Cryptocurrency Trading: Control Your Emotions

Investing, Opinion | December 27, 2018 By:

The art of trading itself is not anything new to the human species. However, we haven’t quite adjusted to the fact that we are trading digital assets and there is no immediate physical loss. Let me try to explain to you how much human emotions play a part in your everyday trading habits.

As I’ve already mentioned, the human mind hasn’t quite adjusted to the newly digitalized world. We may perceive trading as our daily habit, and accept it as a daily occurrence, argue that we are well versed and connected to our losses and profits. But I guarantee you that you feel a lot more emotion when paying with cash, rather than a card. Same goes with trading. In the past, most of the trading was physical, you had to physically be there and exchange physical tangible items. Therefore if you experienced a loss, it had an immediate effect. Nowadays when you lose some money on a trade it doesn’t have an immediate effect on you. However, it does spark emotion in the human mind, which prompts us to retaliate and return our lost goods, that much is common between digital and physical assets.

It is always easy to confuse the way trading works these days. After so much digitalization some people think that the trades mostly happen through logic, algorithms and so on. However, this is not necessarily the case. One of the biggest factors about trading is the human emotions that come with it.

The past confirms it

One of the primary examples, when human emotions tampered with the price of Bitcoin, is when the Chinese national bank banned it in its systems in 2013. Let’s look at that in more detail, shall we?

A centralized bank banned a decentralized digital currency in its network. Let that sink in for a moment. In reality, it shouldn’t have done anything to the value from a logical perspective as Bitcoin isn’t meant to be used in banks, to be honest. However, it did indeed slump by 50%. Why? Very simple, people panicked. The word panic is such a good description for the crypto slump as it is mostly the explanation that experts use when describing a price fall in something. People assume the price will fall, and just by assuming it, they make their worst expectations come true.

Should the investor sentiment had remained the same during the time when the bank banned Bitcoin, it wouldn’t have even budged, maybe just a little bit. This should give you a primary example of how your decisions may affect the prices.

However, there is also a contradictory event that happened this year, which didn’t really contribute to the fall, when it should have. Remember when Poland introduced a tax on crypto at the beginning of December? That didn’t quite budge cryptos too much, did it? That’s because the people affected by the tax are just a small portion of the crypto market. Whereas the Chinese market contains more than 80% of all cryptos in the world. It’s where they mine it the most.

The primary difference between digital and fiat

In most cases, you wouldn’t see fiat currencies suffer too much from bad investor sentiment. Even if all of the indicators were showing that the retail investors were completely abandoning, for example, the USD/EUR pair, it still wouldn’t suffer too much. Why? Because it’s all about the size. Normal investors like you and me, don’t really have the power to affect fiat currencies with our selling and buying habits, because of how big the market is. The ones affecting it the most are large corporations, government institutions, and banks, who trade in the billions. With the crypto market, it’s completely different. It mostly works on the habits of investors like you and me. If we decide that it’s time to sell Bitcoin, there is no large corporation backing the price, therefore it will indeed fall quite a lot.

Losing doesn’t feel too good

You might think that most of the January slump in cryptos can be attributed to the bull market losing its juice, but in all honesty, it was about investor emotions and not the logical decision to sell.

The case is that our minds are wired to avoid losses at all costs, even if we have to sacrifice potential gains, we’re willing to do it. Try to imagine yourself in a position where you’re offered an opportunity. In this opportunity, you have a chance to either win $100 or lose $10. Even though it is a rather large margin and should decrease the risk, it still weighs on our minds and the question “what if I lose?” continues to surf around. In many cases, you’d see people ignoring the opportunity completely, and even those few who accept it, dread the negative outcome, even though it’s not a big deal.

The same thing happened with the crypto market. After witnessing so many people lose their money in a bear market, new traders completely abandoned the idea of joining the market, and older ones just wanted to get out as soon as possible. That’s how prices decrease actually. The more desperate people become to sell off their assets, the easier it is to persuade them to give you a discount. In this case, there was nobody asking for the discount however, the market was adjusting to the traders’ desperation and allowing them to sell their assets at a lower price. Something that spiraled out of control if you ask me.

Start controlling the emotions

There is no secret formula for becoming a better investor. No ultimate strategy that is universal, and most certainly no way you can have a 100% success rate. In order to maximize that success rate, not only in crypto trading, you need to become more patient. You may argue that patience is not an asset during a bull market and I’ll agree. But it most definitely is in a bear market, the one we find ourselves in right now.

One of the best practices I’ve had was to keep myself busy and not pay too much attention to the prices. I used to check them every 30 minutes or so, now I only look at them once a day and make my analysis through that. Thanks to this, I’ve been able to make a lot better decisions for the long-term, while sacrificing the short-term small profits.

Study your failures. The fact that you lost some money during crypto trading in the past, isn’t necessarily your fault, but it is your responsibility to fix it if you want it fixed that is. I suggest you trace the falls to specific articles in the past, learn how they affected the prices, analyze them, and be more prepared in the future.

I can’t guarantee that there will be no more failures, but I can easily say, that the more prepared you are the fewer failures you’ll experience. Try to think of it as the test you would take in your favorite subject back in school. It was never a challenge and you were always confident when writing it, while any other subject you disliked seemed hard and stressful, because you were doubting your knowledge in that sphere. If you want to be as calm as you can with crypto trading, you’ll need to know how cryptos actually work. Luckily, there are more than enough recourses online.

This story originally appeared in ForexNewsNow.