The market is uncertain, but many investors tend to pursue certainty in the market, trying to seize some rules and opportunities that can be accurately grasped, and pursue the certainty of opportunities in the extremely risky secondary market.
This phenomenon is actually called "risk aversion", a stage that investors or traders will be exposed to. After all, everyone who comes to the secondary market is here to make money. Many people have risk aversion and are instinctively afraid of losing their principal. This is normal~
But in the actual trading process, I found that this risk aversion will change depending on the status of your position:
When your account is profitable, this risk aversion will make you want to lock in profits as soon as possible, which will lead to selling prematurely when the market is good (selling at high prices);
When your account is losing money, you will always want to turn losses into profits and choose to continue to hold on to take risks. As a result, the principal of your position will continue to decline, resulting in repeated losses (being trapped);
"Quit while you're ahead" and "Just protect your capital" are actually manifestations of risk aversion, and are also enemies of the "big cycle".
This inconsistency in the treatment of financial risks can easily make you miss out on big market trends and get trapped in a deep decline, which is why there is always a saying in the market that "investment requires going against human nature."
1. The rise and fall characteristics of the crypto market 😆
Before we extend our understanding to solve the difficult problem of "risk aversion", we need to first have a brief understanding of the ups and downs of this market.
In the total market value change chart given above, we can intuitively see the rise and fall style and strength of the crypto industry. Slow rise and sharp fall can be said to be the main theme of the secondary market. However, if the cycle is extended, this law will have a completely different performance in the bull-bear transition.
Unlike the U.S. stock market, whose previous market conditions could be described as a long and slow bull market, the bull market in the crypto industry often rises from a low point to a high point in a short period of time. Short bull and long bear markets are more of the main theme of the crypto market cycle.
The above picture is a daily K-line chart taken by Dabing#BTC 20 years later, which reflects the general changes in the bull-bear cycle over the years. From the perspective of the market tilt, this short rise often makes investors have no time to intervene in the market, and some investors who are a little slow to react, after chasing highs, ignore the risks and the short-term market sentiment, resulting in no timely stop loss, and carry the funds to the next round of the market.
How to adapt to the short-term ups and downs style and the long-term cyclical characteristics is a problem that every investor needs to overcome.
2. Risk Preference Consistency
First, from the perspective of risk preference: in terms of risk perception of money, investors often divide different risk preferences for different fund shares based on the different sources of money. For example, the money earned from opening a contract overnight will be lost much faster than the money earned from holding a spot position for a month.
This kind of short-term, muddled money often makes you ignore the risks behind it, thinking that it is earned anyway, even if you lose it in the end, it doesn’t matter. The habit of short-term funds will also affect the long-term layout. This habit of short-term risk preference will make you ignore the risks behind opportunities/hot spots.
This is also the reason why the money earned in the bull market can easily be lost in excess in the bear market. On the surface, it ignores the transformation of the cycle, but in essence it ignores the control of financial risks and has no correct understanding of the risks of the money earned in the bull market.
3. Use future expectations as a buying and selling standard ⚖️
"Ignoring risks" and "risk aversion" are both taboos in long-term and short-term fund operations. They are the main reasons for deep traps and selling out. How to avoid these two psychological reasons in operations is the key issue to be solved in this chapter. The following are two strategic suggestions:
Ignore the previous value reference point;
Forget the cost price;
Ignore the previous value reference point. In other words, in actual operations, do not use the short-term "previous high", "previous low" or "historical high/historical low" as the basis for buying and selling; and many people will make the mistake of using the purchase cost price as the basis for whether to buy or sell, and think that floating profits can continue to be held, and floating losses can also be held;
The correct basis for buying and selling should be to judge the future of the target held. This involves some industry research content, such as the fundamentals of the target, long-term narrative factors, community temperament, and team temperament. These are best judged through your own cognition rather than hearsay.
If after analysis, you think that the stock is expected to rise, then you can hold on to it, even if you have made a good profit. If the stock is expected to fall, then you must resolutely cut your position, even if you are already in a loss.
Having the courage to face losses is a difficult hurdle in investment, but it is also a safety valve to avoid being trapped. Only by taking the future expectations of the target as a basis for buying and selling can it be easier to survive in the market for a long time, which is why it is said that investment is the realization of cognition.