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.
Victoria Ustimenko, CEO of the PR agency PRETOBUSINESS, believes that psychological stability is important in any business. The expert adds,
“For a trader, a mathematical analytical mindset is more important. I believe that people who cannot control themselves during bidding do not stay in this business, unless, of course, this is a position obtained through the influence of someone else.”
Artem Ibragimov, Cryptocurrency Portfolio Manager at 3V Fund, emphasizes,
“Any emotions in general make a person think irrationally, commit rash compulsive acts. For a trader, of course, psychological and emotional stability is important, and these qualities need to be developed for successful trading.”
Gleb Jount, the official representative of Bitget in the CIS, says,
“Many people often underestimate the emotional component of trading because they think that it's all about chart analysis and intellectual abilities. But in fact, the emotional and psychological component is extremely important. Making decisions about transactions in periods of rage, sadness, anxiety, despair, euphoria is a great and reliable way to quickly burn a deposit and get disappointed. An experienced trader can be compared to a professional athlete, such as a UFC fighter, or a race car driver. They are fully aware of the pressures they are experiencing and that, succumbing to panic, fear, arrogance, they can make very harmful mistakes.”
Vladimir Gorgadze, Head of the Master’s Program “Blockchain” at MIPT, Co-Founder of the Atomyze tokenization platform and Newity IT company, emphasizes that it is critical to act per the chosen strategy and not succumb to passing temptations to quickly commit an opportunistic operation (“the asset has reached the bottom, you need to urgently buy it, otherwise it will be too late ...”). This is a trivial rule in game theory, but it is constantly violated by investors, even professional ones. And in case of violation of the execution of their own strategy, investors actually begin to participate in the lottery, with increased danger of losses. According to the expert, the probability of making money in the market is higher if you eliminate emotional actions and turn on a “cold head”.
Dmitry Noskov, an expert at the StormGain crypto exchange, agrees that trading is a very emotional sphere. According to him, success is achieved by people with a stable mood who know how to control themselves and make informed decisions even at critical moments.
Vladislav Akeliev, Director for Development of the ECOS cryptocurrency investment platform, emphasizes that investors make their crucial mistakes in trading because they do not know how not to be guided by their emotions. There is even a special index of fear and greed, which are the dominant emotions of investors controlling the market.
Yuri Gusev, Founder and COO of Zam.io, says,
“Investors are in most cases strong personalities, who can and should keep a healthy mind in the most unforeseen situations. But here is a subtle point: if wealth and achievement are not gained through suffering, then there is little value in it. Sudden and negative situations, on the contrary, will allow you to better assess the achievements. Therefore, many lucky people who win money in the lottery or receive an inheritance spend money thoughtlessly and quickly.”
Denis Smirnov, blockchain specialist, cryptocurrency researcher, Liquidity Manager of EMCD, the largest mining pool in Eastern Europe, says,
“A cool head is (besides market knowledge) the most important quality for a successful trader. In moments of high volatility, it is very easy to lose your temper and panic, but such decisions, as a rule, only lead to losses. Therefore, it is extremely important to adhere to the initially chosen trading strategy, because in the long run it is not luck that wins, but an exact calculation and knowledge of the market.”
Igor Zakharov, CEO of DBX Digital Ecosystem, believes that the influence of the emotion factor is understated rather than exaggerated. It is precisely because the influence of emotions on decision making is underestimated by traders that so many tragic stories happen. Psychological and emotional stability are the most important quality of a successful trader. A successful trader is also called a "stable trader," and many believe that this is only because of stable profits. But it is the stability in emotional terms that gives the stability of the result. According to the expert, psychological stability is not just important, it is paramount.
How to learn not to follow the mob
The herd instinct is not a myth. In crypto trading, it manifests itself in all its power. As soon as the market gets restless, people rush to massively buy or sell assets, only exacerbating the situation. If the trend was set by some celebrity or a large company in the crypto industry, then the process is even faster. Trading decisions made during mass hysteria are rarely profitable and correct. However, how can we overcome the herd instinct that is still alive in us despite the years of evolution? With this question, we turned to the experts.
Igor Zakharov explains in detail how not to get involved in mass hysteria:
- First, a trader must filter the news background and be able to see not general data, but those that are really important.
