How To Avoid The Most Common Crypto Trading Mistakes

News | March 23, 2021 By:

The cryptocurrency markets are volatile and can easily whipsaw a trader that is not prepared. Trading these markets without a plan and going on your gut feel is a common mistake that novice traders tend to make. The best way to avoid making mistakes when you trade cryptocurrencies is to educate yourself on the types of strategies that are generally successful. Here are six key issues that you will face as a novice cryptocurrency trader and how you can avoid these mistakes.

1) Trading without a plan.

2) No using sound risk management (risking too much)

3) Failure to cut losses quickly.

4) Chasing hot trades.

5) Being Too Emotional About Money

6) Blindly Following Mechanical Systems

Trading Without a Plan

When you first hear about cryptocurrency trading, it’s easy to get caught up in the hoopla. Friends and colleagues might tell you about how much money they have made as bitcoin and ether surged.  Before you place your first trade, you should know that the cryptocurrency markets require time and effort to trade them successfully. You need to set up a trading plan similar to a business plan. Otherwise, you will find yourself in a situation where you are losing money and do not know what to do. 

A trading plan is similar to a business plan; you will determine the types of cryptocurrencies you think will allow you to make money in advance. Your business plan should sketch out how much you are willing to lose on your endeavor into cryptocurrency trading. You then need to allocate a certain amount of capital to this activity. You want to develop trading strategies that work, and it’s prudent to test these plans in advance to make sure you are comfortable trading using these strategies. If you have never run a business before but have played competitive sports, the process is very similar. Before you play your first basketball game, you know who will start the game and be a substitute. You know your positions and particular plays that you might use in specific situations. If you trade cryptocurrencies with a plan, you know that you need to alter your trading plan if you are unsuccessful. If you don’t develop a plan, you will likely be unsure of what your next steps should be.

Not Using Sound Risk Management

One of the critical components of a trading plan is risk management. Risk is the concept that you can lose money on a trade. It’s not the actual loss but the idea that you could lose money. When you develop a trading plan, you want to make sure that the first step is to determine how much you are willing to lose on your trading activity and each trade. If you reach a level that has breached your loss total, you need to go back to the drawing board and develop a new trading plan. 

One each trade that you make, you need to know in advance how much you plan to risk. The profits you plan to achieve should be a multiple of the risk you are willing to assume. For example, if you are ready to lose 1% on each trade, your profit should be 2% or 3%. Before you enter any transaction, you should know how much you plan to risk and your reward. You can then use these levels to create a reward to the risk profile. This ratio of reward to risk should be consistent with each trade that you make. 

When you initially start trading, you should consider risking smaller amounts. If you start with large levels of risk, you might start to become scared of the markets and try to cut your positions so that you can avoid the pain related to losing money. If you avoid the common mistake of risking too much and have a risk management plan, you are well on your way to having a successful trading plan. 

Failing to Cut Losses

There is a saying that goes that you will be successful if you let your profits run and cut your losses quickly. This saying means that when a trade goes against you, do not become emotionally attached to the trade. Cut your losses quickly if they have reached your stop loss level. Do not hold on waiting for the trade to move back in the money eventually. You also want to make sure that you can take advantage of the upward or downward movements in a cryptocurrency if you catch a trend. 

Chasing Hot Trades

Another mistake that will also occur is the desire of many to hop on the hot trade. Just because a cryptocurrency is rising does not mean that you have to jump aboard. If the trade conforms to your trading strategy, then, by all means, take a position, but don’t get involved just because it is a hot trade. Each trade that you take should be part of your trading plan, and hot-trades generally will sidetrack you and potentially make you miss trades that conform to your plan. 

Don’t Get Emotional

To successfully run a business or a trading strategy, you need to eliminate your decisions’ emotional aspects. Losses and wins are part of trading. Don’t let those highs get you too excited, and the lows get you down. By having a sound risk management plan containing stop-loss levels and take-profit levels, you can avoid getting emotional about your trading endeavors. 

Blindly Following black-box Systems

Another mistake that novice traders often make is to follow a black-box system blindly. A black box is a system that spits out buy and sell signals that help you enter and exit positions. The reason for the signals is unclear. Before you use a black-box approach, it’s helpful to test it using your broker’s demonstration account. 

The Bottom Line

There are several methods that you can employ to help you avoid trading mistakes. The most common mistakes are:

1) Trading without a plan.

2) No using sound risk management (risking too much)

3) Failure to cut losses quickly.

4) Chasing hot trades.

5) Being Too Emotional About Money

6) Blindly Following Mechanical Systems

If you create a trading plan and use sound risk management while eliminating your emotion and following a system blindly, you will likely be successful in your trading endeavors.