Beyond drawing lines on charts while conducting analysis, your state of mind and how well you can control it, is a key determining factor for your trading success.
What goes through your mind after opening a trade? Can you go on with your daily activities in full trust of your strategy? or do you just stay in there, warped in anxiety, monitoring your trades every second?
Your control over your emotions is paramount to profit from the crypto market. Unfortunately, many traders hardly get over their emotions; little wonder why 80% of traders lose their capital within the first year of trading. Understanding trading psychology will help ensure you don’t approach the market with too much fear or greed.
What Is Trading Psychology?
Trading psychology investigates the mental state of a trader and conditions that could lead to fear or greed, which in turn influences trading success and profitability.
While on the trading “hot seat,” many traders are faced with real-time situations that require instant decision-making; sometimes, you don’t know whether to “take the money and run,” hold on for more, cut your losses, or have some faith in your analysis and continue holding; all these challenges are broadened state of fear and greed, which are better described below.
Common Emotional Challenges That Cause Fear and Greed
1. The Fear of Losing Money
All our lives, parents, teachers, and the general society have ingrained in us the habit of keeping money safe. “Don’t gamble,” “a bird in hand is worth two in the bush,” “don’t put your cash in the same pocket as other things,” and so on. Hence, this mindset stays with us, consciously or subconsciously.
However, this mentality is counter-productive in crypto trading, as the FEAR of losing will make traders take drastic measures to loss aversion; hence, they are more concerned about avoiding losses than making profits. Eventually, they make emotional decisions, and they begin to record heavy losses.
It is important to be aware and admit that you will always make losses; in fact, you will go on losing streaks; it doesn’t take anything away from your ability as a trader, but the volatile nature of the market may cause the wind to go against your direction. Don’t fret if you are stopped out of a trade; after all, it is said that 20% of trades are responsible for 80% of profits; so. You should manage your risk and stay positive, even in a negative market.
2. Following The Herd
The easiest route to failure as a crypto trader is not having a mind of your own. If you are fond of abandoning your trading strategy for some “fresh news update” that you see on Twitter or Reddit, then you probably are NGMI.
A habit of following the herd without self-confirmation or getting a conviction is an attribute rooted in FEAR; the fear of going against the market or being the odd one out. In the end, abandoning your strategy for some rumors or social media suggestions will only see you lose, as you have followed n advice you are unaware of its source and analysis.
Confidence is good, but overconfidence works similarly to the law of diminishing returns. When a trader has discovered the secrets of beating the market with a few patterns, it is only natural to get confident in one’s abilities; however, when a trader becomes too confident, they are more likely to take unsubstantiated risks due to GREED.
They believe in their strategy and believe they can earn bigger profits; hence, some ignore risk management practices or become too parochial to see obvious market swings. Unfortunately, the market moves in cycles; hence, a winning streak with a single strategy will fade off, and traders who are already carried away with the euphoria of the current streak may fail to realize a shift in the market, leading to terrible losses.
Overconfidence also leads investors to stubbornly refuse to admit a failed strategy, even when a stop loss has been hit; sometimes, they reopen the losing trade in overconfidence of their abilities and reluctance to admit a trading goof with the same speed with which they would have embraced a winning strategy.
4. The LAMBO!
The majority of traders have unrealistic expectations from the crypto market; of course, they have seen many posts on social media with self-acclaimed traders with flashy, luxurious items. Hence, they have a default GREEDY mindset and aren’t easily satisfied with profits. Hence, some traders overleverage and consequently blow up their accounts; some open excessive trades in order to compound profits and end up having too many trades than they can monitor; some traders commit to trades with nearly all or all of their trading capital, risking it all on a single trade, among other practices that counter risk management.
How To Be In Control Of Your Emotions While Trading
1. Be Ready To Lose
As a crypto trader, you will have good and bad days. Some days more wins than losses, and some other days, the opposite. Hence, you must be willing to take your losses gracefully and always prepare for them.
In the bid to create a robust portfolio, don’t be too afraid to lose a few cents, as holding on too much may hurt you. Be patient; success takes time.
2. Set Some Rules
As a crypto trader, you are your own boss; hence, you must set some rules and religiously follow those rules to keep you in check of your emotions.
Your rules may cover the number of trades you want to open daily, the maximum losses you can afford, the maximum profits you should target, the optimal risk-reward ratio to follow, your entry and exit strategies, the markets to trade and not trade, etc.
More than just setting rules, you need to be disciplined and diligently obey the set rules, such that you do not flout your own rules at the sight of a seemingly juicy opportunity.
3. Take Breaks
Burnout is real; although the market is open 24/7, you should take day trading as a job and not engage in it more than your optimal working hours. Of course, if you resumed daily in an office, you wouldn’t work for more than 8 hours, so why spend your entire day monitoring the market? Have a closing time, take breaks, know your productive hours, and ensure that you are always in perfect physical and psychological condition so that you can make the best decisions and not get tempted to gamble.