This newsletter is sponsored by Blockpit, the platform that makes my tax life as a crypto trader easier.My trades were automatically imported after setup and displayed nicely. The tax report was quick and easy to create in the app. I can also track the performance of my assets in the app. With Blockpit, I no longer have to worry about realizing profits or losses in time.SIGN UP HERE and get a 10% discount! Seriously, it's tax time!Let's once again talk about what a good trade and a bad trade are... A good trade should be defined as one where a trader planned their trade, traded their plan and managed their risk — those are all elements they can control. It is NOT defined by the outcome. A bad trade, on the other hand, is where a trader fails to follow their rules and executes trades against their better judgment. This is always going to be a bad trade even if it happens to be profitable. Now let's talk about Random Reinforcement, which is a rarely discussed reason that many traders fail.As defined by Investopedia, “Random Reinforcement” is:Using arbitrary events to qualify (or disqualify) a hypothesis or idea; attributing skill or lack of skill to an outcome that is unsystematic in nature; finding support for positive or negative behaviors from outcomes that are inconsistent in nature—like the financial markets. The market has a tendency to reward bad habits, while concurrently punishing positive behaviors, especially with a small sample set. Let’s take a theoretical example to display this principal.Bob wants to leave his job and become a crypto trader. He sets aside some starting capital, follows the markets and the “big names” on twitter. He sees them talking about an altcoin, opens the chart and sees that price is rising fast. He buys, goes to take a shower, returns and sells for a quick profit. He does this again before lunch and strings together a few successful trades. Bob starts to feel confident that he is a talented trader. So, what is the problem? Bob is trading without a system or a plan and is being fooled into believing that a successful outcome on a few random trades is indicative of likely success moving forward. The market has rewarded his bad behavior. We know how this story ends — Bob continues to make impulsive trades and eventually loses his capital. There is a flip side to this coin. Let’s say that Bob learns his lesson and spends months developing a trading plan, complete with risk management, proper portfolio allocations and trading rules.He identifies a trading opportunity that fits, takes the perfect entry and… stops out of his trade. He tries again. And again. He loses 7 times in a row. The market is punishing Bob for his good behavior. Bob starts to doubt his system and takes a high-risk trade that violates his system — and is successful. To his surprise, he tries this a second time and also makes money. Bob is now back to square one, trading without a system because the market has rewarded his bad behavior and convinced him his old unsystematic method was profitable. Through random reinforcement, the market has re-conditioned the way Bob approaches trading by distracting him away from his trading plan. He has allowed himself to be manipulated into an impulsive, high risk, revenge-based trading approach. This may work for a short run, but it's a set up that always leads to failure.Even if Bob makes money in the latter scenario, he has taken a BAD TRADE.The bottom line? Judge yourself by your process, not the results - you cannot control what price does after you take a trade. If you remain ironclad in executing your system, over a long period of time, you will be profitable. This means if you’re just starting risk only 1-2% per trade in order to leave room for failure until you find your edge.If you do desire to get this email more often, you can join the paid version!The paid version is only $15 a month and goes out every single weekday. It is just like the issue you are currently reading! Composing this newsletter is how I spend the majority of my time, and I take the fact that my members are paying me very seriously. I would love to have you become a more frequent part of this community.https://www.getrevue.co/profile/TheWolfDen/membersIf you cannot pay with a credit card, please respond to this email and we can get you setup with crypto. If you do want to pay with crypto, I can offer 7 months for the price of 6, or 14 months for the price of 12 for the inconvenience!In This Issue:Bitcoin Thoughts And AnalysisAltcoin ChartsChart RequestsIf Your Trade Doesn’t Wreck You, The IRS Will For SureElitium Q & A - Everything You Need To KnowBlockworks - My New Source For News And InsightJack Dorsey Praises Bitcoin And Defends Trump BanBrian Brooks Is Stepping Down From OCCeToro Is Running Out Of BitcoinLivestream With Income Sharks At 8 PM ESTPhemex X League of Traders New Year's CompetitionThe Wolf Of All Streets Podcast Ft. Edan YagoMy Recommended Platforms And Tools
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The Wolf Den #156 - Random Reinforcement
