It can be said that trading psychology is always the most important factor for a successful trader. The more experienced traders are, the more they understand that keeping a comfortable mentality will help them stay longer in the market. And start earning more profits.
What is Trading Psychology?
Trading psychology is one of the factors that especially affects the decisions of traders in the financial market in general and the cryptocurrency market in particular. Especially when they are preparing to execute an order. This includes the thoughts and emotions that a trader has experienced or is experiencing.
It can lead traders to make poor decisions. Even emotional and hasty decisions instead of following a rational strategy that they have set out. Often, these emotions are very complicated. And it takes a lot of effort and time for investors to master them.
The Importance of Mental Control
In the cryptocurrency market, there are always traders who are highly skilled in market analysis or possess a deep knowledge of finance. However, not everyone can become a successful trader. It is possible that they have earned a large amount of initial profit.
But in the end, they end up with nothing. Why? It is because they do not have the skills to manage their emotions in trading. Emotions such as greed, fear, and intense excitement after a huge profitable trade will affect their ability to make decisions on the next trade.
In general, not knowing how to manage emotions can "sabotage" all the profits you have earned before. It can even "burn" your account. The reason for this is very simple. That is, you have made hasty and irrational decisions when you are angry, frustrated or greedy.
Therefore, to become a professional trader, you not only need to gain experience and skills every day, but also need to master your emotions. However, nowadays, there are many psychological factors that can affect the behavior and decisions of traders. And it is almost impossible to completely control all these dangerous emotions.
Therefore, the best way in this case is probably for you to know the emotions that you have to go through. You need to learn to get used to it and not let it control you.
5 Dangerous Emotions Traders Often Experience
Here are 5 dangerous emotions that traders often encounter in the cryptocurrency market. Now, let's explore all of these emotions together!
#1. Greed
It is safe to say that the main purpose of traders when participating in the financial market is to make money. And they are especially interested in the profits they make. This is an absolutely necessary goal.
However, if this “craving” quickly gets out of control and turns into greed, it can cause serious losses. For example, when the market moves in a favorable direction for traders, they refuse to take profits.
Because they think that the trade will always go in their favor. They even arbitrarily add more orders and choose high leverage. They want to quickly make a lot of profit with just one trade. And when the market turns around, they can "lose everything". Or there are many traders who do not accept the fact that they have predicted the market trend wrong and do not cut their losses. Instead, they always believe that they cannot lose.
The price will soon turn back in the direction they want. As a result, their trades generate a huge loss compared to the stop loss order placed according to the capital protection method. All these actions are not based on price action analysis or the original trading strategy. This is just impulsive behavior that comes from greed to make a lot of money. And in many cases, traders can "lose everything".
#2. Fear
Fear is one of the worst enemies of traders. It tends to convince traders that they will not make any profit no matter how great their trading strategy is. This is also the most common mistake of new traders who do not have much experience. Because they have not yet mastered the knowledge of effective trading when the price moves unfavorably.
This makes them scared and may automatically close the trade too early in a loss. And unfortunately, just after closing the trade, the price turns back in the original direction and reaches the expected price.
Typically, fear arises when a trader has a series of losses. Or after they have suffered a loss that is too large for them to bear emotionally. Additionally, market volatility is one of the most common catalysts for fear. To conquer your fear, make sure you have a well-rounded trading strategy with clear rules. Also, determine a loss that you can accept before initiating a trade.
This will help you stay calm and “comfortable” when the market is not going your way. And then you can make the best decisions at that time: stop loss or wait.
#3. Angry and Wanting "Revenge"
This is the feeling that traders often experience when they lose a trade that they were “sure” would be successful. However, the important thing here is that there is no such thing as “sure” in trading.
So, when you risk too much money on a trade. But in the end, you lose all that money. There is a high chance that you will want to go back to the market and quickly make a new trade to make back the money you lost earlier.
However, this often just leads to another (and sometimes even bigger) loss. Because you are just trading emotionally.
#4. Excitement
After traders have a big win or a string of winning trades, they often get extremely excited and become very confident in the markets. While feeling excited is usually a good thing, it can actually cause a big problem.