- Second, a trader must always have a limit on losses. It is important to note here that a trader who always has a stop loss understands and accepts the fact of potential losses, but is sure that he will always have capital left to continue trading.
- Third, a trader must have a trading system. If a trader buys or sells something by the "shouts of the crowd," then he does not have a full-fledged trading system and he will always buy and sell what is called at the wrong time.
Valeria Vinokurova stresses that a market decline, even a significant one, is a normal and natural thing. The easiest way to avoid succumbing to mass hysteria is to carefully and consciously select assets. If a person clearly understands by what criteria and why he selected this or that cryptocurrency, if he is sure that he has analyzed everything correctly and the coin will grow, then no market corrections will make him panic or doubt.
According to the expert, in order to maintain confidence in yourself and your actions, it is important to understand the overall value of Bitcoin. It is recognized and accepted by most countries. Somewhere Bitcoin is already a means of payment, like, say, the dollar (for example, in El Salvador). Bitcoin is in the top 10 largest global assets by capitalization along with gold, Apple, Microsoft, Tesla and Amazon. There is a lot of money in Bitcoin. The top cryptocurrency is successfully developing in the world, and it has a brilliant future. Yet Bitcoin is the largest asset on which the behavior of other cryptocurrencies depends. People who understand its value and significance are NOT afraid of a sudden correction in assets (which are, of course, carefully chosen).
Marat Mynbaev says,
“A professional trader always earns. He does not care what happens to the market, as he adheres to a certain discipline. A ‘cold’ head is quick to make decisions. The fall of the market is a controversial concept, depending on what timeframes we are considering. Globally, the crypto market is growing, and what is happening now is a correction. When you look at all this with open eyes, many things become very clear: why it rises, why it falls, when to expect a fall and where to take the income. With experience, a professional trader will be more likely to predict such things based on fundamental market analysis.”
Gleb Jount emphasizes that, for the most part, the problem of mass hysteria concerns novice traders. However, experienced players are also prone to this. Hysteria seizes just because of the underestimation of emotions and lack of experience in trading. This is all exacerbated, of course, in a falling market. In general, it is very difficult not to panic, especially for a beginner. Panic is sometimes such a strong emotional state that it simply turns off the mind and blocks the ability to make sober decisions. This is a key moment, but in such a state, you need to stop everything immediately and take a break to calm down without making new financial decisions until the emotional state is normal. It’s very difficult, but under stress, you can easily make a terrible series of decisions and completely lose faith in yourself as a trader. Later, you can more soberly assess the situation and understand what to do next. According to the expert, if a trader is not able to exercise control over their own emotions, then they should not make decisions at times of strong market volatility.
Vladimir Gorgadze gives this advice to especially emotional traders,
“If you feel you can’t but get emotional during the hysteria in the market, the safest solution is to go into the safe haven of fiat (stablecoins).”
Vladislav Akeliev explains that in order not to get involved in mass hysteria in the market, you need to draw up your investment plan before the hysteria begins and strictly follow this plan after it begins.
In order not to panic, Yuri Gusev advises to understand that any events in the market are temporary. Every fall is followed by a rise, and every rise is followed by a decline. Also, in this matter, training and tempering your nervous system is important.
Is it worth it to go against the market?
Every trader is familiar with the golden rule of trading: buy when others are afraid and sell when others are greedy. However, how can we effectively go against the market, and isn’t this strategy outdated? To clarify, we asked the experts how effective the reverse action strategy is. Remarkably, their opinions were split.
Igor Zakharov believes that such a "strategy" contradicts the basic rule of success, which is trading with the trend. He says,
“If you buy when the whole market is selling, then you are up against a locomotive whose speed and strength you do not know. In some cases, you can guess the stop of the locomotive and begin to consider yourself a foreseer who predicted the market reversal. But the next time the locomotive (aka the trend) will just fly right through you and only dust will remain from your account. The correct action is always to confirm market reversals, and we track this on the chart using technical analysis. Waves, levels and zones of accumulation of stop orders help to confirm market reversals. Then we don’t care about everyone who buys or sells, because "smart money" is not everything.”
According to Vladimir Gorgadze, the strategy of ‘acting in the opposite’ is not always effective. Also, according to the expert, to implement this strategy, you need to have steel nerves.
Victoria Ustimenko is of the opinion that people who act on the contrary own more information than the market, belong to the category of investors who are ready to invest in the long term, or are optimists.
