26th Oct 2020

Cryptocurrency Trading Mistakes and How to Avoid Them

Despite being just over a decade old, the cryptocurrency market has achieved tremendous size. In October 2020, the crypto market cap was almost $390 billion. Most of this growth, has, however, occurred over the past few years. Take Bitcoin, for example. From a couple of hundred dollars, its price touched the $20K mark in 2017 and has been hovering around the $11K for a large part of 2020. Ethereum is also hovering around the $400 mark, from just around $10 in 2016. Plus, there is the decentralised nature of cryptocurrencies, which protects them from many of the economic and political factors that affect traditional assets.

All this has made them a highly attractive asset for traders. But the crypto market is also highly volatile. Additionally, it is a fairly new asset class, where new developments are taking place at a rapid pace. Therefore, mistakes are quite common, even for experienced traders. So, here’s a look at some common crypto trading mistakes and how you can avoid them.
Trading is a skill that can only be mastered through knowledge and experience. But many beginner traders start trading with real money, without first honing their skills. This can lead to large losses right at the start of their trading career, causing many of them to quit. A smarter route is to start with a demo account. This helps traders simulate the real market experience without having to risk any real money. Before the advent of online trading platforms, this practice was called paper trading. Beginners would write down their buying and selling decisions on paper and then check how their trades would have fared. During the process, they could keep track of the different portfolios, hypothetical trading positions, and profits and losses. This helped them hone their trading method and strategies.
No matter how certain you are of a trade; profit is never 100% certain. Therefore, it is important to have risk management measures in place. This is where stop loss comes in. A stop loss order is placed with a broker, telling them to sell or buy the asset, when it touches a certain price point. For example, a trader places a stop loss at 10% below the purchase price of the crypto. In case the price drops to 10% below the purchase price, the crypto is automatically sold, closing the position. This helps minimise losses. Stop loss is also helpful for keeping emotions out of trading decisions. Emotions such as greed, fear and FOMO often make traders hold on to a trade for too long or sell too early. But with robust risk management tools, this can be prevented.
The digital currency market sees high volatility and when you put all your capital on one position, you are exposed to a high degree of risk. A great way to protect yourself against unexpected market swings is diversification. With this, even if one of the cryptos is performing poorly, your losses can be hedged by the performance of other cryptos. Even famed crypto investors, such as Dan Morehead, Barry Silbert and the Winklevoss Brothers, have large investments in coins other than BTC.
Even the most successful traders experience losses from time to time. What separates them from the others is that they use their experiences to learn and improve their trading game. One of the best ways to learn from your losses is by keeping a trade journal. Keeping a trading journal might seem tedious and time consuming at first. But it can offer great benefits in the long run. A trading journal is a log, where all your trades are recorded. It should have the cryptos you traded, size of each trade, the outcome of each trade, expiration time, dates and your emotions while you were trading. This can help you identify any underlying patterns that might be leading to consistent errors in decision making. For example, without being cognizant of it, you might be entering trades that are extremely high risk, or you may be setting your stop loss order at the wrong place. A trading journal also helps you monitor your progress and refine your strategy.

Making mistakes is part of every trader’s life. The important thing is to learn from them, and avoid repeating them. Confucius once said, “A man who has committed a mistake and doesn’t correct it, is committing another mistake.”
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Cryptocurrency trading can be extremely risky and can lead to large and immediate financial losses. Crypto assets are highly volatile and can result in significant losses of your capital over a short period of time. Cryptocurrencies markets are unregulated services which are not governed by any specific regulatory framework. The provision of such services is not being directly provided by the Company but through licensed third parties.

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