Beginner’s Luck – the Bull Market Moneymaker

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  • Beginner’s luck netted many amateur traders small fortunes in 2017
  • There are theories why beginners can make more money than experienced traders
  • Adopting a ‘beginner’s luck’ attitude in a bull market can be hard but profitable

Beginner’s luck has been around ever since the first games involving an element of chance were devised. The idea that a newcomer to any pursuit can perform better than an experienced individual may seem counter intuitive, but in the world of trading it is certainly possible, as the cryptocurrency bull market of 2017 illustrated. What is the science behind beginner’s luck, and why is it a useful psychology to adopt in a bull market?

Humans (and Sparrows) Are Low Risk Creatures

In 2013 a group of students at an Israeli university divided an area of land into two sides, both of which had holes filled with food – one side had more holes with less food in each hole, while the other had fewer holes but each hole contained more food. The few-holes side was considered the ‘high-risk’ side and the many-holes side was considered the ‘low risk’ side.

The team then released 30 sparrows and watched the behaviour. The sparrows initially moved round the holes at random, some hitting the food-heavy holes, some not. After this random choice, a clear pattern emerged – the sparrows began to move to the low risk area until, by the end of the experiment, only 7 remained on the high-risk side.

This shows that, over time, risky behaviour tends to be eliminated in favour of a more ‘sure bet’, despite the fact that the gains may be reduced. Only with experience does this happen, usually the experience of a big gamble not paying off, leading us to reduce our risk.

Experienced traders nearly always take the low-risk bet where the chances of success are higher but the prize is smaller. Novices on the other hand don’t necessarily know the odds of their trade coming off, and as a result they don’t sell when the experienced trader does – instead, as we saw in 2017, they hold for a 100x or 1,000x gain, much to the chagrin of the experienced trader.

Flow Theory Explains Beginner’s Luck

A theory that can help explain the attitude of new traders is called ‘flow theory’. Flow theory states that beginners to a chance-based pursuit find success more regularly because, unlike old hands, they don’t take strategies and plans into account, they just go with the flow. In contrast, professional traders are always considering their next move, checking charts for bullish or bearish divergences, keeping an eye on sentiment, and a dozen other things that factor into their decision making.

These considerations are supposed to increase a trader’s fortunes, but sometimes they can lead to the trader’s judgement being clouded and closing a deal at the wrong point. A less experienced trader however is not encumbered by these worries and simply continues to hold in blissful ignorance, watching as it continues to rise inexorably.

The Toll of a Bear Market

These theories and examples of beginner’s luck show how being experienced in the trading world can, under certain conditions, be more of a hindrance than a help. Of course, in anything other than a 2017-style bull run the professional trader will almost always win out over the novice, but it shows the advantage of having a newcomer’s approach in a raging bull market.

Going through a full market cycle strips almost every trader of this naivety and scatter-gun scatter-gun approach fairly quickly. If they are still in the game when the new market cycle arrives, the experience can have a profound effect on their psychology – they can be more skeptical of a market recovery and can therefore miss out on gains that a virgin trader is ignorant of, the latter throwing money around left right and center and making bank while the now experienced trader scoffs and proclaims it to be a bull trap.

In the right conditions, beginner’s luck can be a huge advantage, but it can be a real challenge for a bear-hardened trader to open themselves up to the kind of free-wheeling mentality that making the most of a silly season requires. Recognizing when the market is in this silly season phase, throwing off the bear shackles and recapturing a little of that beginner’s luck outlook however can be very hard, especially after a chastening experience like 2017-2020. It can though be the difference between making gains and making life-changing gains.

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