The potential for profits when trading cryptocurrencies is something we are all excited about. It probably has drawn a lot of people into trading, even people who were never interested in trading before, like myself.
However, it is quite easy to fall into habits that can cost you your investments, particularly if you are new.
That’s why we have prepared some of the common habits that all traders should watch out for.
Taking Large and Risky Positions
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. Particularly when starting out, you are advised that 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.
For instance, a 10% worth trade would be considered a very high-risk trade to most investors. If you had $1,000 to trade, a 10% trade worth $100 would be a high-risk trade simply because if you lost the $100 (excluding fees and funding cost), you would only be able to make 10 more of those trades before you were out of funds. Instead, 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.
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.
Similarly, 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.
That is why it is important to take the time to learn about the products you trade and the fundamentals behind them. This will give you a sharper competitive edge and help you feel more in control of your actions.
For tips, you can check out our guide on How to Select a Cryptocurrency to Trade.
One of the common reasons why traders fail is because of over-leveraging. Over-leveraging is the consequence of a trader’s over-confidence in the outcome of a trade. However, this is not advisable.
While applying a lot of leverage can provide traders with substantial profits if the trade is successful, it is a risky practice that has cost a lot of inexperienced traders the little funds they have.
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.
Poor Risk Management
Risk management is the hallmark of responsible trading. When trading on major exchanges, it is important to utilize stop-loss orders to protect you from hemorrhaging a massive amount of funds.
Not only do tools like ‘stop orders’ help traders protect their funds, but they also remain active when the user isn’t, as the crypto markets are.
Consider an example that illustrates the importance of stop-loss orders.
Suppose bitcoin falls over 10% overnight, triggering a margin call that you could not have met as you were away from the market. As a result, your entire investment was fully liquidated. A stop-loss order could prevent this altogether.
When traders don’t use trading tools that assist and protect them, it exposes their investment capital to undue risks.
Trading should be well-planned and thoughtful. If you want to make profits consistently, you must trade responsibly.
When trading responsibly, each trade should have a purpose and be protected as best as possible, using tools to minimize risk. When done successfully, traders will have better results, further encouraging them to execute best practices.