What is essential is invisible to the eye, wrote Antoine de Saint-Exupéry in "The Little Prince," which interpreted for trading would mean that the vast majority are so blind searching for treasures that shine that they could not see a muddied diamond because they would immediately discard it, thus discarding a greater wealth.
Richard Dennis, an old-school trader, said something similar about trading, "If I published my strategy in the newspaper, it wouldn't work. Most people wouldn't follow the rules of the strategy and, if they did, they wouldn't do it long enough for it to work."
If you are a trader looking to start detecting those little gems that don't look like such but whose final results could change your trading forever, keep reading:
Introduction to Game Theory
Game theory is a fundamental mathematical framework that analyzes situations where outcomes depend on the actions of multiple decision-makers. In the context of cryptocurrency trading, this theory provides invaluable tools for understanding and predicting market behavior. Let's see how we can apply it:
Why is it Important in Trading?
Game theory is particularly relevant in cryptocurrency trading for several reasons:
1. Strategic Decision Making:
It allows traders to anticipate and respond to the behaviors of other market participants, such as exchanges, whales, and bots, with data analysis and trends.
I believed for a long time that trading was about knowing how to place an order on an exchange or broker and guessing the price direction (almost praying) for it to give me the profit I needed. This false belief led me down paths where I thought trading was for a caste of privileged, intelligent, scholarly people who knew something I could not grasp, and I almost gave up.
2. Portfolio Optimization: Helps to understand how different assets interact under various market conditions, allowing for better risk management.
How game theory looks applied to your day-to-day trading:
Analyze Correlation: Evaluate how Bitcoin behaves in relation to Ethereum and other altcoins. If Bitcoin tends to rise when Ethereum falls, a diversification strategy could be considered.
Evaluate Volatility: Observe Bitcoin's volatility compared to other cryptocurrencies, to adjust risk (important).
Monitor Sentiment: Use sentiment analysis tools to anticipate market movements.
Forecast Behaviors: Consider how other traders might react to an important announcement, such as cryptocurrency regulation. This could influence the decision to buy or sell before the market reacts.
Implement Hedges: If you anticipate high volatility, you could use options to protect your position in Bitcoin, ensuring you do not suffer significant losses.
3. Prediction of Behaviors: Facilitates anticipation of market movements based on collective behavior. It is fundamental because it helps you understand when you can enter the market and when it's better to take a coffee break.
I know it sounds illusory and that concepts are often so abstract that they do not allow us to understand how we can use them simply in our day-to-day. I know this because that is the daily work, which does not mean we won't make mistakes, but it helps to avoid being impulsive and not leave anything to your own discretion.
I have read how many traders entered trades with no risk management, not knowing the volatility of an asset at certain times or always, setting crazy profit targets, all based on intuition. I did too.
This does not have to continue this way if you manage to understand what things you should implement and what is superfluous in your trading.
4. Practical Example in Cryptocurrency Trading:
Whale Movements: Large investors or "whales" can significantly influence market prices.
Game theory helps us identify patterns of whale behavior, in other words, how large investors who hold significant amounts of an asset can influence market prices.
1. Strategic Interaction
Game theory focuses on the interaction between multiple players making strategic decisions. In the case of whales, their behavior is not isolated; it is influenced by the actions of other market participants. For example, if a whale decides to sell a large amount of cryptocurrency, this can cause a price drop, which in turn may lead other traders to sell as well, creating a domino effect.
2. Anticipation of Movements
You could use game theory to anticipate how whales might eventually react to certain market events. For example, if an important announcement is expected that could affect the price of a cryptocurrency, it can be anticipated that whales will adjust their positions based on the available information.
Important: This involves observing historical patterns of behavior and how whales have reacted in similar situations.
3. Buy and Sell Signals
Whales often send signals to the market through their actions. A trader can use game theory to interpret these signals. For example, if a whale starts accumulating an asset (higher volume of the asset), this can be seen as a signal that the price could increase.
It would be appropriate to evaluate the asset based on data, such as historical volatility; good risk management helps you adjust your strategy based on these signals.
Conclusion
There is a lot behind each trade that someone decides to put in the market, you decide whether these trades are intuitive (because you thought the asset would spike or fall) or counterintuitive and based on something more than a hunch.
Beyond coming to fill your head with theories, what I want to convey here is that there is much more at stake than you imagine, and it is no coincidence that in every trade you lose more than you gain. It is about the approach.
And a way in which you can really start to play the game, not by impulse or mere hunches, is to understand what is behind it.
Trading, like any other profession or business, must be based on objective data to be profitable. For example, a bread sales business must manage its variables such as production costs, sales revenue, profit margins, cash flow, etc.
It is no different here; don't think that because it is relatively easy to place an order, it will also be easy to stay in the game always, even if you don't always win.
It depends on many factors, such as the fact that this is not a guessing game, but rather a set of rules from that and other games that allow you to keep hitting and taking advantage of opportunities when they arise.
By incorporating these principles into your trading strategy, you can improve your understanding of market dynamics and develop a more optimal strategy tailored to the markets, as well as understand that while you play at placing orders and losing money for no reason, others are taking advantage of ignorance by understanding that this is how most act.
The application of game theory in trading not only changes our perspective on how to approach the market but also provides us with concrete tools to improve our trading decisions.
"Rule No. 1: Look at prices instead of relying on information from commentators on (social media) to make your trading decisions." Richard Dennis.
It is a time for reading.
#whalemovement #bitcoin