Valeria Vinokurova is sure that Warren Buffett’s principle “Be fearful when others are greedy and greedy when others are fearful” is relevant to any investment, including in cryptocurrency. The expert adds,
“However, you must understand what asset you are investing in and why. Sure, investors perceive a market fall as a time of sales, when they can buy valuable assets at reduced prices to sell them later at a higher price. But we are talking about VALUABLE assets. Investing in the first cryptocurrency that comes across just because it has fallen in price is a poor option.”
Dmitry Noskov also believes that, according to the laws of trading, one should buy on a fall and sell on an increase. The expert also stresses that in moments of panic in the market, one should try to calm down and not decide being affected by emotions.
Yuri Gusev thinks that this strategy is very effective for investors. The expert notes that you always need to double-check yourself and feel the market. You need to act like surfers who dive under the wave to be on its crest.
Vladislav Akeliev believes that the reverse action strategy can sometimes show good results. At the same time, the expert notes that not everyone can follow it and the result may not always be positive.
Artem Ibragimov says,
“I would not follow this strategy. It is advisable to follow your trading strategy, which must be fully formulated and structured, and act according to it. I can’t say how effective the ‘action in the opposite’ strategy is, because I never trade like that, but I trade depending on what the situation is on the market. If a person fully owns a trading strategy, knows what it is capable of, has tests, results, then there will be no hysteria. Even if the market falls, the trader understands what his strategy is capable of, what it performs during these periods, and works more rationally and calmly.”
Gleb Jount believes that the action in the opposite can be seen at times. However, according to the expert, it is much more effective to stick to risk management and act according to your own trading plan and strategy.
Denis Smirnov notes that the strategy of moving against the market can sometimes be justified, but this often requires not only steel nerves but also a sufficient supply of liquidity, because, as the famous phrase goes, “The market can stay irrational longer than you can stay solvent.”
Controlling emotions in trading
Market psychology exists and strongly influences trading actions, which is undeniable. However, dealing with the influence of emotions is not an effortless task. Even professional traders, despite their experience, struggle to deal with their emotions. We also asked experts how to eliminate the influence of the emotional factor on decision making during trades.
Valeria Vinokurova, an expert in cryptocurrencies, the author and teacher of a large training course “Capital on Cryptocurrency”, emphasizes that it is important for a person to develop emotionally, spiritually and psychologically and monitor their health. It is important to eat well, so that there is energy and motivation to study and analyze the markets. It is important to get enough sleep so as not to lose concentration, and control the situation precisely. A trader who sits in front of the monitor at night, worries about transactions, does not eat or sleep, loses much more than they earn. It is also important for a trader to track their emotional states, analyze them and understand what this or that reaction can bring their deal to.
In the cryptocurrency market, there is a concept of the level of fear and greed. This is an indicator that reflects the emotional state of market players (formed based on the analysis of Bitcoin volatility, market volume, surveys, public behavior in social networks, trends and asset dominance). Investor fear is an excellent opportunity to buy cryptocurrencies. Greed signals a possible correction in the market. So, a trader must monitor such states of fear or greed and control behavior, especially on short-term transactions. This is a lot of work on yourself.
Igor Zakharov, CEO of DBX Digital Ecosystem, is sure that emotions cannot be effaced, but you can build defense mechanisms in your mind. He says,
“First of all, a trader should divide his personality into an analyst and a performer. When there are no open trades, the investor must be an analyst and can afford to think whatever they want. As soon as the investor has opened a trade, they must turn into a mechanical robot, which must or must not close or change the transaction at a certain moment, in accordance with the rules of their trading system. The problem with most traders is that they begin to analyze the situation the moment they are ‘in the market’. But it is at this time that the trader’s mind is dependent on the possible outcome of the transaction and the trader is no longer objective in their assessments. Positive emotions from possible profits, negative emotions from possible losses, depression from the fact that the market simply does not move anywhere for several days, and so on—all this does not allow you to correctly assess probabilities and breaks the filter for incoming information for a while.
“Another important protective mechanism is the right attitude towards losses. If a trader understands that losses are just expenses for their personal business and treats them as such, then they will not feel that the market has fooled them or mocks them.”
