A large part of successful cryptocurrency and bitcoin trading comes from mastering your mind and your thoughts. Let’s dive into the three most common psychological mistakes bitcoin traders make and how to overcome these mistakes to maximize your crypto trading profits.
1. FOMO Trading
FOMO is an acronym for ‘fear of missing out’. The FOMO trader is typically very optimistic about each and every trade and is usually thinking; ‘this trade could be the one! Something about this trade looks so much better than all the others so it has to be the one. If I miss this trade there may not be an opportunity like this one for a while.”
This type of thinking affects so many traders mainly because they don’t even realize it’s affecting them. And it’s a huge problem because it can cause two things:
- It can cause a trader to take every trade even if it’s not that good of a setup.
- It can cause a trader to increase the position size on a particular trade because if this trade does end up being all that good, why would they only want to make a few hundred or a few thousand bucks on it.
And the thoughts that appear are like; ‘screw that, let’s swing for the fence.’ But what happens when this trade turns out to be nothing special and despite how much it seems like there’s no way you can lose money on it, it turns into a losing trade and now you have tons of your capital invested and are sitting on a huge loss that will be almost impossible to come back from.
Don’t Panic on Missing an Investment Opportunity
You can see how this can be a huge problem. If you’ve ever struggled with this, here’s some wisdom from Charlie Munger who is Warren Buffett’s business partner. At a Berkshire Hathaway investor conference, Warren Buffett and Charlie Munger were talking about how they missed Google and Amazon because for some reason they had a blind spot and they didn’t see the opportunity. In fact Charlie Munger specifically said, ‘we will keep missing them but our secret is that we don’t miss them all.’
If the best and richest investors in the world aren’t worried about catching every single investment then why should we? We just have to understand that missing trades is a part of the game and it will happen. So if this fear of missing out is something you struggle with, the solution for it is to stay out of chat rooms, and trade alone for a week or so and if you follow other cryptocurrency traders on social media, stay off of that as well. Seclude yourself and trade alone for a bit because often in chat rooms, or on social media, we see others making money and by nature, this instills a fear of missing out.
During this period, where you are trading alone, if you feel like you can’t find trades or generate trade ideas without chat rooms or social media then you likely need to stop what you’re doing and become more educated on the strategy that you are trading so you know the process to sign trades, when to enter and exit. You need to have an exact plan. Your trading strategies should not rely on the trade ideas of other people.
2. Revenge Trading
These are the types of crypto & bitcoin traders who can blow up their entire trading account and lose everything in just a day or a week. After taking a trading loss, revenge traders will throw everything they know about proper position sizing out the window and will trade like a madman just to make back that loss. This may work once or twice and they’ll come out unscathed but if they keep this up, they’ll get crushed bad and it’s going to hurt.
The market doesn’t care about you or your money and you’re going to be 100% responsible for it. Just be honest with yourself and if this is something you struggle with at all, just get a grip on it before it really ends up hurting you and the solution for this one is actually fairly simple.
Keep Your Trade Position Small
If you’re having this problem where losses are upsetting you enough to get you to this point of seeking revenge on the market, you’re likely trading way too big of positions in the first place. Knock that position size down and trade smaller sizes.
This should allow you to not get so upset about losses and you’ll be able to start making decisions based off of logic rather than emotion. With any trading strategy, you’re going to have losing trades every now and then but the key is making sure your winners outweigh your losers.
Focus on Long-Terms
If you’re having issues with this and you know that your position sizing is in check, then it’s your mindset or your expectations of trading. Make sure you’re committing and focusing on the long term. Try to look at the bigger picture and think about how the long term success is much more important than trying to make back that loss right now.
Revenge trading can also be a result of expecting yourself to make money every single day and anytime you are negative on the day, you will do everything in your power to turn that around. This is just not a realistic expectation. You should be focused on being positive on the year, quarter, month or at the very least; a week. But being positive every single day is just not reasonable as markets fluctuate each day and you can’t control that.
3. Gamblers Fallacy
This might not necessarily be a psychological mistake but rather just a very common misunderstanding of some basic probabilities and then it will cause you to make very poor bitcoin trading decisions. In some cases, this one can also compound and cause very big losses.
This actually spans far past just the trading world and as you can probably guess by the name, it’s most commonly associated with gamblers. We certainly don’t want to treat our trading as gambling, so let’s figure out how to avoid this common mistake that so many traders make.
We all know that a coin flip is a 50-50 bet. So if you flip a coin 10 times, the expected outcome would be five heads and five tails. But, although it’s expected that the same number of heads and tails will show up, we know that the actual number can deviate in either direction. Let’s say we plan on flipping a coin 10 times and the first five coin flips, all land on heads. What is the sixth coin flip more likely to land on? Heads or tails? If your answer is tails then you have fallen victim to gamblers fallacy.
The expected outcome of ten coin flips is, of course five heads and five tails but rolling five heads in a row does not change the probability of the next coin flip. The probability of the next coin flip is completely independent from the past results. So, what is the sixth coin flip likely to land on after five heads in a row? It’s still a 50-50 bet.
Gamblers fallacy refers to the thinking that a series of events will somehow affect the outcome of the next event. As if there was some sort of balancing force at work and in this example, the coin somehow knew that it just landed on five heads in a row so now it should land on tails.
At a casino, if the roulette wheel just landed on red ten times in a row, many would start putting their money on black even though the previous spins have no bearing on what the next spin will be. And this also applies to cryptocurrency trading. Many traders fall into the clutches of this fallacy. If you have five losing trades in a row, this does not mean that the next trade will be a winning trade just because you feel like the losing streak has ended.
Many traders tend to increase their position size after a losing streak because they feel their luck has to turn around soon but the reality is they’re just increasing their risk on a trade that has the same probability of success of all the ones they just lost money on. The market does not know or care if your last few trades were losers or winners.
The solution to Gamblers fallacy is as simple as understanding it. Now that you understand what gamblers fallacy is, you should be aware of it and just make sure you aren’t affected by this type of thinking. Try and treat each bitcoin trade independently from any past trade you’ve made. If you have a streak of losers that does not mean the next trade will be a winner and on the flip side, if you have a streak of winners, that doesn’t mean the next trade is more likely to be a loser.
Trading is a numbers game and you have to eliminate these psychological mistakes and focus on trading the numbers. Once you can do that you’ll take your trading to the next level. The crypto & bitcoin market is not a place for weak emotional people. Make sure you are not your own worst enemy in trading bitcoin & crypocurrencies.