Selling when others are buying in crypto, buying when others are selling

In the second part of our series on cognitive biases in crypto, we will discuss Overconfidence Bias, False Uniqueness Effect, and False Consensus Effect. As many in the investment and trading field know, there is a commonly used saying: ‘Buy when everyone is selling, sell when everyone is buying.’ Although this statement may seem logical and easy in theory, it is important to talk about how people misunderstand this saying due to certain cognitive biases they possess. People claim that they can think ‘differently’ and separate themselves from the crowd due to these cognitive biases. Now, let’s take a look at some of the cognitive biases that lead to this mindset:

Overconfidence Bias

Overconfidence is the tendency for individuals to have more confidence in their own thoughts, abilities, and potential than is objectively reasonable. Almost everyone tends to have excessive confidence and believes they are above average. For example, a study found that a large majority of university students believed they were in the top 30%, which is mathematically impossible as you would expect. The downside of this bias is that individuals believe their decisions are correct, their choices are better, and that they will ultimately be proven right. Consequently, it leads individuals to make mistakes and incur losses by staying in incorrect transactions for longer than necessary.

Many of us have the bias of thinking that we deserve money the most, that our potential is much better than others, that we can quickly grasp the trading and investment business and understand the market better than others. Especially after the success in the first trades, these ideas are further strengthened, but then the realities of the market hit us one by one. Suddenly making a lot of money or catching profitable trades one after another can make people take more risks, become greedy, increase their self-confidence, and think of themselves as a ‘market maker’.

I would like to talk about a personal experience of overconfidence bias. When I was first introduced to “Price Action”, instead of paper-trading, I was getting 5x trades with a symbolic amount of $20 (I can explain the reasons for this in another article). Of the first 21 trades I bought, 19 resulted in a win and 2 resulted in a stop (I didn’t set a stop-loss in any of them, and I made 2 stops manually). I had brought the margin of $200 to $450, of course, my confidence increased a lot and I started to think that I could smell the market. Before starting all these transactions, I prepared a checklist for myself, did not disrupt my trading diary during the transactions (it should definitely be kept) and stayed true to my principles. After closing the first month with a gain of more than 2x, I reduced my $20 entry figure to $100 out of greed (I reduced the balance from 20 trades to four trades). I felt that I was starting to catch the entry points like a sniper, so to speak, in the pairs I traded. After this series of 21 trades, the PEPE short pose I entered not only did not go as I expected, putting me in difficulty, but also caused me to lose my $250 gain in a single trade. I continued to add to my $100 trade as the PEPE went up (although I should have set my stop beforehand, but I got caught up in the optimism bias and thought it was short-hunting). At the end of the trade, not only did I lose money, but I also lost my 19-trade winning streak, my self-confidence, and a month’s worth of time.

You may have experienced a similar story, as I have seen similar stories in the people I mentor in terms of psychology and risk management, so I wanted to dedicate a separate section to this. As a personal observation, many new users enter transactions with great attention after training, starting with high profit rates, but after a while, the time and attention they allocate to designing transactions are inversely proportional to the confidence they have developed; on the other hand, the amount of risk and the money they invest increase. Therefore, excessive confidence leads individuals to violate their principles and, like me, lose all their profits, efforts, and time in a single transaction. As time passes, your transaction-taking muscles develop, and these processes become automated for you, but your attention threshold also decreases similarly. Therefore, it is crucial for you to pay attention to each transaction as you did in your first transactions.

Fallacy of false uniqueness

The illusion that no one else possesses the qualities, abilities, thoughts that we have, that is, that they are not like us. Many people resort to sayings such as ‘Go against the market trend’, ‘Sell when everyone expects an increase; buy when everyone expects a decrease’, but in reality, the person themselves are also part of everyone. Parameters like fear and greed index beautifully summarize this situation. People who fall into this illusion approach from a place of arrogance, thinking that they can think differently from the market with excessive self-confidence, act with reverse psychology, and believe that they are smarter and better than everyone else. The people who truly possess reverse psychology are the ones who can buy when the market is at its lowest and sell when it is at its highest.

The false consensus effect

In the opposite of the false uniqueness fallacy, a person under the influence of false consensus believes that others have the same emotions, thoughts, and beliefs as themselves. In other words, people sometimes exaggerate the similarities between their own thought structures and the evaluation of others’ thought structures and behaviors. Similarly, in financial markets, individuals believe that when they expect a rise, the big players in the market also think the same, and when they expect a decline, they also believe that they expect a decline. There are several reasons for this: First of all, if we have a belief about the market, we have likely been influenced by others, and the people who influence us generally have similar frames to ours. Therefore, we feel as if everyone thinks like this because we are with people who present us with what we want to hear or see, and these are repeated constantly. Secondly, finding common ground with others makes us feel that our decision is correct. Thirdly, we have a self-centered perspective, and we think that people also think like us in order not to doubt the correctness of the decisions we have made because this is what makes sense! Finally, we can fall into the confirmation bias, which we will discuss in the next section.

To break free from this existing influence, we should create different scenarios by looking at it from different perspectives before undertaking any action. If you only look at it from a rise or fall perspective, you are likely to fall into the trap of wrong consensus at times. Thinking about scenarios that contradict your own thoughts will at least provide you with a backup plan. Also, you should pay attention to whether the people you follow generally have similar thought structures. If others give you only what you want to hear or see, it will not add anything extra to you. As a social entity, we are quite susceptible to being influenced by others, especially in financial markets, where everyone thinking the same thing as us does not necessarily mean that it is correct.

This article does not contain investment advice or recommendation. Every investment and trading transaction carries risk, and readers should conduct their own research when making decisions.