Crypto traders need to develop a number of essential skills in order to master markets: the ability to evaluate fundamentals in context, perform technical analysis to determine entry and exit levels, and to keep emotions in check to make the best trading decisions.
This has everything to do with trading psychology, which requires traders to contain their emotions, think quickly but thoughtfully, and strengthen their discipline levels in order to execute carefully crafted trading strategies. Weak emotional control leads to making irrational trades, abandoning trading plans, and going well beyond previously established risk/reward ratios.
Controlling emotions sounds easy enough, but even the most experienced crypto traders still struggle with containing emotions and not letting fear and greed take over.
Common emotions influencing your trading game
Fear is a common emotion that often leads crypto traders to make the wrong trading decision. It can go both ways: either during sudden a dip fear takes over and traders close a position pre-emptively, or after a good rally fear of a retracement leads to the same decision to close the trade too soon.
Greed tends to lead traders to go beyond the risk/reward ratio they are actually willing to accept. Once you only start looking at trades that could possibly be outsized winners compared to the moves you’ve previously made, there is a good chance you are letting greed get a hold over your strategy which will likely lead to outsized losses – wiping out the gains carefully accumulated over a longer period.
Overconfidence is the cousin of greed, and it will do very little for a crypto trader trying to make profits consistently. Just because you’re on a good run, either a product of a well-executed trading strategy against the right market conditions or sheer luck, doesn’t mean you can stop being careful. Once you become overconfident, you will start placing larger trades and go for increasingly bigger wins.
Excitement is great in life, but not so when trading crypto. As many prolific traders have said: “trading should be more like watching paint dry. If you want excitement, take your money and go to the casino.” While it may be great to see your trading plan working out, chasing feelings of excitement when trading crypto markets is simply leading with the wrong motivation. You will only end up losing more than you gain, which leads to going down a deeper hole as you try to make up for lost profits.
How to contain your emotions
Truthfully, you can’t control your emotions. What you can do however is reduce the effect they have over your trading activity by putting rules, plans, and mechanisms in place before you enter trades.
1 Lower your trade size
The easiest way to lower the emotional intensity of your trades, is simply by lowering your trade size. If you set a rule for yourself that you never trade over a certain percentage of the capital available in your account, you will reduce the weight of each individual move and instead spread it out over several positions. It’s a lot easier not to let fear of what is going on in the market affect your decision making if you are exposed at varying price levels to varying degrees. Plus, having some resources left in your account to cover short or long positions always helps if you only need a little funding to avoid a margin call.
2 Place stop loss and take profit orders
Before you place a trade, calculate what you are willing to lose if it doesn’t play out the way you thought it would. Then see how that compares to the potential reward. If the trade is worth it, it helps to place stop loss and take profit orders when you place the initial trade. By doing this ahead of time, you essentially remove yourself from having to make a decision when the market goes against you or when it moves in your favor. You have already defined those levels and now all you need to do is let the scenario play itself out. Some traders prefer to work with automated trading strategies to further remove themselves from trading actively.
3 Develop a strategy, and stick to it
Whatever your trading strategy is, stick to it. Don’t let a few good moves convince you to up the ante and risk more capital that you initially set out to do. Plus, it takes a long time for a strategy to be validated or invalidated. If you break from the strategy you have no way of knowing if you were on the right path. Then when you do incur some losses, you will likely switch strategies again, placing trades erratically and haphazardly in a bid to chase losses. Of course, you do need to change trading strategies at times but only if market conditions change – not just because a few trades did not work out.
4 Accept losses
It’s important to realize that losses are part of trading. This goes beyond cutting losses short. What it really means is that you should be aware that most traders suffer losses, and it’s the best ones that win 6 out of 10 times. Trying to make gains every single time will only make you anxious when a trade turns sour. That’s when you start making decisions that weren’t part of the plan. If you traded the right size, developed a strategy, established your risk and reward levels and placed stop loss and take profit orders, all you need to do is let the trade play out.
Sometimes it works, sometimes it doesn’t. But always analyze what happened and refine your strategy to improve your crypto trading skills.