Crypto Trading Psychology: Common Mistakes of Traders When Opening a Position
The human brain evolved in entirely different conditions compared to which traders must conduct their activities. As a result, the human brain's decision-making patterns could be more efficient in the market. It doesn't mean that they sway trader toward a "bear" perspective, but rather that they place the yield curve of his deposit in a "bear" trend. Here are a few examples of how a trader's deep mental needs can lead to losses.
I Want to Enjoy!
The system of human instincts works on the principle of carrots and sticks. For the correct action (eat, warm up, etc.), a person is encouraged by the release of "happiness hormones" serotonin and dopamine, and for the wrong action, pain and the release of the stress hormone cortisol.
Therefore, in the "default" mode, the human brain always looks for opportunities for another dose of joy and happiness. If a trader got a tangible profit from a trade at least once and felt euphoric, his brain has already built a logical chain: "opened a position - enjoyed it." A similar association is formed in people who are addicted to gambling.
In this case, the entire complexity of the analysis is simplified, and the most striking fact is stored in memory. For example, when the position was "trending." And now, in pleasant anticipation, the trader opens a new position on a trend line, not fully realizing that he is doing this, not being guided by analysis or strategy, but only to feel the joy of easy profit again.
I Want to Win Back! I'm Not Ready to Accept a Loss!
Now, instead of the long-awaited profit, the trader gets a loss. Then another. The anticipation for joy is replaced by bewilderment: "What is happening? I've done everything before!" And it's not so painful to see a slight loss on your account, but the prospect of looking stupid in the eyes of friends and family, to whom the trader has already boasted of his first successes, is scary.
A profitable trade for a trader is no longer income - it is personal. A way to heal a wounded self-esteem. A way to justify your actions. In this state, the brain has no time to think about the potential return, evaluate the risk/reward ratio, and do other significant things. The main thing is to profit and return to the comfort zone as soon as possible. And to make a profit, you need to open another position. The subconscious, as it were, urges the trader to take action, even if the market does not favor him.
Fear of Missing Out on an Opportunity (FOMO)
Let's return to the fact that the brain often simplifies the context of a successful trade to a simple idea. For example, "trend trading." Sometimes, especially after a couple of missed trading opportunities, a trader will be overcome by the fear of missing out on profits, especially with a negative account balance. As a result, the trader begins to show excessive activity in the search for patterns and signals, switches to lower time frames, and updates charts too often.
If there are doubts about the practicality of the trade, it is better to refrain from active actions and observe from the outside. But fear of missing out eliminates this logic in his head. The slightest hint of a "trade with the trend" becomes a powerful incentive to open a position. The subjective perception of the risk of a trade turns out to be less painful than the prospect of watching the "leaving train."
In this instance, self-discipline is tricky since such "trend trades" occasionally occur, supporting a false trading stereotype. At the same time, the trader's increasing uneasiness makes it challenging to focus on other market elements that impact the scenario.
I Want to Avoid Pain! Logic Loops
Experiencing repeated losses is a terrible experience. However, every trader has a sequence of failures, which may be excruciating. Simultaneously, the subconscious mind stubbornly tries to protect its carrier from negative emotions, offering logical solutions such as eating a chocolate bar (to get a dose of endorphins), taking a break from trading, complaining to a friend about problems, buying something for yourself (a popular female life hack), sleeping, and so on.
More appropriate solutions may also emerge under awareness: attend training courses, seek "functioning" trading tactics, and pay attention to other financial instruments. However, all of this is about seeking fast ready-made solutions when effective trading requires a lot of personal market study.
The market is continually evolving at the level of small but crucial elements. Depending on market mood, the same trading signals might be employed in radically different ways. These distinctions can only be discerned with a thorough understanding of the market.
A high degree of tension makes it hard to focus on the market. Under stress, the human body prefers to flee or fight rather than remain in deep thinking and creativity. Consequently, the trader is trapped in a series of "logical loops" and stays at superficial analysis.
For example, suppose a trader made a 2% profit and the price climbed by 1%. Following the completion of the analysis, the decision was taken to maintain the position for a more extended period to boost earnings the following time. The trader kept the trade longer the next time, but the price fell, and the trade was terminated at a loss. Following the study, it was decided to close the trade with a 2% profit. And the cycle continues.
There are several instances of such loops, but they all come down to a trader making the same errors repeatedly and losing money. Looking at the issue from the outside and restoring your strategies to a productive path while in this mood is tough.
I Want to Avoid Pain
Dissatisfaction with the consequences of logical loops may lead to moral weariness. The trader no longer knows how to trade or what to pay attention to, yet they continue to establish and close positions systematically to enter positive territory.
The brain gradually shields its user from psychological damage, attempting to divert his attention away from trade and toward anything else. As a result, concentration diminishes, and losses increase.
In the subconscious, a dead end is formed: there are no prospects for lucrative trading, but it also does not work to convince the awareness not to trade. Therefore, the most logical choice is to reduce the deposit to zero to prevent future hardship. According to the subconscious, this is a legitimate method to reduce mental tension.
And now, the trader has more and more ideas about going "all in." Either he soon becomes wealthy and justifies all of his sufferings, or he loses the deposit and can finally rest and relax. Eventually, the trader succumbs to this need, and in one or two huge trades, he loses all his money. After that, there is no more money. The cycle of failures and torments has come to an end. The brain has effectively shielded its owner from pain.
What to Do to Avoid Emotional Trading?
This article describes the main emotional reasons for opening trades chronologically, but it does not always happen that way. Good, thoughtful positions often alternate with emotional decisions, reducing the final result.
It is hard to do something without clear guidelines. First of all, to avoid losing money due to ineffective mental stereotypes, it is necessary to have clear criteria by which each trade is opened. The more formalized the strategy, the easier not to succumb to subconscious emotional impulses.
Collect situations where you can earn and use money. Write clear recommendations on the number of funds used in each typical trade. Watch all-new experimental patterns from outside, or use the smallest possible trading volume. Avoid "guessing," and don't give your brain a chance to get a dose of endorphins from a random win.
Loss or profit from a random trade is equally detrimental to the trader. A significant loss causes a solid desire to recoup, and a big profit creates a dangerous precedent at the level of thinking - the brain begins to think that you can always earn money this way.
Nurture your mind. Remember that despite all the power of the intellect of modern Homo sapiens, some part of it is always guided by instincts and feelings. If, after opening a trade, you suddenly realize that you were in a hurry and made a rash decision, immediately close the position, regardless of its result. This will train the subconscious mind to refrain from questionable trading ideas and not rely on its conscious part to allow it to play a "guessing game."
If the trade has reached a stop loss, take the loss quickly and calmly if the fundamental drivers are no longer relevant. The brain will get used to this pattern, and next time it will be much easier for you not to pull the loss.
Monitor your psychological state while trading. Ask yourself "How do I feel? What emotions do I experience? Is this trade profitable, or am I just bored? Is my attention focused now, or are my thoughts constantly shifting to something else? Should I make a decision right now?
You can keep your personal psychological diary if you are an active trader using pen-and-paper or an automated trading journal like Trader Make Money. You can describe your emotions during the trading day. When keeping a diary, you can see your most common psychological mistakes and track the times when it's better not to make any decisions at all.
You can also develop your own additional rules that will allow you to approach trading in a more balanced way. This may be a list of conditions in which you must not come to your trading station (For example, if you're feeling fatigued, excessive excitement, etc.), as well as special exercises and techniques for relaxing and stabilizing your emotions.
Strive to manage yourself more than your own money. Steady earnings will come soon if you can effectively implement these challenging recommendations.