Beware Of Unit Bias When Trading

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Hey JessInvestors

As retail investors are at all-time highs with the proliferation of trading apps and cryptocurrency we are seeing more people getting into the space and investing directly. Many new investors do not bother to do research and either subscribe to signal tools, trading groups or they are using the metrics within these trading dashboards or even refer to popular sentiment online.

When it comes to trading, position-sizing, risk evaluation and more, many of it is either unknown or not taken seriously and we can see a lot of emotional trading and herd mentality when it comes to piling into to stocks and cryptocurrency.

One of the most popular biases I come across when speaking to new investors is unit bias and is the reason altcoins often see capital flow into it without reason or rhyme.

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What is unit bias

Unit bias refers to the preference that a single entity (within a reasonable range of sizes) is the appropriate amount to engage, consume, or consider. Since we measure most of our value in the fiat of our local region or dollar unit bias takes on a different aspect in trading.

For example, 1 BTC may seem expensive to most people so instead of buying a couple thousand satoshis, they'll opt for 1 Litecoin instead as an example since its perceived to be far cheaper, or value for money.

Metrics to look at

When sizing an investment especially in cryptocurrency one should not only look at the unit price but also at factors like market cap, circulating supply, order books, slippage & liquidity.

Market cap

The market cap of a coin helps you size how far the market for the specific token can go, yes it may be a few cents, but if the market cap is already at a billion it's going to take a sizeable amount of money to move the price of a coin.

Circulating supply

Circulating supply refers to how many tokens are available for trading and yes your token may be 10 cents but if there are billions or trillions of them floating around it, it's going to take a substantial investment to take coins off the market and the position size you need to take in order to see profits when the market does move.

Order books

Order books are important because you want to see how many people are buying and selling in a certain coin and a certain range, if you have thousands of coins that you need to dump you may need to do it on a different exchange or incrementally as not to put too much-selling pressure and drive the price down as you sell, losing out on potential profits.

Liquidity

Liquidity speaks to how many coins are bought in a certain price range, you also want to look at the spreads on an order book so you can sell into the most favourable exchanges with order books that meet your valuation and have plenty of buy pressure to sell into when you're looking to take profit.

In some cases, having 1 of a certain coin could be better than having 1000 in another coin and vice versa. You will need to evaluate each market and compare them to those in competition to find out where you can score the best value and not just think oh you secured 1 000 000 shit coins on the cheap when you could have had 0.1 BTC instead.

Have your say

What do you good people of HIVE think? How do you look at investing? Do you fall for unit bias? How did it happen? Did it turn out to be a good or bad trade?

So have at it my Jessies! If you don't have something to comment, comment "I am a Jessie."

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4 comments
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very nice, trading is an art which every one master with time. trading demand for patience and skill as you mentioned in your post, not for light-hearted.

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Thanks and yes, it is an art, it's not easy money as many people think and as some like to promote, it takes a lot of information, risk and time to understand where you are leading yourself and not fall for certain common misconceptions

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yeah, i'm pretty bad, i just follow price action... thanks for the tip on BAND, i've been adding in last 2 weeks, wow

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Pleasure, I've also been restaking my earnings and doubling up on the good times pretty sure these returns wont last as the mainnet matures and more nodes come online to compete for blocks

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