TL;DR
Trading psychology represents the emotional aspect of a trader’s decision-making process. Every trader, to a certain extent, has emotional triggers. The two primary emotions that affect traders are fear and greed — both can lead to poor decisions, such as going all-in on one asset or panic-selling out of fear.
Even if a trader knows how to perform technical and fundamental analysis at a high level, a weak or anxious mind easily swayed by emotions can be highly detrimental to their portfolio — especially in a volatile trading environment like crypto.
What Is Trading Psychology?
Trading psychology refers to the psychological factors that influence how people trade in markets like crypto or stocks. It is based on the idea that emotions can significantly impact a trader’s decision-making process.
For example, greed can drive a trader to make a high-risk decision, like buying a cryptocurrency at its peak due to its rapidly rising price. In contrast, fear can result in a trader prematurely exiting the market.
FOMO is particularly prevalent when an asset has appreciated significantly in value over a relatively short period of time. This has the potential to cause a person to make market decisions based on emotion rather than logic and reason.
Every trader is affected by emotion. For most people, losing money is painful, while earning money is joyful.
Why It’s Important To Understand Your Mindset When Trading
Fear and greed are the two primary emotions in trading.
Fear can drive a trader to avoid all risks and possibly miss out on a successful trade. On the other hand, greed can lead to excessive risk-taking to maximize profits, such as buying an asset at its peak because its price is rising rapidly.
Experienced traders know to strike a balance between fear and greed. Fear protects traders from taking unnecessary risks, while greed motivates them to capitalize on opportunities. Over-reliance on either emotion, however, typically leads to irrational trading decisions.
Learning to trade with the correct mindset is as important as performing fundamental analysis or knowing how to read a chart. By understanding and controlling their emotions, traders can make informed decisions and minimize losses.
Making unemotional decisions is, of course, easier said than done. Traders deal with a variety of challenges every day that can invoke an emotional response. Here are a few examples.
- Unrealistic expectations: Trading is not a get-rich-quick scheme. People who go into trading with this idea are in for a rude awakening. Like any skill, trading requires years of practice and discipline.
- Losing: Even the best traders have gloomy days. For new traders, losing trades is a tough concept to grasp and often leads to even more failed attempts to try and outwit the market.
- Winning: While winning feels good, the downside is that traders may feel a sense of over-confidence or invincibility, and may be under the false perception that they can’t lose. This can lead to riskier decisions and ultimately, losses.
- Market sentiment and social media: Beginner traders are easily influenced by what people say on the Internet. Negative sentiment on social media can lead to fear, which can result in panic selling. It’s equally unwise for a trader to blindly follow an influencer’s advice to buy a specific token, especially if the influencer is sponsored by the token’s project and paid to promote it.
How to Use Trading Psychology to Become a Better Trader
Think long term
Set achievable goals. A realistic plan of what you want to achieve helps prevent over-trading or getting too emotional due to unrealistic expectations. It will also help keep your focus on the long-term goal rather than short-term gains or losses.
Take a break
Regular breaks can provide much-needed perspective and clarity on where things stand. If you hit a string of winning trades, step back before you get carried away into overtrading. Additionally, pulling all-nighters will cause you to burn out and as a result, make bad decisions. Breaks are beneficial not only for your portfolio but also for your own physical and mental well-being.
Learn from mistakes
Everyone makes mistakes when trading. Instead of getting angry at yourself or worse, trying to recoup your losses with even more capital, go back and analyze what went wrong. Implement new strategies based on what you learn from previous mistakes and you’ll be more prepared the next time.
Set rules
Create a detailed trading plan and stick to it. This plan will outline how you approach different situations and will help keep your reactions under control during times of stress. Some examples include using stop-losses and take-profits, limiting how much money you can gain or lose in one day, and a risk management strategy with which you’re comfortable.
With a clear plan in mind, you’ll know exactly what steps need to be taken without allowing an emotional response to derail your decisions, ensuring you don’t stray from the initial plan you set out for yourself before entering a position.
Is Trading Psychology Different In Crypto?
Trading psychology holds true for any asset class, including crypto. Humans are all similar to a certain degree, particularly regarding money. Most people, for instance, don’t enjoy losing money and vice-versa. Additionally, traders of any asset feel excited when they’re on a hot streak.
However, there are a few unique psychological challenges crypto traders face.
Unlike the stock market, which closes on weekends, the cryptocurrency market is open 24/7. As a result, crypto traders always have access to trading tools, their assets, and, most importantly, potential opportunities. For a trader who is prone to making emotionally charged trading decisions, having 24/7 access can be very costly.
The crypto market is also highly volatile and as such, traders must think fast while maintaining a strong sense of discipline.
For example, professional traders don’t jump onto a rapidly rising asset just because everyone is talking about it, nor do they decide to risk all their capital because the market closes green for a day.
Closing Thoughts
Emotions are one of the most common pitfalls in crypto trading. Learning to control your emotions by understanding your mindset and emotional triggers is an invaluable skill that will protect you from chasing gains or hitting the panic button and liquidating your portfolio.
Ultimately, becoming a good trader requires years of consistent learning and practice. There’s no shortcut or life hack to getting rich by trading. Follow a strategy that suits your financial situation, keep practicing, and don’t let fear or greed force you to make a decision you wouldn’t usually make.
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