Volatility and Emotions
Dear Readers,
Yes, we all have them, without which life would hardly be worth living. We like to think that we could be purely rational calculating thinking machines, especially in the world of trading/ investing, but what is nice in theory falls far short of the realities. In spite of the philosopher’s speculations to the contrary, emotions lie at the very core of our selves and need to be dealt with accordingly, especially in that world of trading/ investing.
Price goes up, we feel exhilarated and jump with joy; price goes down and we feel an equal and opposite reaction… as if there were some ledger at work to balance out our joys with our sorrows. This is where temporary volatility gets the better of us, where we are still the plaything of price. Yet this is also where technical analysis enters into the picture to provide some equanimity, some grounding, and some continuity and order to the apparent chaos of ephemeral events.
And so to a multi-month chart devoid of TA.
Here there is a complete lack of TA on a chart that shows emotions exactly coinciding with whether price is going up or down. Sure, it’s perfectly natural for present price action to affect us to a certain extent, but the less it affects us the better. The point of adding technical analysis to the chart is to take a more rational approach to the price action, where it is smoothed out on a longer-time frame, and so to the next chart with some TA super-imposed.
With just the use of a simple and basic 200 moving day average [standard for many assets] the picture changes quite a bit. First of, the time frame is wider. Even though it’s still on the daily, it incorporates a good couple of years. It functions as a frame of reference to the volatility, and serves to counter-balance the emotions that tend to be dragged along in its wake. In 2023, price breaks above the blue, comes back, moves up again, rinse and repeat, comes back, hovers just below, then breaks well above toward the end of the year, only to once again come back, hover below, and break above again. If the trader/ investor has some such line in mind, he’d not be taken too much by surprise by the retracements to the thin blue line following on from the spikes above. Indeed, for all practical purposes, one could consider price tied to a bungy rope that stretches then contracts around the averages.
Of course, the possibility [or hope] is always that price might go parabolic, break the technicals, and enter into a heated market, but this should also realistically remain counter-balanced by the technicals. You could say, with the contrast between the emotions of volatility and the rationals of technical analysis, that TA functions as a discipline - one becomes more disciplined in their approach to the market, whether trading or investing, and less prone to making irrational/ emotional decisions. Of course, this is all about a question of degree and should always be put on the spectrum as opposed to a dichotomous one or the other [emotional or rational] - there will always be an element of emotion at play with the point being to restrain, minimize or discipline that emotion. We are not robots. As mentioned in an earlier article:
Besides a rational discipline, as in an objective field of study, TA in turn, also serves as a rational discipline over everything that would come under the rubric of subjectivity. Here TA, applied as a technique, is as much a restraint over one’s psychology and emotions as it is about purely technical rules as applied to the chart. As a discipline, in this more subjective manner, TA then also involves a context such as a wider general strategy and more particular tactics, that always belong to a market participant, that subject and initiator of all trades and positions. Indeed, it is this larger strategy that provides much of the discipline required over the momentary emotion and reactions of the day, for this discipline, in its more practical aspect, is the means by which the news and noise [and volatility] of the day is ‘bracketed out’.
Of course, I am not wanting to be a complete killjoy here. It’s more about everything in moderation. Once having established some discipline, and some well-weighted longer-term trades/ investments, one might choose to engage with some shorter-term trades on volatility/ day-trading. But following a disciplined approach, those trades would be restricted to a certain percentage of the funds you have at your disposal. The picture here is of the punter going to Vegas in the weekend for a bit of fun, over and above his ‘main’ job [longer-term trades/ investments], not the desperado who lives in Vegas 24/ 7 looking for that huge payment in the shorter-term and most often getting rekt. This distinction between the risk levels of shorter and longer-term trades was explored further here:
If time were to be placed on a spectrum, with the shortest of periods at one end and the longest of periods at the other, randomness and possibility would belong to the shortest periods, while pattern and probability would belong to the longest periods. There would be varying degrees of probability/ randomness depending on what point of the spectrum you were dealing with - at the one end, minutes would be near completely random, at the other end, years would have a much higher degree of probability. Just as with any science, where momentary observations only start to make sense when accumulated into a mass over a longer period of time, so too with T.A. It applies most effectively to longer time frames, where lines might be drawn, and trends discerned.
The reality is that trading/ investing is all too often a very dull business… when most of your trades are longer term. Naturally enough, we look for a little excitement, and even think we’re missing out when we see price jumping up [after first collapsing]. Not much damage can be done with a little day trading [I prefer swing trading] if done on top of those longer-term trades/ investments, with some system of risk management, and with the proportionate percentage of funds… the recreational weekend money so to speak.
Personally, I’m fine with sticking to the longer-term trades. And I find it helps to have other interests besides Crypto/ investment/ money. Mine are history and politics, and activities such as swimming. If Crypto is the sole interest one has there will be the tendency to over-trade, when most often the best option is to sit and do nothing. But each to their own. The point here is not about whether to day-trade or not, but rather to have a method or discipline whereby that day-trading [verging on gambling] is relatively restrained…. no matter the technicals you might employ for those trades.
To finish with a long-term chart. We’ve more confidence of the outcome based on the trend [as opposed to shorter-term moves], but it also involves time and patience. Much of this is about a waiting game. On the basis of the longer-term model of the LGC [logarithmic growth curve], we can have confidence [though never certainty] that with the passage of time we’ll see yet another spike to the upper levels of the channel formed and extrapolated. Of course, this no doubt also involves ‘killing’ time, and that can be done with a little day or swing trading here and there, or by engaging with other activities outside the Crytpo sphere, or by work or leisure…. or, even better, by doing all of things.
Until next time,
Stay, relatively, safe out there,
Dave the Wave.