a decision.