Common Psychological Challenges when Trading

In crypto trading, two emotions can ruin the results of an otherwise outstanding trader. These are greed and fear. However, it’s not enough to know these two emotions. You also need to understand how they manifest themselves so you don’t fall victim to them.

To help you do that, this article will go over some of the more common psychological challenges in crypto trading.

FOMO (Fear of Missing Out)

The first and perhaps biggest psychological mistake in crypto is FOMO: the Fear of Missing Out.

Traders with FOMO believe that every trade can be a winner. They don’t like to sit trades out for fear of losing profits, and don’t pay much attention to losing trades because they believe in their ability to recoup losses quickly.

FOMO leads to 2 specific mistakes: taking on more trades and opening bigger positions than your system dictates.

The best way to solve FOMO is to hold yourself accountable and stay disciplined. On Adara, you can also ask fellow community members to keep an eye on what you do and make sure you’re not giving in to FOMO.

Our second problem is very similar to FOMO, and it’s called…

Revenge trading

Despite what it sounds like, this doesn’t involve getting revenge on anyone. Instead, revenge trading is the act of trying to recoup money lost by engaging in more trades.

Here’s an example.

Let’s say Mary makes her very first trade and loses more money than she expected: 3%. Mary knows that she’s dealing with some drawback now, so she decides to make the money back with her next trade.

Unfortunately, Mary doesn’t find any trades she can make to fit her trading system and strategy… But because she’s desperate for a win, she breaks her own rules and buys into a coin she hopes will appreciate.

Can you guess what happens next? In the real world, statistically speaking, Mary almost always loses her money. This happens for several reasons.

First, traders in revenge mode forget about their own system. Second, traders in revenge mode take action when they shouldn’t out of desperation . Last but not least, traders in revenge mode stop thinking about the market because they’re thinking about the money they need to make.

All of these factors lead to bad, unprofitable decisions — and can quickly wipe out a large budget with severe drawdowns.

Our third problem is…

Overconfidence bias

Here’s how this one usually plays out. Let’s say a trader called Jack has been trading for several years. His win rate is about 50%, meaning he wins every other trade.

But in the current trading period, something changes. Jack’s win rate jumps to over 80%, and he feels like he can’t lose no matter what he does. At this point, he figures that he’s intuitively onto something — and starts departing from his trading rules and system.

Can you guess what happens next?

That’s right. As Jack starts to depart from his system in a bid to keep his winning streak going, he starts losing money. In fact, most people in Jack’s position keep losing money until they undo all the good work they did by winning in the first place.

The problem is so bad that some crypto funds make their traders take a break once a streak goes on long enough to prevent overconfidence.

Can you see how all the problems we’ve covered so far are representative of fear, greed or both?

FOMO is a mix of fear and greed. Overconfidence bias is pure greed. Revenge trading is a mix of wanting to make more money — greed — and being afraid of accepting losses, or fear.

There are many other mistakes, of course. In our Adara Academy videos, we cover the gambler’s fallacy, being emotional about assets, and many others.

If you want to minimize the effect negative emotions have on your trading, you may want to head over to Academy — which is free — and learn about these for yourself.

For today, though, remember the 3 mistakes we already covered: FOMO, revenge trading, and overconfidence bias. Keeping these 3 in mind while trading will help you maximize losses and minimize losses consistently.

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Common Psychological Challenges when Trading was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.