Trading is more complex than investing, as you take advantage of market volatility. Indeed, trading can leverage more significant results in shorter periods, but you’re always on slippery ground due to market bias. Unfortunately, traders’ opinions can influence the market since the information they read and use for analysis is shaped in a certain way. That’s why media involvement weighs so much because it can lead to changing assumptions about the market.
This phenomenon was studied within the behavioral finance sector around the 90s when it was revealed that emotions influence investors’ decisions. Therefore, the entire decision-making process is altered, so these factors can determine a trader’s performance.
Understanding how these cognitive barriers work might help you make better decisions and overcome emotions and fears when trading with crypto. This would take a lot of discipline and self-control, but it’s the best thing to do to be a successful trader. Here’s how to do it.
What are the types of biases that interfere with the trading process?
Coinrule recommends that whether you’re day trading, swing trading or position trading, you must determine how much you must hold onto positions during the fast-paced way of how things usually go in trading. This can lead to experiencing many stressful situations that eventually translate into bad financial decisions.
Therefore, there are two common types of biases that traders experience. First, cognitive bias comes from the information sources you choose to read and use for creating strategies. For example, if you take all your info from a careless crypto guru, you might accumulate a lot of inaccurate data and misuse it, leading to losses. But since you’re convinced this is not the source of your defeat, you continue reading from the same source.
Then, there’s the emotional bias, which is more challenging to tackle. It includes the involvement of emotions, such as fear or greed that distort your perception of what is safe and dangerous. Emotional biases can look different depending on the trader’s personality, from being overconfident in your accuracy of predicting prices and trends to remaining within the comfort zone to the status quo out of fear of adjusting their strategies to improve them.
How can you get over these biases?
Sometimes, traders must realize that what they’re doing wrong has nothing to do with how much they invest or the methods chosen. In many cases, they lack awareness of how their psychology can influence success.
First, cognitive biases can be managed more efficiently because you only have to do more research and analysis from crypto trading and consult different perspectives to gain insight into what are truly good strategies. Therefore, you should try basing your decisions on objective reports and information, so get familiar with charts, indicators and market fundamentals before forming your opinions. Moreover, using a trading bot that is always unbiased is more efficient.
Regarding emotional biases, things start to get more complex. Handling them means working with yourself and improving your self-awareness. Take your time to observe how you use your trading methods. After rapid, short-term gains, do you tend to get involved in trading for some time obsessively? Are you getting attached to current positions because they’re safe and don’t want to regret a mistake?
Based on the known types of trading biases, you might find the pain point that doesn’t allow you to progress. To mitigate this issue, you can create a set of rules to stick to, such as having predetermined entry points or following guidelines for risk management as closely as possible. This way, you’re less prone to experiencing strong emotions that will mistakenly drive you to do something.
What are the best trading strategies to adopt?
Plenty of crypto trading strategies are available to try, but not all guarantee success or even moderate revenue. So, what you might want to do is stick to the well-known trading methods, such as the following:
- Day trading is a classic, and it’s as simple as it sounds ―you only have to enter and exit your positions on the same day. This style is safe because prices are not affected by overnight market changes;
- Swing trading can last from one to 30 days, requiring more patience. Since you have more time on your hands, risks and stress are at lower rates, and you will benefit more from swing trading compared to day trading;
- Position trading implies buying and holding an asset for extended periods, from a few months to years. This method helps you build your portfolio over time, and you can even predict market trends since you can consider the bigger picture;
Still, you must be careful with your emotions, even when using these basic strategies. For example, day trading can provide you with coins fast, but you can lose them similarly, triggering your loss aversion bias when you hold a poor position for too long.
Swing trading also requires more research to master. While you have enough time for your position, sometimes you must realize that not making the right decision out of fear of regret will only lead to losses. This regret aversion bias won’t help you close a position when required.
Finally, position trading requires strong, unbiased opinions because you commit your money for longer. During this period, there may be risks of losing money due to market volatility, and you can’t even benefit from what you’ve gathered since profits are available after that long period. This strategy might lead to self-control bias, when you may have an impulse to close your position despite wanting to stick to a particular method. In this situation it might be a wise decision to use the best crypto trading bot to benefit from the needed support to boost your profit.
Trading crypto is already complex since there’s so much information and so little time since the market has become a real thing. But besides the difficulty of handling volatility, media influence and poor investor sentiment indexes, you must also be aware of how biases influence your strategies.
Upon reading about cognitive and emotional biases, you may find that your responses to market changes are simple impulses. If you could control them, you might be able to pump up your profits and become a successful trader.