Buy Winners, Not Losers
Buying winners (stocks, crypto) seems risky, but buying or adding to losers is much riskier. In markets, strength begets strength.
Many traders, myself included, suffer from a mental fallacy of wanting to buy the laggards, the losers, the slow-moving instruments. We somehow believe they have to catch up to the winners and that there is an edge in not jumping onto the leading coins or stocks. It makes us feel smarter to buy those instruments no one is looking at.
Do you suffer from the same mental fallacy?
First, some facts:
There is no rule to say that lagging coins or stocks have to make it all up and run harder than the winning, leasing ones. Just because some do, it doesn’t mean all do.
When buying, you want to buy strength, not weakness. When selling, you want to sell weakness.
If some coin or stock has been in an uptrend and looks strong, the odds are good that it will keep going up. Strength begets strength.
There is no limit to how high something can go in a bull market, often surprising everyone.
Buying highs feels risky but is often safer and more profitable than buying lows (on significant dips, bear trends, lagging instruments).
The analogy of racing horses
I found this analogy helpful in shifting my perspective, even though it is faulty and has nothing to do with trading.
Imagine that you’re picking your team of racing horses for a long race on the track. Your goal is to win the race—it’s teams vs. teams. You have ten horses. Some are leading the race, some are caught in the middle, and some are lagging, limping, sick, and tired.
You can replace your horses at any point during the race. The number of changes you make is unlimited, but they cost you a little (fees).
Would you buy more sick, slow, and tired horses?
Or would you want to buy faster, more powerful, leading-the-pact sort of stallions?
You’d want to replace the slow horses with fast ones, right?
If you want to win, you buy winners!
It seems so simple when you look at it from this perspective, doesn’t it? Then why is it so hard to do the same with cryptocurrencies or stocks?
I’ve always had difficulty buying tokens after they pumped high. It felt that if I bought them, a door would open under my feet, and I would fall straight down into a dark well. Make no mistake; that is always a real possibility.
But here’s the thing: the odds are bigger that that door into infinite losses will open up when you buy a token no one wants. How do we know no one wants it? Because it’s lagging, the price action looks horrible, and there is no volume or large orders on the bid side (buying).
The wrong way - losers buy losers; losers add to losers
This was my instinctual approach. When I saw something significantly drop in price, I wanted to buy the poor sucker and help him get back up. I always chased the slow-moving coins and avoided buying the big winners. It just made more sense to buy what hasn’t “pumped” yet, hoping it would overperform the leading coins.
While it did happen on occasion, most of the time, weakness begets more weakness. It took those tokens longer to get back up after a deep market-wide correction, and many of them never made a real progression.
I also added to losers. When the price of something I owned kept tanking, I bought more. This is the one thing I would advise against. If one token, coin, or stock is tanking, there might be good reasons for it. Something you’re not aware of. Danger! Leave them alone, or better yet, cut them loose. If you want to buy something but healthy instruments, those that are showing strength!
I endured tens of thousands of dollars in losses before I learned this rule:
Never add to losers; add only to winners!
The right way - winners buy winners; winners add to winners
I am a chartist focused on technical analysis. I look at price charts and ignore most other information if it can even be called that. I don’t do background checks on my instruments, and I don’t waste time reading hundreds of forums, as I believe that all that information is displayed in the chart.
If some insider with money knows something is going up, the price will have turned up, as he’ll be buying everything he can. If there is bad news, the chart will show it, as there will be visible selling.
I stand by my conviction that in the crypto markets, fundaments are a made-up word, and they are mostly scams, with the exceptions of honest scams (joke coins) and Bitcoin.
How, then, can I choose what to buy?
I look for strength.
I look for massive volume.
I look for bullish price action.
Anyway, this was a little reminder for myself and hopefully for some of you to buy winners and sell losers, not the other way around. Good luck out there!
Oh, and learn risk management! Don’t give all your hard-earned money back to Mr. Market.
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