Wild swings in cryptocurrency can keep you in constant restlessness while trading. You might be tempted to modify or adjust your positions as the market shifts. Greed, anxiety, hope, or anger can leave you doubting your trading decisions. Or cause to make unreasonable moves while trading. Allowing emotions to influence your investment decisions is never a good idea. It takes a great deal of discipline to rise above these emotions. Professionals always ensure they fully understand the risks before proceeding. But the unceasing market volatility can generate panic, stress, or over-excitement in anyone.
That is why seasoned investors use various approaches to manage their impulses while investing in cryptocurrencies. This article shares five techniques professionals use to prevent emotions from influencing decisions.
1. Thoroughly understand the risks
Before investing in any cryptocurrency asset, research the asset to identify all risk areas. Apart from market analysis, calculating the risk-to-reward ratio is also essential. It is best to have an idea of all the potential outcomes of the investment. When you are mentally prepared for the market’s ups and downs, it becomes easy to embrace the volatility. Ready your mind for the worst and best-case scenarios. This would help you stay true to your trading plan and your rules.
2. Determine your risk tolerance level and trading time-length
Predicting when the crypto market will rise or fall is tough. No one is sure how much price increase or decrease will occur within a particular period. That is why successful investment does not rest on how long you hold a position. However, you must determine the risk amount you can handle. And use it to adopt a suitable strategy. If you prefer a long-term investment, you are probably comfortable with higher risk. Long-term investments often take bigger hits from market volatility. On the other hand, if you are more of a short-term investor, you may prefer a lower risk level. These investments receive lesser impact from the market’s ups and downs.
3. Recognize and embrace the emotions
Crypto market volatility can induce serious strong feelings. The first step to gaining control is recognizing emotions, whether fear, greed, anger, or nervousness. Once you understand the emotion, it is easy to catch yourself acting on it. Be aware when you are over-excited or overly anxious. That is why having a basic knowledge of trading psychology is essential. You can determine the potential behavior resulting from such emotions through such knowledge. It would help you avoid these behaviors, remain level-headed, stick to the trading plan, and be reasonable.
4. Avoid getting influenced by “the noise”
When you listen to the news, your goal should be to stay informed. Avoid reacting to every incredible headline or news article. Remember that cryptocurrency remains a controversial financial instrument. People’s opinions about it remain divided into two groups. One group considers it evil or a fad. The other group believes it is the future of finance. You will find both groups everywhere in mass media, and both have strong opinions about the asset. It is better to seek authentic information rather than get swayed by all the noise. One way to do this is by conducting your analysis. Luckily, there are technical tools for this purpose. Keeping an eye on regulations, and following actual market data, including demand and supply, is a great way to be rightly informed.
5. Diversify your crypto investment
Remember the saying, “do not put all your eggs in one basket.” And apply it to your cryptocurrency investment. Limiting the risks will help your emotions stay under control. Professional investors minimize risk by diversifying their portfolios, whether in stocks, cryptocurrency, or other investments. There are various cryptocurrencies. Researching the market will reveal several potentially profitable coins to invest in. It is safer to spread the investment among them. Apart from helping manage your emotions, there is the likelihood of great rewards if you diversify.
The financial market is ever-volatile, and the cryptocurrency sector is worse in this regard. Prices can make huge jumps between two extremes during the day in this market. Investment can be challenging unless you learn to embrace this volatility and regulate your emotions. There are different psychological stages of a market cycle. Understanding them can help you stay emotionally aware. Hence, you can avoid making investment decisions based on these emotions.
Psychological stages of a crypto market cycle
Stage 1 – Doubt
If a particular crypto asset has trended in one direction for some time, investors may doubt the new trend at the first instance of a change. They may expect the price to get back to its original path.
Stage 2 – Hope
If the new trend endures, investors may start to hope that the trend is here to stay.
Stage 3 – Optimism
Investors gain confidence in the new trend
Stage 4 – Confidence
Investors enter the market and start capitalizing on the new trend.
Stage 5 – Excitement
The profit starts pouring in, and the confidence increases. If not controlled, FOMO (Fear Of Missing Out) can kick in. This stage may escalate to over-excitement and over-confidence.
Stage 6 – Carelessness
The trend changes direction. The investor doubts this change, believing they will continue to cash in trading in the same direction.
Stage 7 – Fear
The trend continues on its new path. Fear and anxiety set in.
Stage 8 – Denial
The short-term investor switches to the long-term style. They hold the position hoping the trend will return to its previous path.
Stage 9 – Anger
The investor has lost so much money. They can not believe what just happened. They get angry.
Stage 10 – Sadness
The loss depresses them. They start thinking maybe the naysayers are right – Maybe cryptocurrency is a scam. They consider quitting.
Stage 11 – Doubt
After an extended period, the price changes direction. A new trend begins. The investor/trader ignores the first signs of change. They expect the old trend to continue.
Every investor experiences these emotions. Neophytes go through all the stages. Professionals have mastered their emotions while dealing in this market. Understanding the different stages keeps you conscious. It reinforces the motivation to stick to your plan.