The cryptocurrency market differs from other financial markets, but most rules and techniques for successful trading work here as effectively as when dealing with stocks, bonds, commodities, and currencies.
The main difference between the cryptocurrency sector and traditional financial ecosystems lies in the impossibility of using most fundamental analysis techniques when assessing the current market situation.
Although all assets in this field are speculative, the huge number of tokens available for trading can overwhelm a newcomer. Some prefer to completely avoid decision-making and simply invest in crypto copy trading. Copying the trades of experienced traders can be a good strategy, but it will never match the effectiveness that an individual investor can achieve in the long term using unique analytical approaches.
You can study all the nuances of the cryptocurrency market, know the strengths and weaknesses of decentralized startups, and be well-versed in staking, but this is not enough for success!
The importance of psychology in cryptocurrency trading
Psychological aspects of trading require special attention. Many beginners ignore mental health and emotionality, which often leads to capital loss. Most traders experience depressive and other mental disorders due to a lack of skills in managing emotions. Even when conducting successful trading activities in the short term, you may experience incredible stress.
Emotional management of a portfolio and risks invariably leads to sad results. Although many doubt the extent to which emotions influence the decision-making process of investors, there is a whole field in behavioral economics called behavioral finance. This science studies the influence of fear, anger, greed, and other human emotions on price dynamics and traders' reactions to events in financial markets.
To achieve long-term success and maintain your mental health, you need to understand the importance of psychology in trading. If you realize why we often make certain decisions under the influence of emotions, you can avoid mistakes and use your knowledge to profit from the mistakes of others.
Due to the speculative nature of the cryptocurrency market, psychology is even more important when working with popular tokens, which are often subject to trends formed by the emotional responses of the trading community to events in the blockchain industry or significant financial markets.
How emotions affect cryptocurrency trading and how to cope with them
Science has shown that any positive emotions improve the functioning of the central nervous system, provoke the production of happiness hormones, stabilize overall condition, and generally have a good effect on a person. Accordingly, negative emotions cause the opposite reaction of the body on both psychological and physiological levels.
A trader's emotional state during important investment decisions will inevitably affect the results of opened trades. Because of this, in the last ten years, many investors have turned to fully automated trading systems (ATS) that are not subject to emotional influences and always strictly follow the instructions of the trading system.
Trading cryptocurrencies is almost always a mechanical process. The speculative nature of the assets makes technical analysis the preferred method for predicting price changes, so trading based on signals with a pre-established level of profitability and acceptable loss is the approach chosen by hundreds of thousands of traders. The problem is that our emotions often prevent us from making the right choice or opening a market position on time. Even if this does not lead to losses, it certainly reduces potential profits.
The influence of emotions on a trader's decisions is undeniable. Here are some emotions that are often associated with mistakes in investment activities:
Greed. Locking in profits is a critically important skill for any trader. Mastering it requires not only careful study of market nuances but also personal qualities that can be cultivated. Discipline, the ability to delay gratification, a clear understanding of basic investment principles, and restraint are characteristics that must be developed to avoid succumbing to greed.
Anger. After a series of unsuccessful trades, any trader will feel indignation. We know for sure that anger affects trading results. This is evident from several studies where people traded with real and virtual money. In the first case, participants quickly lost capital and reported how angry they felt after each losing trade. The best way to cope with this emotion is a simple pause in investment activity, while prevention requires self-work.
Fear. It may seem that excessive fear of losing funds should reduce risks for an investor, but practice shows that fear is often one of the main reasons for capital loss. Control over emotions that can lead investors to financial ruin is a vital skill. Overcoming fear of the financial market is the first thing a trader must do.
There are various strategies for managing emotions. Almost all of them are based on various techniques of behavioral psychology. We will not discuss individual methods, but we will describe several extremely important concepts for strengthening emotional stability in the long and short term:
Constantly strengthen your body and mind. Maintain a healthy sleep cycle, exercise, eat well, and engage in meditation or yoga. Your physiological state directly affects how rationally you can think and control your emotions.
Know how to take a pause. Never trade under the influence of fear, greed, anger, insecurity, and other negative emotions. Learn to stop to give yourself time to 'reboot'. Rest, then analyze the results of your recent trades. Try to understand what you did wrong and focus on correcting mistakes.
