According to statistics, 95% of cryptocurrency traders constantly lose money. This is largely due to their emotional state during the trading process.
The two main emotions that affect the psychology of traders are fear and greed. Emotional state can lead a person to adopt wrong investment solutions due to afraid of investing or due to overconfidence. Trading psychology is an extremely important factor as emotions can cause serious losses even in the case of a trader who is an expertise in basic and technical trading analysis.
This short guide will assist you in learning the significance of psychology of trading, find out what problems traders face when trying to manage their emotions, and learn how to gain by emotion-free trade.
How does the psychology of crypto trading work?
The concept of psychology of crypto trading relates to the emotional state of a trader when buying and selling cryptocurrencies. The emotional state affects how a person trades cryptocurrencies.
For example, when the value of a newly launched type of crypto increases, due to greed, a trader may be tempted to join the wave of hype and buy coins. On the other hand, it can also be tempting to prematurely exit the market at a time when one should just wait for the price dynamics to change and make more profits.
Psychological issues faced by crypto traders
Before embarking on crypto trading, it is worth understanding what psychological problems you may face in the role of a crypto trader.
Emotions associated with losing money
No one likes to lose. Whenever it happens, failure is accompanied by an emotional storm, because of which the trader is in danger of adopting wrong solutions.
Against the backdrop of losing, a trader may be tempted to «outsmart» the stock market by participating in more deals, even in an unbalanced emotional state. When a person makes an investment at the peak of an emotional crisis, there is a high risk of losing.
Emotions on the back of winning
One may ask the question why a win represents a mental danger to the investor. When a deal is successful, it is so encouraging for the market trader that it can make one desperate to participate in new deals. At this point, greed — the desire to get as much as possible — comes into play. In an emotionally unbalanced state, a trader runs the risk of taking actions that could result in the loss of all the money earned.
Hype in social networks
If you are a beginner, there is a chance that you may be influenced by the hype surrounding cryptocurrencies on social media. By trying to trade a questionable cryptocurrency that is being recommended on social media, you risk losing money.
Rumors
Rumors are another problem you can encounter when trading in the cryptocurrency market. When you hear that a certain cryptocurrency will grow, you invest in it, but the expectations may be unfounded.
How not to become a victim of emotions in crypto trading?
To trade profitably without succumbing to the emotions of fear or greed, you need to have a plan of action and follow a number of rules described below.
Establish a trading outline/strategy
A lot of investors don’t have a trading plan or goal when they enter the market. They don’t know how much they want to earn, how they will trade or what strategies to apply. However, a trader needs a solid and comprehensive trading outline to know what they should be doing at any given stage of trading.
Stay disciplined
Success in trading is not limited to creating a trading plan. It is equally important to stick to the rules you set for yourself. For example, if according to the plan you should stop after three or four hours of trade, you need to fulfill this point. Maintaining discipline is an important factor that will allow traders to profit and make no feelings.
Analyze the situation constantly
Among the greatest errors a trader can make is to continue trading even after suffering a loss. In case of a loss, pause trading and analyze the case. Analyzing the situation can give you an idea of where you made a mistake and how you can avoid repeating it in the future.
This approach is useful not only in a situation when you suffer losses. When you make a big profit, you should also hit the stop button, avoiding immediate additional investments. The reason is that whenever you win, emotions may drive you to try to maximize your profits, in which case, as described above, you will risk to lose it all.
Do more practice
Practice makes you an expert in any chosen field of endeavor. Practicing managing your emotions while dealing will enhance your skills as a trader.
Why is unemotional trading important?
There is an opinion that the most important thing a trader should study is basic or tech analysis or the knowledge of how to understand graphs. These things are essential, but the ability to manage your emotions during trading is no less important: it will help you prevent losses and get maximum returns.
Even if a trader is able to carry out technical analysis at an expert level, but is unable to manage his emotions, he runs the risk of incurring large losses. The ability to control emotions has a detrimental effect on trading, and the ability to control them allows you to bring more positivity to trading.