Being a cryptocurrency trader is not an easy activity. People cannot handle the pressure. Therefore, most traders cannot foresee obvious traps.
Common Traps for Entry-Level Cryptocurrency Traders
Trading is rather hard work, requiring knowledge, practice, patience, discipline, psychological stability, and the constant pursuit of the trading system.
Why is it not so simple, and why bind yourself with a trading system, plunge into the jungle of technical analysis, keep a journal of operations, learn to manage emotions? The fact is that the market is influenced by many variables, which no trader can take into account in their work. And in order not to drown in the flow of information and get a more or less stable profit, market players create trading systems for themselves.
The latter are sets of rules that are compiled, taking into account the psychological characteristics of the trader and his own risk appetite.
Psychology in trading is extremely important. Even an experienced but overly emotional trader is likely to make annoying and ridiculous mistakes that multiply any trading system by zero. Today, we are going to reveal eight mental traps that face many novice crypto-traders.
The Cryptocurrency Trading Without a Plan – Is the Worst Idea
Trading without a plan means relying on luck. TP helps to eliminate doubts and emotions caused by spontaneous transactions, often leading to losses. It can also serve as a kind of adviser, suggesting which coins are worth paying attention to, and even when and for what amount to open a transaction following the trading strategy.
A good trading plan will give positive results if it is in harmony with the individual characteristics of a person, and not contrary to them. The high-volatility altcoins, which allow you to get high profit in a short time, maybe suitable for risk-prone traders. Those who can not tolerate stressful situations are likely to prefer small deals with the most liquid coins.
Fighting the Mental Traps as a Cryptocurrency Trader
A trader should learn to deal with fear and greed. Feeling of fear prevents you from making the right decisions. Greed, in turn, “helps” make bad decisions.
The “terrible” news in the media, for example, about hacking a large exchange or another rejection of an application for ETF, can scare a trader, prompting him to make an emotional decision. For example, without waiting for confirmation of information or breaking through an outstanding level, an inexperienced player may panic to close a deal or open a position at the wrong time, which is likely to result in losses.
Greed is a serious psychological problem that is most common for novice traders. The desire to get everything from the market to the last Satoshi can lead to devastating losses because of the provisions of the trading system and, accordingly, the rules of risk management are violated.
It happens as in another old saying: Bulls make money, bears make money, pigs get slaughtered.
“Bulls make money, bears make money, and pigs go to slaughter”
Also, novice traders, seeing that the market is “on their side,” often push away the take profit order, trying to increase profits. This often leads to the fact that the goal of the transaction is not achieved since the price does not reach the cherished mark, as luckily unfolds a few points from it.
On the other hand, it is unlikely that people would ultimately trade without greed and fear. After all, without these feelings, there would be no desire to make money. However, a trader can learn to manage these emotions, significantly increasing the effectiveness of the trading system.
One of the most apparent manifestations of Fear and greed is Fear of missing out (FOMO). This is perhaps one of the biggest obstacles to the efficient trading of cryptocurrencies or any other assets.
FOMO-affiliated traders blindly believe that they should emerge as winners from every trade. For them, the loss on the transaction is an out of the ordinary event. Besides, they are convinced that they can very quickly and easily compensate for losses.
Such traders, as a rule, tend to open more deals with large sizes of positions. Naturally, they trade haphazardly, not relying on risk management. Such players must develop a trading plan and responsibly follow it.
Also, many newcomers are prone to the so-called “revenge trading,” which has much in common with FOMO. Such players, after each loss, tend to immediately enter new deals in the hope of recovering as soon as possible.
Another psychological trap for novice traders is overconfidence. Suppose Jason has been trading for several years and his average win rate is 50%. However, the situation on the market suddenly changed dramatically: a protracted flat gave way to a bull run and the trader’s win rate reached 80%.
Jason feels euphoric and is sure that now he is knee-deep sea and he is able to get out of the water dry in any situation. In anticipation of a series of bright victories over the “hamsters”, he decides to deviate somewhat from the postulates of his trading plan. However, instead of profit, he receives losses, because due to neglect of time-tested risk management rules, mathematical expectation acts against Jason.
An excessive self-confidence is a very serious psychological problem, ignoring which can be expensive. If the streak of failures has dragged on, and the deposit volume has noticeably decreased, it is better to take a break and analyze the mistakes.
The main psychological mistakes of the trader are due to greed, fear, despair, or excessive self-confidence. In order to be less exposed to stress and the effects of fleeting emotions, all aspects of the transaction should be worked out according to the trading plan before its opening, and not after.
The strongest survive on the market. In order to survive, you need to improve yourself, gaining new knowledge and experience, which is impossible without error analysis and is necessary to improve the trading system. Following a trading plan can teach a trader to manage his emotions, make him more disciplined.