Because at this point, traders believe that they have fully grasped the market. They start trading with excitement and ignore the potential risks. Then, unconsciously, they let their emotions start to dominate them. And make emotional decisions that lead to regrettable losses.
#5. Herd Mentality
Herd mentality or crowd psychology describes how the actions of a few traders are influenced by others. In other words, it refers to the imitation of each other by a group of traders, resulting in actions and investment decisions being made in accordance with the crowd. Instead of being based on fundamental market analysis.
For example, when a crowd buys an asset. This pushes the market price up. At this point, the market is at a tipping point: the price is rising too fast and too high. At this point, the psychology of traders begins to fluctuate.
They start trading without any strategy or technical analysis. They want to buy at all costs despite the high risk. And when the whole market rushes in, the price has peaked, a crash occurs and you lose heavily.
So beware of the "crowd", the majority is not always right. Only trade when you have fully grasped the information and analyzed the market carefully.
6 Mistakes to Avoid Before Learning How to Control Your Emotions
#1. Compare yourself with other traders
One of the common mistakes that traders tend to make is comparing themselves to other traders. In most cases, we tend to compare ourselves to successful traders who have more experience, knowledge and skills. This creates the mindset that you are underperforming.
While in reality, you may be trading surprisingly well for your experience. This will cause you to lose confidence and become hesitant in making trading decisions. You may miss out on good trading opportunities.
#2. Pay high transaction fees
When traders start trading, they often make a lot of trades every day in the hope of making the best possible profit. But they forget that high transaction fees can "eat" a significant part of your trading profit. So to be able to make more profit, choose an exchange with high transaction fees and high liquidity.
#3. Choosing the wrong trading asset
Another common mistake that traders make is choosing the wrong asset to trade. It could be an asset that you don’t care much about or trade often. This will reduce your analytical ability because you have too little information about it.
#4. Not doing market research
The main reason why traders fail is not studying the market. Most traders are often "delusional" about their judgment ability. Especially when they have "won" too many times. They believe that their judgment is 100% correct.
However, with a volatile market like cryptocurrency, all risks can happen. If traders do not analyze the market situation carefully, they can easily make wrong decisions. And there is a possibility that their accounts will be "burned".
#5. Don't use analytical charts
It can be said that this is an extremely serious mistake when investing in cryptocurrencies. The best time for you to buy any coin is when the price shows signs of breaking out from a stable price platform. But how can you identify that breakthrough point?
That is why traders need to know how to use analytical charts. Charts will give you an objective view of price increases and decreases. From there, you can grasp the market's movement trends and choose the most appropriate time to enter orders.
#6. Trading without stop loss
One of the important skills that a trader needs to learn when entering the cryptocurrency market is to get used to accepting losses and moving on to other goals.
Set a stop loss order with the maximum risk tolerance right from the start of the position. Instead of being unhappy with the loss and continuing to extend it with the mentality of "getting back what you lost". This will blow up your account immediately.
8 Ways to Control Your Emotions When Trading
Here are 8 popular ways to help you control your psychology when trading in the cryptocurrency market. Follow me to find out.
#1. Set personal rules
Having rules that you need to follow when trading is one of the effective ways to control your emotions. These rules can include setting acceptable loss/profit levels for you to enter and exit the market through setting profit targets and/or using stop-loss orders.
#2. Trade in the right market conditions
Also, stay away from less than ideal market conditions. Never trade when you don’t feel confident. These may be times when the market is difficult to determine trends or is highly volatile due to unstable and unpredictable economic or political events.
In short, for times when you find it difficult to see market trends. Or times when there are major events or financial news. If you cannot make your own judgment, then "ignore". Don't follow others. Only trade in market conditions that you feel "safe".
#3. Reduce transaction size
One of the easiest ways to limit emotions from influencing your trading decisions is to reduce your trading size. Remember, if you trade large, it is true that you can make a lot of profit. But what about losses? You can also lose a lot!
To make it easier to understand, imagine this. Now you invest $10,000 in a coin. If that coin increases in price, say 10%. Then you will make $1,000. But what if it suddenly decreases by 10%. You will lose $1,000.
You must be feeling nervous. When you put so much money into a trade, you can’t sit still without knowing how it’s going to turn out. At some point, you can easily lose control and act on your emotions.
