John was a successful trader who had made good money trading Crypto. He was confident in his investing abilities and was known in the community for having a sharp eye for the best crypto and blockchain projects. One fine day, John received a hot tip about a new cryptocurrency about to take over the market and shoot up in price. He got excited and invested about $1000 into the coin.
As the weeks went by, the coin price began to increase. John felt that familiar sense of satisfaction that comes from putting your money in the right place. Weeks turned into months, and suddenly, the coin price began to fluctuate. John started becoming anxious but refused to sell off the coin. He held on to that coin even when the price dropped dangerously close to the bottom. When he finally let it go, he lost a significant amount of his investment.
The above situation is a familiar one for many investors and traders alike and is one that is often influenced by behavioural biases.
Behavioural biases are irrational beliefs or behaviours that unconsciously influence our decision-making process. These biases affect how we receive information, choose options, and assess risk. Trading of any kind, whether fiat or Crypto, comes with the potential for risk. This article explores ways to avoid behavioural biases in crypto trading.
5 Ways To Avoid Behavioural Biases In Crypto Trading
Here are five ways to avoid behavioural biases as a crypto trader:
Develop a trading strategy
A trading strategy is a set of rules that guide your trading decisions. It should include your risk management plan, entry and exit plans, and a detailed outline of your financial goals. By having a trading strategy, you can avoid making impulsive or illogical decisions solely based on market hype, "hot tips", or irrational emotions. A properly structured trading strategy also builds your financial discipline and helps you remain consistent regardless of how the market moves.
Follow your strategy consistently
Once your strategy is ready, stick to it. Don't let emotions cloud your judgement or external influences sway your decisions. Follow your trading plan but allow some level of flexibility for market volatility. Prices fluctuate rapidly in the crypto market, and sticking to your personal trading guidelines helps you avoid making decisions based on fear or greed.
Several lessons have stood out to me from my years of trading. One, Patience - While some people make it quick in Crypto, others just have to go through that journey of consistent hard work before actually making real money, and I was one of them. Two, Discipline - In the Crypto market, if you allow FOMO to rule your actions or do something outside your trading plan, it's likely to result in heavy losses. Three, Contentment - I learnt that taking profit, irrespective of the size or amount, should be a top priority as no one knows the heart of market makers. Four, Humility - No matter how much you make from trading, there's always someone richer and smarter than you. So to become better, learn from them. -A. Williams.
Avoid FOMO (Fear of Missing Out)
The fear of missing out (FOMO) is a common problem faced by experienced and beginner traders. When a coin or token is increasing in price, following the crowd and investing without doing your due diligence can be tempting. However, FOMO often leads to impulsive decisions followed by costly consequences. Read more about avoiding FOMO here.
Do your own research and seek advice
What do you know about the cryptocurrency you're interested in? Do you know anything about its developers or its market history in general? These are several questions to ask before buying any coin or token. To make it easier, we compiled the five most important questions to ask before buying any crypto into one article here.
It is also helpful to seek advice from reputable sources when trading cryptocurrencies. This can include financial experts, trading forums, or crypto communities.
Take a trading break
It's essential to take breaks from trading to avoid burnout and reduce the impact of emotional biases. You are not a trading bot or a human blockchain. Taking a step back from the market can help you regain perspective on your finances and perhaps life in general.
A break can be as simple as taking a walk, engaging in enjoyable activities, or even taking a 2-week vacation from trading. Whatever you decide to do, ensure it is relaxing for your mind and body.
Behavioural biases can significantly impact your trading decisions, leading to poor and costly financial outcomes. By developing a trading strategy, following it consistently, avoiding FOMO, doing your research and taking trading breaks, you can avoid the influence of behavioural biases and make informed trading decisions.
Disclaimer: This article was written by the writer to provide guidance and understanding of cryptocurrency trading. It is not an exhaustive article and should not be taken as financial advice. Obiex will not be held liable for your investment decisions.