What is Trading Psychology? And how does this affect your crypto trading?
A trader’s mindset is as critical to their success as their mastery of analytical and research skills. However, many people do not pay attention to these psychological problems rooted in human nature.
It is common for traders to get into trading after some practice without understanding the critical emotions that might get in the way of making consistently profitable decisions. No wonder most day traders lose their capital within a year of trading.
So what is this trading psychology and how does it affect your trades?
What is Trading Psychology?
Trading psychology refers to the emotional and mental state of a trader which affects their trading decisions. It represents a trader’s mindset that influences his trading actions and determines his success.
Your mindset determines how you manage your profits and losses in the crypto market. You should run trading like a business; after all, making decisions based on emotions could be detrimental to business success.
The nature of crypto day trading
Before delving deeper into the psychological issues that affect transactions, we must first understand the nature of cryptocurrencies. Below are some things to know.
1. Round-the-clock opportunity
The crypto market is open 24 hours a day, giving you endless opportunities to earn money. Unlike the forex market, which closes on Fridays, the cryptocurrency market is always open. This allows traders to have more trading flexibility.
2. Volatile market
The market is volatile, resulting in constant price fluctuations. A single crypto token can rise over 100% in a matter of hours and drop again. The price hike could be triggered by shifts in sentiment resulting from celebrity endorsements or social media comments.
Day trading often forces traders to think quickly and make quick decisions. They often enter and exit trades at different intervals and on short notice.
The future value of a cryptocurrency depends on whether investors believe in a coin or not. Sometimes they also change based on influencers’ comments and activities on social media.
There have been instances where comments on platforms like Twitter and Reddit have affected the price of certain tokens. This gives it elements of randomness and chance.
4. Related to Bitcoin
Investing in different unrelated assets within an asset class has been a risk spreading strategy for investors. Doing this could be difficult in crypto trading, as tokens move in the same direction as bitcoin.
The value of Ethereum and many altcoins, to a large extent, is tied to bitcoin – when the price of bitcoin goes up, it goes up, and when the price goes down, it also goes down.
The psychology of crypto trading
Crypto trading poses psychological challenges to traders. Some of these challenges are described below.
1. Lose money
Nobody wants to lose money. We were taught to keep our money safe and we tend to feel bad when we lose it. However, this mindset does not work for a day trader. A trader will lose part of their trading balance, regardless of their trading quality. In fact, they will have losing streaks.
Most new traders don’t handle this reality well, leading them to start taking steps to beat the market consistently, which is usually counterproductive.
Most people get into trading for the wrong reasons, like having unrealistic profit expectations. Social media doesn’t help either: it’s common to see photos of so-called traders on Instagram, using flashy cars and luxury items. The showoffs have made many believe that trading is a quick and rich pattern.
Eventually, most of them either lose all their money or are shocked by the reality of what day trading holds.
3. Make money
Having winning streaks also affects trading psychology. Winning streaks give many traders the feeling that they are already very good at trading. Many easily get carried away, forgetting that winning streaks don’t last forever.
4. Endless Trading Opportunities
The market is always open and it is very volatile. The opportunities to make big money are endless. Traders usually fall into this trap thinking they can trade at any time and in any market situation.
It has also been known to cause endless nightmares for day traders. Round-the-clock availability and market volatility cause many day traders to overtrade.
It has been established that market sentiment and social media comments affect the crypto market. However, no one can boldly determine which one would affect the market – there are still some elements of luck. However, these comments come easily to newbie traders, and they try to make their trading decisions based on them.
Making trading decisions based on rumors never ends well; it heightens emotions and induces traders to trade lest they get left behind. Marketers who take social media suggestions at face value end up losing their money.
All of these situations lead to psychological issues that eventually affect traders. Traders encounter problems such as fear of missing out on big opportunities, doubt about one’s strategy, greed, disappointment and anxiety.
Practical steps to master your trading psychology
Since we have looked at some of the psychological issues traders face, we should also look at some of the practical steps you can take to develop your psychology for effective day trading.
1. Have the right trading mindset
Always remember that the market is not constant. You will have good days and bad days – they will both come and go. Also, remember that you won’t get rich quick; building a rock-solid portfolio takes time and effort.
2. Create a trading plan (establish rules)
There is a lot of activity taking place in the cryptocurrency market and you need a set of rules to guide you. Your rules should cover the type of trades you want to trade and the time you want to spend on those trades.
These rules may also include the maximum win or loss you can tolerate in a day. Other than that, you need to have a reasonable stop loss and take profit, a risk/reward ratio you are comfortable with, and an appropriate entry and exit strategy. You also need to know the fundamental factors to watch out for.
When you have reached one of your limits, you should stop trading no matter what the market brings.
Take your time to build a trading plan that is unaffected by market sentiment. You can observe what successful traders do and learn from them. Don’t copy them, stick to your proven plan.
3. Stay disciplined
Once you’ve created a plan, you need to stick to it no matter what. An unruly trader follows rumors and opinions. This trader does not have a trading plan. Indiscipline in trading only opens the door to different trading emotions that will only make you lose money.
4. Have regular commercial breaks
The market is open 24 hours a day, but sitting in front of the market for 24 hours doesn’t help. It would just wear you down and start playing games or making emotional decisions. Take regular trading breaks or have a specific number of daily trading hours.
5. Keep practicing
Practice can help you build mental toughness. Most exchanges have practice accounts where you can learn to trade. You can also use them to build a reliable strategy. You can consider some of these exchanges that charge low fees for your practices and trades.
6. Use automated trading strategies
If you don’t want to go through the learning process of trading, you can use automated bots. These bots are programs that do your trading for you. Trading bots take each trade based on the state of the market and are unaffected by emotion. They are not affected by fear, greed or doubts.
Another main advantage of crypto robots is that they stay online around the clock. With them, you can be sure not to burn out and make the most of trading opportunities. We have another guide to help you better understand crypto robots and which types are right for you. We also won’t forget to tell you that not all trading bots are reliable – be careful in your search for one.
Your trading mindset is the key to your trading success
To be a good trader, you must learn to trade according to your strategy and not follow your feelings. If you don’t deal with the emotions that affect trading, they will take care of you. The good thing is that these tips don’t just work for crypto trading; they are also valid when trading in other financial markets like forex and stocks.
Please note that we do not give you financial advice. This is only to guide you on a key issue that affects day traders. We encourage you to seek advice from a licensed financial adviser before making any major investment decision.
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