So trade with a moderate size. A size that you can accept and control.
#4. Set Up a Trading Plan and Journal
Planning before entering the market will help you have a calm and objective view of the market. You will not be affected by market fluctuations. In other words, your decisions will not be influenced by emotions.
Furthermore, with a proper trading plan, every action is taken before entering a trade. Therefore, you will not be faced with making rash decisions. All you need to do is “stick” to the plan.
Meanwhile, keeping a trading journal will help you easily track your trading history. From there, you can accumulate more experience as well as learn from your own mistakes.
For example, if you lose because of emotional trading, keeping a journal will also help you realize your mistakes. After looking back, you will find the strengths and weaknesses of your method and strategy. And you will "tweak" and create a better trading strategy next time.
#5. Limit demo trading
Indeed, a demo account is an extremely useful tool for learning trading techniques. Especially for traders with little capital and new to the market. It is completely free. Moreover, you are not under any pressure if you trade at a loss. However, over time, this invisibly makes you not feel the future psychological traps that you will encounter. In addition, it also makes you become extremely easy on yourself.
Even lose discipline in trading. You will make transactions emotionally instead of following the plan you have made. Besides, demo is a type of account that uses virtual money to trade in the real market with "perfect" conditions.
This means you will be unaware (or less aware) of problems that real traders face. Such as slippage. And when you encounter these situations, you will not know what to do and easily let your emotions take over.
#6. Set reasonable expectations
This is a popular method often applied in parallel with setting up a trading plan. Especially for new traders after their first success. They often have the mentality of wanting to get rich quickly and expect huge profits every month.
However, it is unreasonable to set fixed profit expectations of several % per day, per week, and even several times the account per month. This leads to high account risk. Instead, profit rate expectations should be set on an annual basis.
Even the best performing hedge funds in the world only average 25 to 40% annual returns. This equates to 2 to 3% per month. So set a reasonable return expectation over the long term, and improve your rate with each year of experience.
One thing to note is that these expectations will often have a direct correlation to your risk-reward ratio. How much risk are you willing to take? How much capital can you commit? Answering these questions will go a long way toward confirming your potential returns!
And only when you identify the potential profit you want, you can focus 100% on planning to make it happen. At this point, you will not be swayed by any emotions anymore. Therefore, this will help you earn more profits. Isn't that great?
#7. Stop trading when there is a series of consecutive losing orders
The cryptocurrency market is always volatile and we cannot always determine the trend with 100% accuracy. At some point, in unfavorable market conditions, you may have a series of consecutive losing trades.
At this point, your psychology will be insecure. You start to doubt your trading strategy. This is also the time when your trading psychology gradually loses control. You will do everything possible to "save the situation". And usually, you will want to enter an order immediately to recover the loss. Even if the market conditions are not really ideal for trading. You can even increase the trading volume several times to quickly recover what you have lost.
However, there is a high chance that this will cause you to lose more, maybe even everything. Because you lost your temper. You traded emotionally.
So, if your total losing orders make you lose 20 to 30% of your account, you should stop trading. Then review and analyze your losing trade history to learn from your experiences. From there, improve your trading strategy. You can also trade with a demo account to "practice" the new strategy. As well as regain the feeling of winning. Only when you feel more comfortable and confident should you start trading again.
#8. Limit trading when there is a series of consecutive winning orders
This is a very good thing! However, this can have a negative impact on your trading. Because a series of consecutive wins will make you feel subjective and complacent about your level. And then, you let your emotions control you.
For example, you will increase the trading volume in the next trades. And expect that this time you will win bigger than the last time. But things may not happen as you expected.
And then, you have a big loss. A loss can wipe out all the profits you have made. That is why when you have a winning streak, you have to be more careful in your next trades. Both in terms of trading conditions and the volume of your trades.
With that winning streak, you’ve probably made a significant profit. It may even exceed your monthly profit target. So, it’s time to reduce your trading volume.
Because if you keep winning, that's great. But if you lose, it's just a small fraction of the profit you're making.
The important thing here is to never let your psychology and emotions become too excited after winning orders. Remember that being too confident will make you subjective, and that is a very taboo thing.
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