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Behavioral biases are irrational beliefs that can influence crypto trading decisions without our knowledge. Common behaviors that can influence decisions include overconfidence, buying or selling at the wrong time to avoid regret, limited attention span, and chasing trends. Traders and investors should be aware of these biases and avoid them to lower the risk of making illogical decisions. Here are four biases and how to overcome them.

Introduction

If left unchecked, behavioral biases can lead to poor crypto trading and investing decisions. In fact, there is a specific field of study called behavioral finance that combines psychological theory with conventional financial economics. Bias is often unconscious, so you must pay close attention to your behavior to reduce decision making based on bias.

Human behavior and psychology have been studied extensively by Israeli-American psychologist and economist Daniel Kahneman and the late Israeli cognitive and mathematical psychologist Amos Tversky. Interested readers can check out Judgment Under Uncertainty: Heuristics and Biases to gain a better understanding of human bias.

Overconfident

“The illusion that we understand the past fosters overconfidence in our ability to predict the future.”― Daniel Kahneman

Overconfidence bias applies to traders who are too confident in their trading abilities, so they make risky market decisions or trade too frequently. You can also become overconfident in the assets you invest large amounts in, resulting in a portfolio lacking diversification.

Although there are exceptions, a study led by Columbia University professor Dr. Kai Ruggeri concluded that the more active a retail investor is, the less money he makes. Consider trading less and investing more, as investing often requires more fundamental research into the intrinsic value of a project or cryptocurrency.

You can also consider diversifying your trading after doing sufficient research. This can help you reduce the overall risk associated with owning a single token.

Avoiding Regret

A study published in the Journal of Economic Theory by Jie Qin, professor of economics at Ritsumeikan University, shows that traders are twice as likely to sell profitable positions too early and sell losing positions too late to avoid the regret of losing profits or capital. Based on instinct, we avoid regret even though it makes us take illogical actions.

To limit the urge to do so, you can continue to follow certain trading and investment strategies instead of making decisions during market fluctuations. A simple approach to this is to automate your trades with predefined conditions, such as price and quantity.

One example of a strategy is dollar Cost Averaging (DCA), which is a practice used by traders to invest a fixed amount periodically regardless of the asset price.

You can also use a trailing stop order which allows you to place a predetermined order at a certain percentage of the market price. In addition to tracking price movements automatically, trailing stop orders can help lock in profits while limiting losses to help prevent you from mistiming the market due to regret.

Limited Attention Span

Given the large number of tokens on the market, countless crypto opportunities are available. However, we only have a limited amount of attention to understand each option properly before trading.

Additionally, there is often a lot of market disruption regarding various crypto opportunities. This can lead to trading decisions being made with incorrect or inadequate information.

Don't rush into a trade that hasn't been carefully looked at first. Instead of fumbling around, do your own research (DYOR) and perform fundamental and technical analysis before trading.

Additionally, you should not rely on information from third-party influencers who have content around potential crypto trading opportunities.

Another study conducted by professor Prem C. Jain of Tulane University and professor Joanna Shuang Wu of the University of Rochester concluded that 39% of all new capital allocated to mutual funds accounted for the top 10% of mutual funds last year. This fact shows our tendency to chase trends. This can lead to hasty trading actions rather than logical decisions based on adequate research.

Due to the volatile nature of the crypto market, traders may be fooled by the exponential price increase of a token and not learn the fundamentals that support such increases. Rather than following the euphoria, consider assets that are trading below their intrinsic value based on your valuation rather than simply focusing on tokens with spectacular performance.

Warren Buffet once said, “Beware when others are greedy and be greedy when others are fearful.”

You can also fine-tune your trading strategy and stick to it instead of entering trades every time a token gets hyped. As a first step, there are a number of trading strategy articles on Binance Academy, including a beginner's guide to crypto trading strategies, day trading strategies, and how to backtest your trading strategy.

Closing

As humans, it is natural for us to want to trust our instincts when making decisions. Monitor your behavior and try to control behavioral biases, then the chances of making bad trading decisions will decrease.

Further Reading

  • Five Risk Management Strategies

  • How to Manage Risk and Trade Responsibly | Binance Support

  • Dollar-Cost Averaging (DCA) Explained

  • Alasan dan Cara Melakukan Riset Sendiri (DYOR) Saat Berinvestasi dalam Kripto