The price of crypto CFDs, just like any other financial instrument tailored for traders, makes haphazard but structured upwards or downwards movements.
This implies that in the long term, a trader has a 50 percent chance of posting a winning trade. The data out there, however, depicts a rather bleak truth.
In CFDs trading, the probability of posting consecutive losses for an unprepared newbie or seasoned traders can sometimes be high.
There are several factors that contribute to this more so in Crypto trading. However, ordinarily, and there are statistics to back this, fewer than one trader out of four makes a profit while trading.
For this reason, the European Securities and Markets Authority (ESMA) has issued guidelines that mandate trading platforms to post disclaimers warning traders of the risk in trading CFDs and other financial instruments. For compliance, CryptoAltum has a risk warning but concurrently presents tools and materials to reduce risks for all cadre of traders.
Understandably, there are several factors that impact a trader’s performance. External factors like slow order execution speeds or technicalities that prevent trading are some, but a big part can be zeroed in to individual traders.
Failures to create a strategy can drain an account. However, mastering your psychology is a massive win for any trader .
So, what makes the difference between the successful and the unprofitable trader?
The Decision-Making Process of a Successful Crypto CFD Trader
Every successful trader in crypto CFD trading has mastered risk management theories, which include entry/exits and position sizing.
They also go into the market, acknowledging that it is not a get rich quick scheme. They have an understanding that any form of trading, be it in crypto, commodities, stocks or forex is not a walk in the park.
Best of all, the trader that keeps trading despite making some losses, becomes ultra-successful in crypto CFD trading because they have mastered their emotions. They are disciplined, have courage and astute. Above all, they are cognizant of the risk and reward control.
Consequently, in a highly speculative and volatile market, this trader will;
- Let their winners run setting a profit target before commencing any trade as per their risk-reward ratio.
- Avoid all distractions to trade, and ignore contradictory indicators. As such they will avoid misleading advice from trading forums ideas and “hot tips” from gurus.
- Embrace the fact they will at one time have a series of losing trades and use that experience of loss to optimize their trading approach
- Be disciplined enough to stick with their trading strategy until they have spotted a recurring trend that needs to be rectified or amplified
The Emotionally Driven Trading Process of a Loss-Making Crypto CFD Trader
The crypto CFD trader, bound to leave the market after the few loss-making trades, on the other hand, has an emotion-based trading plan.
They will not perform any sound research for their trading master plan but will join the market hoping to have fun and make a million dollars in their jammies.
This trader’s emotional trading traits include;
- Allowing their losses to run while trying to avoid a minute loss, causing massive losses as they wait for the tide to reverse itself
- Overconfidence after a winning streak, blinding them to the fact the market is unpredictable
- Over trading to ensure that each movement of an instrument brings in profit
- Greed, anger, and fear-driven trading actions that ignore all their risk management education and strategies
- Trading too aggressively to beat the market, which causes them to go against trends
- Failing to protect their capital in the race for profit
How to Master Trading Psychology
A trader’s psychology is the personal understanding of how their behavior and character influence their decisions.
A good grasp of trading psychology can help a trader master their emotions. When coupled with market experience and knowledge, it can bring a balance to risk-taking and discipline. This level of mastery will push a trader to the one percenters, a club of profitable traders that make 12 percent of all market trading activities.
When a trader understands their personality and its reactions to trade-driven emotions such as fear, anger, or greed, they will inherently learn to hold back when greed is prevalent. They will also learn to take risks when fear abounds to make more in profit.
The “Oracle of Omaha”, Warren Buffett, refers to fear and greed as contagion, advising traders to take fewer risks when the greed is widespread and to go for broke when the market is in the state of fear.
The thought types that have the highest influence on a trader’s strategy are moods and emotions, social pressure, and their behavioral biases explained below:
1. Moods and Emotions
Emotions result from a chemical chain reaction that stems from the nervous system and the brain. The emotion precipitated by these systems triggers moods that can lead to hope, anxiety, frustration, greed, fear, or boredom during a trade. These emotional states can influence a trader’s calls in various ways, bringing up a different result each time despite uniform market conditions.
As Warren Buffett says, fear and greed can be an enemy or ally in trade, and the master trader uses them counter-intuitively.
They will not cling on to hope and chase bad trades unnecessarily since they work as per their trading plan. They will also not give in to frustration or boredom but will rely on the technical aspects of a trade move.
2. Social Pressure (FOMO) and Regret
FOMO (or the fear of missing out) is very prevalent in crypto trading.
An excellent illustration of the danger of FOMO is the massive number of traders that hopped into the Bitcoin Express in late 2017, at the peak of digital currency’s Bull Run.
When the decline came after the short-term drastic price rise the FOMO driven trader made a panicky decision and jumped in and out of the rally, losing their precious trading capital.
A good understanding of trading psychology assists traders to suppress FOMO as soon as they have sensed it. It is crucial to understand that there will always be another opportunity to trade since the market is always moving in both directions.
3. Behavioral Bias
There are four main psychological biases that influence crypto CFD traders. They are driven by the emotion of fear. They include;
- Overconfidence bias
Overconfidence bias is triggered by trading euphoria. The trader’s natural focus on their self-image can lead to overconfidence during a trade. When a winning streak strikes, the trader will wrongly assume that they can predict the next trade. To avoid overconfidence bias, a trader should analyze each trade, and allow room for the inevitable mistake as part of the learning curve.
- Anchoring bias
The trader’s mind can create a comfort zone when their analysis displays a certain market trend. With an anchoring bias, the trader will base their future trading decisions on the present market conditions, ignoring the volatility of the crypto trading markets.
Irrelevant and obsolete information will eventually lead to frustration and losses, as the crypto CFD trader holds on to the tried and tested assets. The trader that embraces new prospects and movements will reap better rewards.
- Confirmation bias
In this case, a trader will look for data that will justify their trading decisions, meaning that he/she is not learning and optimizing their strategy. On the flipside, a successful trader researches and creates an optimized profitable strategy by fighting their confirmation bias.
- Loss-Aversion bias
Derived from the prospect theory, loss aversion pushes emotion-driven traders to accept fewer loss trading opportunities for higher rewards. Fear is a better motivator than greed is, so a trader with a loss aversion bias will get out of the trade when the profits are too low. Understanding loss aversion bias will help the crypto CFD fully embrace Warren Buffett’s trading advice on fear and greed.
Trade with CryptoAltum
Master your trading psychology, draw up your trading strategy, and join the CryptoAltum trading platform for the best crypto CFD trading experience.
CryptoAltum uses the highly rated MT5 platform which is specifically geared for trading. Besides, it comes packed with over 50 indicators perfect for all the trading pairs offered by the trading platform.
A better analysis of the trading market will mean nothing more than losses if trading execution is slow. Traders enjoy lighting fast trading order execution and superior trading data. CryptoAltum offers a high 1:500 leverage and safety of funds in cold storage facilities.