Crypto Traders Are Looking for Alpha in the Wrong Places, According to Top Strategist

A popular crypto analyst says many traders are trying to gain an edge in the digital asset market via the wrong methods.

The pseudonymous crypto trader Altcoin Psycho tells his 426,600 Twitter followers that many people buy into the “illusion of alpha.”

“Arguably the biggest way I’ve seen good traders burn out is the never-ending search for a unique edge in the market. But what if I told you that 95% of the time, alpha is an illusion. And furthermore, most traders look for it in the wrong places.”

Altcoin Psycho says real “alpha” relies on things like arbitrage, miner extractable value (MEV), mempool bots and opportunities to exploit inefficient market-makers.

Illusionary alpha, by contrast, relies on things like order flow, technical analysis, footprint, and indicators, according to the analyst, who argues that 95% of traders utilize this second group of tools.

Explains Altcoin Psycho,

“In trading, there are two orders of thinking.

First order: How do I interpret the info the market is presenting? Second: How will others interpret the info the market is presenting? Most traders look for alpha within 1st order, while it’s almost always actually found in 2nd order.

To further elaborate, traders will spend years perfecting order flow starts, the right indicator combo, the best [technical analysis] style, or a mix of the above. I also fell victim to this. In other words, I looked for the best way to personally interpret market info, AKA First order thinking.”

The analyst notes that it wasn’t until he switched to “second-order thinking” that his profitability surged.

“So what does this actually mean in practice? The first (and most important part) is to swallow your pride. To understand second-order thinking, you need to first come to terms that a lot of this shit is a self-fulfilling prophecy and that you aren’t actually a genius.

Price doesn’t bounce off your trendline because you’re good at [technical analysis], price bounced because enough players were looking at the same level. Smart money knows this, which is why they use common traps like stop-loss hunts or support and resistance fakeouts to bait retail.

While this all may sound obvious, so many traders spin their wheels for years asking the question: ‘How do I better interpret what the market is showing?’ When the better question to ask is ‘How do I improve how I think *others* will interpret what the market is showing?'”

Altcoin Psycho says he no longer puts weight on his own opinion of a project when it comes time to analyze the merits of an investment. Rather, he just evaluates what the market will think of that project.

“Most of my biggest wins in trading came after I started applying this mental model. It can feel very counter-intuitive to buy things you hate and pass on things you love. It takes time to refine. But that’s why I say it requires a bit of an ego death.”

When it comes to trading, especially crypto…

narrative > reality

— Psycho (@AltcoinPsycho) March 29, 2022

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