Do nothing unnecessary. If you have an analytical strategy dictating certain actions, do not deviate from the algorithm. Stick to the rules and strive for stability in your investment activities.
The importance of planning and discipline in successful cryptocurrency trading
If you have a ready-made guide for opening market positions, you just need to follow the plan unconditionally and adhere to proven algorithms. Attempts to gain excessive profits or 'recoup' losses on several large trades almost always lead to disastrous results.
Following a trading algorithm helps avoid significant drawdowns. Modern trading bots never deviate from the trading plan set by the investor, making them an obvious tool for investing if the trader is easily swayed by emotions. Avoiding responsibility for making impulsive decisions is also a good way to combat the human factor.
Remember that a well-established trading strategy with proper risk management will lead to long-term success, so just follow its conditions.
What affects the effectiveness of a trading algorithm?
Trader discipline. The ability to control oneself and make difficult decisions with a cool head—these skills allow you to follow the strategy and open even those market positions that may seem counterintuitive or erroneous. If you are working with a tested technical analysis strategy, you should trust it.
Following planning rules. The overall investment strategy should have certain limitations. For example, the size of each market position should be a strictly defined percentage of the portfolio. For long-term positions, you can allocate 10% - 20% of capital, while for short-term trades, it's better to use a size that is 10 times smaller. Create rules for risk management and diversification of investments, and then strictly adhere to them.
Do not let emotions disrupt trading rules. Let's return to the skill of taking pauses. Trading using a well-thought-out algorithm may lead to temporary drawdowns, but one must not succumb to panic after several unsuccessful trades. In a fit of anger, one might open several even more unprofitable positions. Just try to cool off after an unsuccessful trading session.
How to develop mental resilience for more successful cryptocurrency trading
Overall mental state and emotional balance require constant self-work. There are many paths to achieving stability and confidence in decision-making, but they are more related to life coaching rather than investments. We will discuss which psychological exercises and techniques can be used to learn resilience during capital investment decision-making.
Here are some tips that will help you learn to trade with a cool head:
Constant practice. A confident trader has simply completed thousands of trades and knows what to expect from the market. You do not have to take the hard road of scalping, trying to minimize position sizes. You can use demo accounts on centralized exchanges, virtual trading, and other tools for risk-free trading.
Use proven risk management methods. Forewarned is forearmed. An investor who is well aware of the risks is prepared for losses and will not be too upset by a couple of unsuccessful trades. Using standard risk management techniques will help you mentally prepare for potential losses and be confident that they will not affect your long-term strategy.
Trade every day. A trader's mental resilience is built over several years. Trading should become a habit, something natural and easy to execute. If you can create your comfort zone in investing, you will overcome all psychological barriers and learn to control emotions even in the most critical moments.
Taking specialized courses and training can also be beneficial. Learning to respond to stress, basic techniques for stabilizing mental states, and other important skills are taught not only by self-proclaimed gurus and life coaches but also by professionally trained psychotherapists. Regardless of which course you choose, be sure to take something useful from it for yourself!
Practical tips for managing emotions and making the right decisions in cryptocurrency trading
Some investors believe that a trader's goal is to achieve maximum profit in the shortest possible time. This is not a goal, but a side effect of constant work in the market. By adhering to certain algorithms and rules, opportunities for huge profits will arise on their own. A trader chasing the trade of a lifetime usually quickly loses capital.
Stable income and consistency in decision-making are the true goals of the modern trader. Making informed decisions based on in-depth risk analysis and well-considered signals is a valuable skill that takes years to hone.
Managing a trader's emotions can be extremely difficult to master, but you can use several applied methods to learn it:
Maximize the use of the demo trading function for cryptocurrencies. Practicing with the ability to analyze trading results will help you get accustomed to the cryptocurrency field and start trading with more confidence.
Test different strategies and find truly reliable analytical approaches. If you are confident in your technical analysis method, you will soberly assess your chances of success when opening each individual market position.
Never trade under the influence of recreational substances. Try to avoid alcohol, drugs, and medications that affect cognitive function. Always work with a clear mind to avoid succumbing to emotional influences.
Remember that a person rules the world when he rules himself. Stay as calm as possible and learn to accept failures with grace. If you can tame your emotions, you will achieve success in the field of investing!