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I first entered the cryptocurrency scene in the height of the 2017 bull run. I had heard of Crypto before and had done a little bit of research, but the hype was too good for me to pass up. I first got in at around the $10k mark, and rode Bitcoin all the way up to its peak at $20k. This would have been great — if I had sold. Instead, I held on — thinking that the trend would continue indefinitely. In the ensuing months, my dreams came crashing down (along with the value of BTC) and I’m ashamed to say that I panic sold (more than once).
It turns out that the emotions I was experiencing were completely natural and normal. I would bet money that my story resonates with many of you reading this article. The truth is, humans evolved for these mechanisms of fear and excitement to drive our behaviors. But when it comes to trading, these mechanisms lead us into foolish decisions. This is the very reason why 90% of traders lose money: they can’t overcome their emotions. This article will contain trading tips, and how to overcome emotional trading.
The Fear/Greed Index
Just like I explained to you in the paragraphs above, the inexperienced trader holds when he feels greedy and sells when he feels fear — often leading them to not lock in profits, and to cut losses. It may be counterintuitive, but the best time to actually buy is when most people are feeling fear, and the best time to sell is when most people are feeling greed. The best news is — there is an index out there that keeps track of this market sentiment! Check it out, and use this tool to your advantage!
Create A Trading Plan
Another good way to overcome your emotions and trade rationally is to create a trading plan. Before you place your first trade, ask yourself, “what is my strategy?” Write down rules, and promise yourself you will not break them. Good rules to have would include:
1. when to enter (to avoid FOMO)
2. a stop loss some % away from your entry point (for protection)
3. a defined exit strategy (to avoid greed)
4. pre-allocated entry sizes (to avoid overexposure to risk)
Once you know that you have a winning strategy, it’s important to limit the number of trades you place per day. If you are having an off day, it is ok to chalk up a small loss and move on, knowing that you will win more than you lose. Doubling down on a bad day is a great way to get rekt fast. For me, I never place more than 3 trades per day. That number may be different for you, but it’s crucial that you set rules for yourself and stick to them — no matter what.
Be Content with Consistent, Small Wins
Did you know that a 2% gain every day will turn $700 into $1M in just one year? That goes to show you that consistent small wins is the way to go, every time. It makes me think of the old children’s tale “the tortoise and the hare.” Slow and steady wins the race.
Did you know that your brain is hard wired to find meaning in random data? The term Apophenia is a fancy psychology word that is used to describe that exact phenomenon. There have been many studies that prove that this is an innate human psychological condition — and for traders it is extremely dangerous. Again, this is why it is very important to have a solid strategy that includes when to make your entries.
The worst way that you can come up with your entry strategy is by staring at a chart for hours on end. Eventually, you are guaranteed to convince yourself that you have discovered some hidden pattern that no one else has found yet. Trading on this notion would be very wrong — and very expensive. No matter what strategy you are using, your best bet is to backtest every method thoroughly, and find one that makes you money slowly over time.
If you’ve made some of these common mistakes before, don’t beat yourself up. I’ve been there too, and now I’m trading effectively. With discipline (and a little luck), you will be a profitable trader in no time. These tips are a great place to start, but it’s important that you do your own research and find a strategy that works well for you.