The expert adds that a trader should always give oneself time to recover. If, after a series of losses, a trader begins to feel oppressed, they should realize that in such a state they cannot make reasonable decisions. There is a situation when a trader has been kicked out of the market, but they have not yet switched to the personality of an analyst and remain a "performer out of the market". This is very easy to recognize: if a person has received a loss and, moving away from the charts, still sees them as if before their eyes, then they are still a deal maker. They should wait for the moment when they no longer seek to return the losses and does not experience any negative emotions. Only at this moment can one again make a quality analysis and make the right trading decisions. It is worth noting that this time is different for everyone. In practice, a range from several hours to several months is possible.
Vladislav Akeliev, Director for Development of the ECOS cryptocurrency investment platform, says,
“You need to define for yourself the rules of investing and follow them. Draw a line for yourself below or above which you exit the transaction. These rules can be revised, but only when you understand that you are not under the influence of emotions.”
Gleb Jount, the official representative of Bitget in the CIS, notes that it is important for a trader to have a realistic view of the market and realize that it is impossible to completely avoid losses. The market can be compared to a living system that is not completely controllable. It is also important to understand that long-term and profitable trading implies a clear action plan and risk management. Desperate trading in the hustle, with emotions, in sweat and without a plan, without a good analysis, with opening and closing positions intuitively—this is blind trading and a sure way to nowhere. The expert also advises setting pre-planned stop losses and take profits according to the strategy that was originally planned in order to save nerves and capital.
What should a trader be guided by instead of emotions when making decisions?
It is important for a trader to understand the current sentiment of the market in order to make the most profitable deals, and not focus on emotions. Ideally, you need to catch local highs and lows. Also, do not underestimate the importance of technical analysis, which is used to analyze previous market cycles in order to understand how psychological patterns work.
As the popularity of crypto trading grows, it is important to determine what psychological and other strategies can mitigate the risks inherent in this activity. General risk minimization strategies have some similarities to gambling: stick to a budget, don’t spend more than you can afford, and don’t regret losses. Experts talked about what a trader should be guided by instead of emotions and what analytics methods one should use.
Valeria Vinokurova notes that a trader should have a good understanding of technical analysis and money management. But studying them is not enough. It is the complex that is important of technical analysis + money management + PSYCHOLOGY. It gives the best result.
The expert adds,
“A trader must have systemic points for entering the market and taking profits with losses, as well as a clear understanding of when to enter transactions, when to take profits and losses. Moreover, the strategy must be worked out in practice. It is one thing to make analyses and forecasts in theory, and another thing is to open real trades with real money. If a trader has not solved the psychological aspects, then they may not emotionally cope with the current situation on the market. After all, a trading strategy that is ideal in theory may not perform in reality as expected. As I have already said, emotions make a trader abandon their money management and trading strategy, change decisions on the spot and thus make mistakes.”
Marat Mynbaev, investor, expert in fundamental and technical analysis, Founder of Amir Wallet, gives traders the following advice,
“You have to trade systematically. It’s like pumping the press. If you haven’t pumped all week and then pump the press all Sunday, then this is worse than if you do 15 minutes every day. The same is true in trading. What is important is consistency, regularity and moderation. For example, you can trade at certain hours, according to a certain routine, with a certain trading strategy. The most important thing is to develop this habit.
“There is a certain set of rules that each trader makes and introduces for himself. There are rules of other successful traders, and you can adopt them, but in the end you will still make your own rules, and the discipline is in adhering to them. For example, if you said to yourself that the maximum loss is minus 2%, weekly or daily, then as soon as you reach this indicator, you close the computer, go away from the table and rest until the next morning. You need to clear your head, since emotions get in the way of work. If you completed the plan in the first 2 hours of trading, the euphoria of success is even worse than the despair of loss, because it creates the illusion that you are lucky. And this is the biggest catch, because at this moment you lose control, and the market punishes you. This is where discipline and rules matter. If you have fulfilled the plan, then you also close the computer and go away, and you need to find the strength in yourself to do this. It is the presence of a set of rules that helps to maintain a cold calculation and reason.”
Artem Ibragimov, Cryptocurrency Portfolio Manager for 3V Fund, emphasizes that analytical methods are in no way connected with the emotional factor. According to the expert, in order to exclude the influence of the emotional factor, you need to:
- Form a complete trading strategy and test it;
- Just trade. With experience, a certain resistance to emotions at work will be developed.