Market Algo or pain trades

I was reading another trading book today and much like watching the dumb money movie the other day, it prompted me to write another post.

So, you may have heard the expression "the market is an Algorithm" whilst this is somewhat true, it's actually more a sequence, Ralph Elliott, Richard Wyckoff and Edward Jones knew this.

In simple terms, the larger operators or what's known as sophisticated money - chase liquidity pools that are often areas Dumb Money have taken entries or placed stops. Now if it was as simple as this, you could simply write an indicator or be on the winning side 100% of the time. Unfortunately, there's a lot more to it!

When I say the smart kids are taking the dinner money of the dumb kids, you need to appreciate the fact that winning whilst playing against retail traders is like putting the Patriots against your local under 12's side. Or like having the New Zealand All Blacks play against an old people's home in Pakistan. (I am not sure if Pakistan even have a 1st team in rugby).

To gain some understanding, you need to appreciate there's such a thing as "pain trading".

A "pain trade" refers to a situation in financial markets where a significant number of investors or traders find themselves on the wrong side of the market, leading to losses or discomfort. In other words, it describes a scenario in which the market moves in a way that causes the most amount of pain or financial losses to the largest number of participants.

For example, if a majority of traders are positioned for a market to go up, a pain trade would be a sharp and unexpected decline in prices, catching those traders off guard and causing them losses. The term reflects the idea that markets often move in ways that inflict the most damage on the greatest number of participants.

Understanding pain trades is important for investors and traders, as it highlights the potential risks of crowded trades and the importance of risk management strategies to mitigate unexpected market movements. Investors and traders often use various indicators, market sentiment analysis, and risk management techniques to try to avoid being caught on the wrong side of a pain trade.

(Thanks ChatGPT for the summary).

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So take a company like Carvana for example...

This type of move happens over and over again - creating cycles (But not always the same).

In this image above you can see it's likely to have swept long stop losses and then rallied hard.


You probably know about the Gamestop Saga.

I wrote a post on that film recently.

I talked about being on the wrong side - I can't get over how someone could be up $500,000 and still go broke? But it's all in the mindset. Liquidity is the name of the game.

How do these things fit together?

Well, Bitcoin is a prime example - retail mindset is "HODL, Buy the Dip, Diamond hands & Lambo" - whilst as a professional trader, it's enjoying your profits and buying/selling at the expense of the dumb money. These moves are shown as the last post, buy momentum.

Here is the summary image from that post.

Since we had a move up - retail seem to think it's up only, they seem to put all the eggs in the hope Blackrock and a halving will make them rich...

I have read articles like this recently.

After watching the Dumb Money film - you know where following the crowd goes.

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Why is this an important lesson?

It's all to do with pain, where is the maximum pain? Retail sentiment would suggest pain comes in the form of little movement, grinding prices in up moves and fast aggressive drops.

Some context from Blackrock themselves: What is Blackrocks Biggest ETF?

So again, let's add a little logic. Where is liquidity sitting?

If and it's a big if - Blackrock get an ETF approved and it's half the size of their biggest ETF to date, let's then assume Retail flood in and match it dollar for dollar. That market cap would still put us roughly at the current ATH, given coins in circulation.

This again just amplifies, why we are simply - NOT READY, YET!!!

The move I didn't want in 2022, looks to be the biggest liquidity grab we are likely to see in the Bitcoin chart.


We are very, very likely still in an A-B move up for the slow pain of coming back to build sustainable momentum.

Have a Happy New Year all!

Stay safe and see you in 2024!


Disclaimer
This idea does not constitute as financial advice. It is for educational purposes only, our principle trader has over 20 years’ experience in stocks, ETF’s, and Forex. Hence each trade setup might have different hold times, entry or exit conditions, and will vary from the post/idea shared here. You can use the information from this post to make your own trading plan for the instrument discussed. Trading carries a risk; a high percentage of retail traders lose money. Please keep this in mind when entering any trade. Stay safe.