Bitcoin Trading & Market Psychology
Emotions And High Volatility = Problem
The main problem with somebody who begins to trade in any asset-class is that there is no experience beforehand. No one is born the perfect trader; every successful one made a lot of mistakes and most of these mistakes are probably based on irrational actions caused by emotions.
This is a problem. Especially when you trade cryptocurrency markets like Bitcoin. Cryptocurrencies are, in perspective, a very new technology. Not only in general but in a technical way, it is different to anything available now, yet we still are seeing low adaptation and practical usage of the blockchain-technology. This paired with the fact that the market runs 24/7 means the emotional reactions of market participants are stronger than anywhere else.
The Herd Problem
What consequences does this have? One consequence is that beginners with no trading experience are afraid to make their own decisions.
Or as I say ‘the herd problem’: meaning participants often think they made the decision but they actually just fell for a psychological trap. Humans tend to do what others are doing when they don’t have enough knowledge about a certain topic. This means a lot of beginners are looking for guidance (e.g. bigger crypto social media accounts, people they know in real life, etc.) Here comes the second problem – it is pretty hard to find people who can ‘guide’ you in this space as the average knowledge about trading cryptocurrencies is still very low.
And decisions based on this guidance are bad in the first place; even if it works out in some cases. Try to control your emotions as best you can while trading. Do not follow the masses, make your own trading decisions based on own analysis and stick to it.
Act Smart – Be Aware of Market Psychology
To be aware of market psychology you need to begin analyzing not only the actions and emotions of others but of yourself. It is important that you do not fall for ‘confirmation bias’, meaning the system of listening to other people who have a similar opinion to you and becoming an ‘echo chamber’ of that person’s opinion. To be aware of both, your actions and actions of the market with background of market psychology you have to listen in every direction.
What helped me a lot is a little ‘trading diary’. This concept is pretty simple; whenever you decide to make a trade you should write down the date, specific position (entry, stop loss, target, risk/reward-ratio), the decision you made and most important – what you felt when you made this decision.
You may think that this is overkill but believe me – after some months, when you go through some of your entries you will learn a lot about yourself and why you did what you did. And these learnings will push you forward if you take it seriously.