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This newsletter is sponsored by Blockpit, the platform that makes my tax life as a crypto trader easier.My trades were automatically imported after setup and displayed nicely. The tax report was quick and easy to create in the app. I can also track the performance of my assets in the app. With Blockpit, I no longer have to worry about realizing profits or losses in time.SIGN UP HERE and get a 10% discount! Seriously, it's tax time!Let's once again talk about what a good trade and a bad trade are... A good trade should be defined as one where a trader planned their trade, traded their plan and managed their risk — those are all elements they can control. It is NOT defined by the outcome. A bad trade, on the other hand, is where a trader fails to follow their rules and executes trades against their better judgment. This is always going to be a bad trade even if it happens to be profitable. Now let's talk about Random Reinforcement, which is a rarely discussed reason that many traders fail.As defined by Investopedia, “Random Reinforcement” is:Using arbitrary events to qualify (or disqualify) a hypothesis or idea; attributing skill or lack of skill to an outcome that is unsystematic in nature; finding support for positive or negative behaviors from outcomes that are inconsistent in nature—like the financial markets. The market has a tendency to reward bad habits, while concurrently punishing positive behaviors, especially with a small sample set. Let’s take a theoretical example to display this principal.Bob wants to leave his job and become a crypto trader. He sets aside some starting capital, follows the markets and the “big names” on twitter. He sees them talking about an altcoin, opens the chart and sees that price is rising fast. He buys, goes to take a shower, returns and sells for a quick profit. He does this again before lunch and strings together a few successful trades. Bob starts to feel confident that he is a talented trader. So, what is the problem? Bob is trading without a system or a plan and is being fooled into believing that a successful outcome on a few random trades is indicative of likely success moving forward. The market has rewarded his bad behavior. We know how this story ends — Bob continues to make impulsive trades and eventually loses his capital. There is a flip side to this coin. Let’s say that Bob learns his lesson and spends months developing a trading plan, complete with risk management, proper portfolio allocations and trading rules.He identifies a trading opportunity that fits, takes the perfect entry and… stops out of his trade. He tries again. And again. He loses 7 times in a row. The market is punishing Bob for his good behavior. Bob starts to doubt his system and takes a high-risk trade that violates his system — and is successful. To his surprise, he tries this a second time and also makes money. Bob is now back to square one, trading without a system because the market has rewarded his bad behavior and convinced him his old unsystematic method was profitable. Through random reinforcement, the market has re-conditioned the way Bob approaches trading by distracting him away from his trading plan. He has allowed himself to be manipulated into an impulsive, high risk, revenge-based trading approach. This may work for a short run, but it's a set up that always leads to failure.Even if Bob makes money in the latter scenario, he has taken a BAD TRADE.The bottom line? Judge yourself by your process, not the results - you cannot control what price does after you take a trade. If you remain ironclad in executing your system, over a long period of time, you will be profitable. This means if you’re just starting risk only 1-2% per trade in order to leave room for failure until you find your edge.If you do desire to get this email more often, you can join the paid version!The paid version is only $15 a month and goes out every single weekday. It is just like the issue you are currently reading! Composing this newsletter is how I spend the majority of my time, and I take the fact that my members are paying me very seriously. I would love to have you become a more frequent part of this community.https://www.getrevue.co/profile/TheWolfDen/membersIf you cannot pay with a credit card, please respond to this email and we can get you setup with crypto. If you do want to pay with crypto, I can offer 7 months for the price of 6, or 14 months for the price of 12 for the inconvenience!In This Issue:Bitcoin Thoughts And AnalysisAltcoin ChartsChart RequestsIf Your Trade Doesn’t Wreck You, The IRS Will For SureElitium Q & A - Everything You Need To KnowBlockworks - My New Source For News And InsightJack Dorsey Praises Bitcoin And Defends Trump BanBrian Brooks Is Stepping Down From OCCeToro Is Running Out Of BitcoinLivestream With Income Sharks At 8 PM ESTPhemex X League of Traders New Year's CompetitionThe Wolf Of All Streets Podcast Ft. Edan YagoMy Recommended Platforms And Tools