Trading is an opportunity that most people use to earn extra income. However, trading cryptocurrencies, can be particularly risky mainly because of the sector’s volatility.
As a result, it is important to be aware of some of the costly mistakes that traders are prone to making.
Here are 4 reasons why many traders end up in bad trades and how you can avoid the pitfalls of trading failure:
1. Over-Leveraging
Leading crytpo exchanges like Binance and FTX have recently cut down the amount of leverage that users can apply.
These exchange have set the maximum leverage users can take to only 20x the amount of cash staked on a position. Previously, traders could leverage positions up to over 100x.
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SEE ALSO: Why Major Exchanges Are Cutting High Leverages to Just 20x
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Over-leveraging happens as a consequence of a trader’s over-confidence in the outcome of a trade. It’s akin to aiming for a home run on every swing. As you can imagine, this is unsustainable.
Using high amounts of leverage can provide traders with two outcomes:
- The most hopeful outcome is that the trade is successful, leading to substantial profits
- However, high-leverage positions can also deal an equal amount of losses leading to liquidations of held positions
With crypto trading being incredibly volatile and unpredictable, the more likely outcome is to incur a loss just as costly as it would be profitable. In addition, the loss could liquidate a trader’s entire funds and potentially even more if the market was highly volatile.
Successful traders never undertake trades that are leveraged beyond their means or even beyond their strategy.
As such, novice traders should be most concerned with preserving capital and aim for small and consistent wins, which adds up over time. An incremental growth per aggregate of trades is more critical as a strategy.
Small but steady growth allows traders to compound their investments over the long run.
2. Poor Risk Management – Stop Losses
Traders usually assess the potential risks that may arise with the trades the make. They can then take steps to prepare for the risks.
One of the ways to manage risk is by utilizing stop loss orders. Implementing a stop-loss can address a major risk for traders helping protect their positions should trades perform below expectations.
The tool is available on major exchanges and can operate automatically, helping traders minimize losses even when they are away.
Suppose bitcoin falls over 10% overnight, triggering a margin call that you could not have anticipated as you were away from the market. As a result, your entire investment might get liquidated depending on your positions.
A stop-loss order could prevent this altogether.
3. Taking Large and Risky Positions – Capital Overallocation
Novice traders often fall prey to the idea of ‘go big or go home’, plunging much of their finances on a single trade. Not only is this reckless and dangerous, but the logic is also entirely flawed.
When starting out, every single unit of funding is vital. As such, you should adhere to strict money management rules to protect your capital. In fact, the most successful traders follow similar rules and restrictions on each trade.
A 10% worth trade would be considered a very high-risk trade to most investors.
For example, if you had $1,000 to trade, a 10% trade worth $100 would be a high-risk trade simply because if you lost the $10 you would only be able to make 10 more of those trades before you were out of funds.
It’s much wiser to trade at 1% or even less. This way, you can learn how the market works and take on losses without breaking the bank. As more wins accumulate, you’ll eventually have more funds to work with.
At that point, you may be trading with higher value amounts, but the percentage of your funding will not waver, making you an experienced trader.
4. Not Trading Responsibly – Emotional Bias
Psychology and emotion have a great influence on the way traders trade. For this reason, undisciplined and irresponsible practices are a prevalent cycle that novice traders fall into, causing them to fail.
Likewise, compulsive trades and gambling are sure ways to lose in the long term. When traders face a losing streak, it may be challenging to turn the tide and stop the bleeding.
In these situations, sometimes, the best trade is no trade at all.
Another irresponsible form of trading occurs when novice traders do not have a clear understanding of the products they trade. In other words, they are trading blindly.
Taking the time to learn about the products you trade and the fundamentals behind them will give you a sharper competitive edge and help you feel more in control of your actions.
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RECOMMENDED READING: 6 Tips on How to Build a Well-Balanced Crypto Portfolio
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