The secret to profitable crypto trading lies in emotional mastery! Learn how to avoid common mistakes, diversify wisely and trade with a clear plan.
Crypto trading can be a rollercoaster of emotions, especially if you are a beginner or trading on leverage. These emotions cloud your judgment and can ruin your trades. In this article, CoinMarketCap Academy dives into the best ways to keep these emotions in check to boost your trading success.
While trading – regardless of the market – can be nerve-racking on its own, crypto markets are notorious for their volatility. They move around erratically, and the lower the market cap of your coin of choice, the less predictable the moves get. A single tweet from Elon Musk can move the price of Doge significantly, not to mention what happens when bad news hits the press.
Just look at the aftermath of the FTX collapse in Nov. 2022. The bear market has taken its toll for over a year, and all of a sudden the second-largest derivative exchange collapsed. FUD spreading across the industry, people panic selling and losing a lot of money – a perfect example of emotions involved in trading.
Meanwhile, those with a level head were able to use the opportunity to their advantage, buying coins while others were running for the exits.
The Importance of Managing Trading Emotions
If you want to be successful in trading, you need to keep your emotions in check. Fear, greed and FOMO can mess up your decision-making ability, leading you to irrational behavior and costing you a lot of money. Your emotions may also cause you to look for information that confirms your pre-existing biases rather than seeing the reality at hand.
By managing your emotions, you put yourself in a position to trade objectively based on an objective analysis – which is bound to positively affect your profitability. Let's dive into how you too can manage your emotions, and boost your trading success.
Recognize Emotions for What They Are
The first step towards managing (and mastering) your emotions is to recognize the emotions for what they are, and learn what they are telling you. For example, fear and greed are some of the most common emotions in trading, bearing responsibility for the majority of trading mistakes.
Recognizing these emotions and understanding them completely will help you manage them. Fear of missing out is common when the price is at the most optimal level to buy, but it can also suggest being overexposed. The next time you experience FOMO – analyze where the emotion may be coming from, and it will tell you what to do next.
Similarly, greed often happens when you are in a winning trade and have made significant profits – it will make you want even more. Oftentimes, this is precisely the moment to take profits, as the risk of losing profits exceeds the potential for further gains.
Essentially, studying your emotions and understanding them deeply will provide you with meaningful information about the market, the kind of information you can capitalize on – especially when you consider the fact that most people might be feeling that emotion in the markets. Time to beat the competition!
Losing Is Unavoidable in Trading
Trading emotions are often directly correlated with losing money – and for good reason. It is a game of probabilities, which means losing is an inevitable component of the game. Sure, you can invest in a relatively risk-averse way, but there will always be a chance that you lose.
There is a reason that "do not invest more than you can afford to lose" is one of the best pieces of trading advice out there. If you trade or invest, your best move is to consider your deposited money as a loss from the start. So long as the money is on the exchange, they are just numbers on the screen. This makes it easier to accept any losses.
Only when the profits are returned to your bank account, you will have successfully taken money from the market.
Suggested Reading: 7 Common Mistakes to Avoid in Crypto Trading
Diversification Reduces Risk
While losing money is an inevitable component of trading, there are steps you can take to reduce the likelihood of losing. By spreading your money over multiple investments, the effects of price volatility are smoothed out, resulting in less emotional responses to price volatility as well.
For instance, instead of putting all of your money in a single altcoin, consider putting your eggs in multiple baskets. Buy some Bitcoin, some Ethereum, and a few other alts you like. Not only will this allow you to comfortably hold your way through a bull market but will also allow you to capitalize on narratives in various sectors.
Get Experience, Learn From Your Mistakes
Now if diversification and HODLing are not up your alley, the best way to manage emotions is by learning from your mistakes. If you can go back and look at the past trades in which you experienced fear, greed or FOMO, and how those trades turned out – that provides useful information you can use to guide your decisions, even when under the influence of trading emotions.
Journal Your Trades and Emotions
The more experienced you get, the more you will be able to recognize certain situations and act accordingly. Keeping track of your trades, the reasons you took them, their performance, and the emotions you felt will only boost this process. Furthermore, such a journal allows you to look back at your trades over time and highlight potential errors and common mistakes in your approach. With time, this process will enable you to trade clinically, instead of emotionally.
Trade With a Plan
Oftentimes, you may feel down when a trade goes against you. Experienced traders prepare for this scenario by creating a trading plan for each trade they take, specifying both the enter and exit positions and common errors. After all, by planning ahead, you will no longer make trading decisions under the influence of emotions. All you need to do is stick to your plan.
Before you enter any trade, you should create a plan, preferably one that consists of more than just an entry, take profit (TP) and stop loss (SL). The trading plan outlines your strategy, and rules you must follow throughout the trade. It also describes how you will manage your risks, ensuring that you do not lose more than strictly necessary.
Writer’s Disclaimer: This article is based on my limited knowledge and experience. It has been written for educational purposes. It should not be construed as advice in any shape or form. Please do your own research.
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