On The Gambler’s Mindset & Mastery of the Inner Ape
On The Gambler’s Mindset & Mastery of the Inner Ape
Are we (traders & cryptocurrency investors) all just delusional gamblers drawing patterns on a screen?
This will be an essay on the psychology of gambling & trading. Why do 95% of traders lose? And how to overcome this inner ape?
You’re at the roulette table.
It has hit 🔴 the last 69 times in a row.
You ask the people at the table, which is more likely to be hit next 🔴 or ⚫?
Some gamblers say 🔴 , because 🔴 is on a hot streak.
The other group of gamblers will say ⚫, because ⚫ is now due. It has been red so many times in a row, so probably the chances are higher it will hit black.
What is true?
The reality is neither is true.
Humans universally look for patterns and meaning in randomness. The Gamblers Fallacy is a prime example of that. Psychologists call this phenomenon Apophenia. Taken to its pathological extreme it is associated with schizophrenia.
Here, observe your brain doing it:
The Goblin House plant.
Baby’s feet for the win. Shame on you for thinking otherwise.
Confirmation bias is another related phenomenon: checking if a certain assumption is right, emphasis is given on proving it to be true, rather than false. Have seen this more than ever since covid started… (from both sides).
Back to roulette
Each spin of the roulette wheel is an independent event. One doesn’t affect the outcome of the other. If you’ve been tricked by this in the past, that’s not your fault. It’s literally how you’re hardwired. And it doesn’t help that casino’s actively play into this. Have you ever observed how there are these electronic counting boards next to roulette tables keeping track of which numbers and black/red happened recently?
So what about Charts and Technical Analysis (TA)?
Are we all just delusional gamblers drawing patterns on a screen?
Liquidity for the Market Makers?
This is where it gets tricky…
But if you truly get this and incorporate this truth so that your actions reflect this belief, you’ll be ahead of 95% of other traders. At the end of the day we’re all just monkeys staring at a screen, buying when price goes up and selling when it goes down. If we overcome our emotions, or rather keep our emotions out of it and only look at it from a probabilities perspective, it will get boring. Your dopamine system might not be firing anymore. But as a reward you’ll get a steadily rising equity curve.
Alright, so what’s the special sauce?
At a fundamental level, the market is a series of up and down tics that form patterns. Technical Analysis (with all its trendlines, indicators, you name it) defines these patterns as edges.
Any particular pattern is just an indication there’s a higher probability that the market will move in one direction over the other.
The Big Paradox here is that “pattern” implies consistency, or a consistent outcome. But the reality is that each pattern is a unique occurrence.
They may look (or measure) exactly the same from one occurrence to the next, but the similarities are only on the surface. The underlying force behind each pattern is market participants, and the participants who contribute to the formation of one pattern are always different from the traders who contribute to the next; so the outcome of each pattern is random relative to one another.
So you need to have good risk management and create consistency. This required that you completely accept (and thus are congruent in your actions) that trading isn’t about hoping, wondering, or gathering evidence one way or the other to determine if the next trade is going to work.
Gathering “other” evidence makes about as much sense as trying to determine whether the next go on the roulette wheel will give you red or black, after the last 10 rounds came back red. Regardless of what evidence you find to support black coming up, there is still a 50-percent chance that the next flip will come up red. By the same token, regardless of how much evidence you gather to support acting or not acting on a trade, it still only takes one trader somewhere in the world to negate the validity of any, if not all, of your evidence. The point is why bother! If the market is offering you a legitimate edge, determine the risk and take the trade.
Fin.
Oh, and none of this is investment advice. I’m not a professional and mostly am stumbling my way through the world the same way I was at age 13. Just documenting and sharing some thoughts and none of it is a science. I, like everyone else, am simply an aged baby walking blindfolded into a forest, startled by my own humanity.