Bitshares Trading Diary, Day 5: The Catch-22 Of Following.

When you're learning how to trade, you quickly bump into - or get bumped by - a catch-22. The markets are not kind to followers. The trouble is: in order to learn something, you have to follow it. And once you do so, it's easy to fall into following a jump while hoping that it turns into a real pump. It seems sensible - what if other people follow along with me? - but it usually doesn't work that way. Like memes, jumps or dumps sometimes do go viral - but the bulk of them don't. Below, you'll find out why.

Overnight Sag

As I found out when I got rolling this morning, I didn't get my doors blown off when I was asleep. :) But still the market wasn't all that cheery. As shown by this two-day chart screenshot at 8 AM (all times Eastern):

Bitshares spent the night sagging in price. The welcome pump of two nights ago hasn't been followed through upon. Instead, it's been slowly sliding.

The six-hour chart as of the same time shows the buybook being rotted away by recurrent dumps, including one big dumpfest when a lot of punters lost hope and gave up:

Other than that nice green high-volume candlestick to the right of the dumpfest that the buyers absorbed, there was little reason to be optimistic. I resigned myself to figuring out how to trade against my book: selling low and buying lower. Since I'm margined-up long, successful trading of this kind has the effect of lowing my cost basis a tad.

But the market did its thing and surprised me. I was prepared to follow along by spread-trading the downtrend, but instead the market rallied after making a double bottom a little below 950. Have a look at the six-hour chart from 1 PM:

Yep, things changed for the better - and the activity picked up. As the mostly-upward spikes in the candlesticks show, it was also a market with more than the usual share of hasty folks that provide spread-traders like me with gains. Although it's easy to get cynical about people who buy or sell immediately, they're the bread and butter of spread traders. The other side of the coin is that spread-traders provide liquidity for those folks and help narrow the spreads.

It was a nice & active turnaround, even though it doesn't look that impressive from the vantage point of the one-day chart as of the same 1 PM:

Enter The Whale

Speaking of providing liquidity, at about 12:20 a huge buy order burst into the buybook at 961. Whoever this whale was, he or she wanted more than 2.5 million Bitshares at that price.

That made the spread-trading even easier, as 961 acted as an adamantine decline-stopper until 6 PM. But to be honest, I didn't seize the opportunity like a cut-throat would. Despite my earlier wisecracks about "professional courtesy," collegiality does have its place. I did put some bids just above that whale-floor, but not that many; I wanted to see him or her get the 2.5 million. On that chance, I saved some buying power for a lowball bid at 940.

Although the chart suggested that a turnaround was in play, the orderbook said otherwise. There was a huge sell of half a million Bitshares that started off in the low 990s and was later moved to 984. Unless a real pump got going, there was too much supply to make for a breakable ceiling. Anyone who followed along with the midday climb got disappointed later in the afternoon as the sag returned. So much so, that a pile-on just before 6 PM got that mystery whale's buy order filled completely:

The rightmost candlestick with the huge volume spike shows the dumpfest that ensured the whale got all the Bitshares (s)he wanted. Shortly afterwards, the price sunk below 861.

The two-day chart from the same 6 PM shows that Bitshares is back in sag mode:

But somewhere, a happy whale is the proud owner of >2.5 million Bishares - well in advance of the Peerplay sharedrop.

The Trouble With Following

As I said in the intro, following the market is a natural thing to do. There's no other way you can figure out its bobs and weaves. But the trouble is, changes in price - particularly sudden changes - change people's behavior. If an insta-buyer wipes out five levels in the buybook, punters notice. They see that they can get more for their coins than immediately beforehand. They ask themselves, "why don't I drop a sell right below the new low ask?" Some tradebots are programmed to do so.

As a result, more supply goes live at somewhat lower prices. A little race to the bottom-ask ensues. So, the people who restrain themselves can get a slightly lower price than they would if they had jumped right after that insta-buyer. The same scenario plays out vice-versa for an insta-seller.

There are insta-buyers who do trigger pumps, and there are insta-sellers who trigger dumpfests - but they're not normal. Even the big swingers normally induce a short-term countertrend rather than ignite a pile-in.

If you've taken economics, you'll recognize this process as a market finding a new equilibrium after being jolted out of the old. That s what's taking place, all because traders and pumpers change their actions in response to a change in price. They see it as an opportunity to be taken advantage of by leaning against the trend and thus helping to counteract it. For this reason, it's helpful to check your impulse to follow and to wait a bit. Not always, but usually.

Lesson Of The Day

You have to follow the market to figure it out, but trading as a follower usually means throwing away a somewhat better price. Waiting a bit after a sudden jump or thump does pay, even though it's not easy to learn.

Thanks (again) for reading and upvoting! See you tomorrow with Day 6, when we'll see if the sags continue...