Summary
Trading psychology reflects the emotions that traders use when making decisions. To some extent, every trader has emotional triggers. Fear and greed are two of the main emotions that affect traders. Both of these emotions can lead to poor decisions, such as going all in or panic selling.
Even if traders are able to perform technical and fundamental analysis at a high level, if they are not mentally strong and resolute and are easily swayed by emotions, this can be very detrimental to their portfolio, especially in a volatile trading environment like cryptocurrency.
What is Trading Psychology?
Trading psychology refers to the psychological factors that influence people’s trading behavior in cryptocurrency or stock markets. The theoretical basis is that emotions can significantly affect traders' decisions.
For example, driven by greed, traders may make high-risk decisions, such as buying at the peak of a cryptocurrency’s price as it continues to rise. Conversely, fear can cause traders to exit the market prematurely.
Fear of missing out (FOMO) is a common emotion when an asset appreciates significantly in a relatively short period of time. This can cause traders to make decisions based on emotion rather than logic and reason.
All traders are inevitably affected by emotions. For most people, losing money is painful and making money is joyful.
Why is understanding your mindset shift so important in trading?
Fear and greed are the two main emotions in trading.
Fear can cause traders to avoid all risk and thus miss out on a winning trade. On the other hand, greed can cause traders to take excessive risks in pursuit of the highest returns, such as buying a cryptocurrency at its peak because its price keeps rising.
Experienced traders know how to find a balance between fear and greed. Fear prevents traders from taking unnecessary risks, while greed motivates them to take advantage of opportunities. However, over-reliance on either emotion in trading often leads to irrational decision-making.
Learning to trade with the right mindset is just as important as using fundamental analysis or knowing how to read chart indicators. By learning to understand and control emotions, traders can make smart decisions and minimize losses.
Of course, being able to make decisions without emotion is not as easy as it sounds. Traders face a variety of challenges every day that can cause emotional reactions. Here are a few examples.
Unrealistic expectations: Trading is not a way to get rich quickly. Anyone who starts trading with this unrealistic idea will be hit with a sore thumb. Trading is like any other skill, it requires years of practice and constant training.
Losses: Even the best traders lose sometimes. For novice traders, it is difficult to accept losses in trading, and they want to rely on their own intelligence to make a profit, which results in more failed attempts.
Profits: Profits feel great, but they can also lead to overconfidence or a sense of invincibility, a false sense of invincibility. This can cause traders to make riskier decisions, which can ultimately lead to losses.
Market sentiment and social media: New traders can be easily influenced by what people say online. Negative sentiment on social media can instill fear in them, leading to panic selling. It is also unwise for traders to blindly follow the advice of a blogger to buy a certain token, especially if the blogger is sponsored and paid to promote it.
How to use trading psychology to become a better trader?
Take the long view
Set achievable goals. Having realistic plans for what you want to achieve can prevent you from overtrading or getting too emotional with unrealistic expectations. It also helps you focus on long-term goals rather than short-term gains and losses.
take a break
Taking regular breaks can help you shift your mindset and gain a clearer perspective on the situation. If you're on a winning streak, take a step back before you get carried away and overtrade. Plus, pulling all-nighters can be exhausting and lead to bad decisions. So taking breaks isn't just good for your portfolio, it's good for your physical and mental health, too.
Learn from your mistakes
Everyone makes mistakes when trading. Rather than getting angry at yourself or, even more unwisely, investing more capital in an attempt to recover your losses, go back and analyze where you went wrong. Implement new strategies based on what you learned from your mistakes, and you’ll be better prepared next time.
Setting the rules
Set up a specific trading plan and stick to it. List the responses to different situations in the plan, which will help you control your reaction when facing pressure. For example, you can set stop-loss and take-profit points, limit the amount of profit and loss you can make each day, and develop a risk management strategy that you can accept.
With a clear plan, you know exactly what you need to do next, rather than letting emotional reactions interfere with decision-making, which will ensure that you stay on track with your original plan until you reach a certain point.
Is trading psychology different in cryptocurrency trading?
Trading psychology applies to any asset class, including cryptocurrencies. Humans are all similar to a certain extent, especially when it comes to money. For example, most people don’t like to lose money and love to make money. In addition, traders of any asset will feel a sense of excitement when they have a winning streak.
However, cryptocurrency traders face some unique psychological challenges.
Unlike the stock market, which is closed on weekends, the cryptocurrency market is open at all times. Therefore, cryptocurrency traders can access trading tools, assets, and various potential opportunities at any time. A trader who is easily influenced by emotions may suffer heavy losses in this 24-hour trading.
The cryptocurrency market is also extremely volatile. The price of a token can double in a single day before falling back to where it started. Such wild price swings require traders to be both quick-thinking and disciplined.
For example, a professional trader will not impulsively buy a rapidly rising asset just because everyone is talking about it, nor will he risk all his money just because the market trend goes up in one day.
Conclusion
Emotions are the most common pitfall in cryptocurrency trading. Understanding your own mindset and emotional triggers, and learning to manage them, is a valuable skill that can prevent you from being too profit-driven or panicking and liquidating your entire portfolio.
Ultimately, becoming a good trader requires years of continuous learning and practice. There are no shortcuts or tricks to getting rich trading. Follow a strategy that fits your financial situation, practice, and don't let fear or greed drive you to make unconventional decisions.
Further reading
The psychology of market cycles
What is the Crypto Fear and Greed Index?
What is behavioral bias? How to avoid it?
Stop-profit and stop-loss points and their calculation methods
How to Trade Cryptocurrency Responsibly
Disclaimer and Risk Warning: The contents of this article are factual and for general information and educational purposes only. They do not constitute any representations or warranties. This article should not be construed as financial advice and does not recommend that you purchase any specific product or service. Cryptocurrency prices may fluctuate. The value of your investment may go down or up, and you may not get back your investment. You are solely responsible for your investment decisions and Binance Academy is not responsible for any losses you may incur. None of the above constitutes financial advice.