All price movements, regardless of the market, are influenced by the psychology of traders. Thus, emotions become the primary driving force. The combination of personal feelings and expectations creates the market sentiment. For example, when most participants expect an interest rate increase, the sentiment is positive. This condition is known as a bull market or an uptrend. On the contrary, when investors expect the target asset to fall, a negative pattern is formed and the market enters a bearish phase or downtrend. These movements are interconnected as they follow each other.
To better understand the emotions that traders experience, it is worth considering specific examples:
- A bull market is a positive market phase based on strong buying activity. Investors expect prices to rise and rise, so they buy more assets. The key emotions here are euphoria, greed, optimism, faith.
- Bear market. Sooner or later, the cyclical nature of trading leads to downtrends. As stocks begin to decline, people experience feelings similar to the Kübler-Ross model stages of grief. Initially, traders are in denial and they believe the market is still forming, so they keep the assets. Later comes anger, bargaining, depression. Finally, market sentiment turns negative, as most traders accept the new conditions and sell assets. Unfortunately, many traders refuse to sell assets at the most opportune moment and get rid of their coins near local lows. Then the market stabilizes and gains momentum for the next uptrend. Emotions during a bearish trend are anxiety, denial, fear, panic.
From the above, we can conclude that crypto trading and emotions are two interconnected and inseparable things. The only problem is that the emotional component can greatly interfere with the trader’s decisions during transactions.
Trading and Psychology
As cryptocurrency exchanges become more accessible, the barrier to entry, especially for retail investors, is dropping to an all-time low. People with little investment experience are entering the cryptocurrency market en masse. The lack of experience in trading leads to losing money by most of them. Not the last role in this is played by the inability to cope with emotions, especially in a volatile market, when trends constantly replace each other. To sort out the issue, we asked the experts how important psychological and emotional stability is in trading. And also, can emotions really affect the decisions that a trader makes, or is the influence of this factor exaggerated?
Marat Mynbaev, investor, expert in fundamental and technical analysis, Founder of Amir Wallet, notes that traders are people, not robots, so the emotional factor will always be present. The expert adds,
“The key thing is not to let money into your heart. You need to understand that money is just a tool that you need to work with coldly and mathematically. Before you start any first steps, you need to decide for yourself what goals you want to achieve. Financial freedom is different for different categories of people. For some, a monthly income of $ 1,000 is a good enough amount, for some even 10 thousand is not enough, and for some even 100 thousand is not enough. You need to decide how much you want to receive as an investment income, and how much money and time you are willing to invest. And in this regard, if you are doing this professionally enough, then at least 4–6 hours should be allocated daily. To start trading, you need to devote at least 1 hour a day. Starting with small amounts, the main thing is to form a routine, discipline and strictly adhere to it. Accordingly, when you grow up to a large amount, then discipline has already formed as a habit, and you already do everything exactly according to the schedule. When you are already successful in the market, you professionally do not pay attention to the amount. You mainly pay attention to other indicators, for example, to the percentage of profitability or financial planning; for example, you bet 1% or 2% per day, and then there is a mathematical calculation. For example, you have a million dollars in management, your task is to do 1% per day, and you do it according to your specific trading strategy, and the amount no longer matters.”
Valeria Vinokurova, an expert in cryptocurrencies, author and teacher of a major training course “Capital on cryptocurrency”, focuses on the impact of market volatility. Since the dynamics of prices can vary up to tens or even hundreds of percent, and in both directions (increase or decrease in the exchange rate), quite naturally a person experiences certain emotions at that. He is simply psychologically incapable of NOT reacting as follows:
- If assets grow, the trader rejoices. He is inspired and confident, and he wants to take even more profit.
- If assets fall, the trader experiences fear and tension and doubts the decisions made.
According to the expert, in both situations, there is a high risk of wrong decisions made on the spot and under the influence of emotions. If a trader does not know how to cope with his emotions, he leaves the trading strategy and violates risk management, which often leads to loss of money. Psychological and emotional stability is one of the main factors that influence the result of a trader. This is not a secret or an insight. But, alas, many people forget about it.