Avoid These Mistakes When Trading Cryptocurrency
Trading cryptocurrency can be a good way to pass the time while also making some money. When you make smart trades based on the latest information, you will be able to achieve long-term gains with crypto trading. To maximize your chances of profits, and reduce your risk of losses, learn what mistakes to avoid while trading crypto. Some are less common, but all can lead to financial losses, wasted time, or annoyance.
Mistake: Failing to Place a Take Profit or Stop Loss
Because cryptocurrencies are highly volatile, you want to set up your trade in such a way that you limit your potential losses. The best way to do this is via a stop-loss order. Similarly, you can ensure that you at least make some profit with a take-profit order. While most exchanges will offer stop losses, not all will have take-profits. Use both when possible.
To figure out how to place your take profits and stop losses, examine the liquidity pools for the given crypto asset. This will let you find the support and resistance levels so that you can place your orders just below and above those levels.
Mistake: Making Stop Losses Too Tight
While stop losses are important, you need to use them correctly as well. It is common for traders to mistakenly choose a stop-loss that is too close to their buying price. The volatility of a cryptocurrency may mean that your stop-loss gets triggered quickly, including right before a situation that would bring you plenty of profits. That is why it is so important to look at the resistance and support lines when choosing the stop losses.
Mistake: Using Dollar-Cost Averaging
Another common mistake when trading cryptocurrency is dollar-cost averaging or DCA. This strategy involves purchasing smaller quantities of your chosen asset at varying prices. This seems like a good idea due to the volatility of crypto. After all, your position price is not fixed, so you reduce the psychological aspect of trading. If you were to take this approach, you would have a total budget but only enter a position with part of it.
Experts still debate whether dollar-cost averaging is effective, but most agree that you should avoid it for cryptocurrency trading or other purposes. That is because dollar-cost averaging is less effective at minimizing risk over time.
Mistake: Investing More Than You Can Afford to Lose
Because of the volatility of cryptocurrency trading, experts agree that you should never invest more than you could afford to lose. This would also be true of any other semi-risky investment, including traditional financial instruments. There is never a guarantee that you will make a profit when you trade cryptocurrencies, so you do not want to find yourself without any funds. Expect to make some mistakes and experience the occasional loss, especially in the beginning. Those mistakes should never bring your funds down into emergency levels.
In addition to the financial irresponsibility associated with investing more than you can afford to lose in crypto trading, there is also a tactical element. If you cannot afford to lose the funds, you are less likely to think clearly and make informed decisions. You may act instinctually, leading to closing positions before you should or making ill-informed investments.
Mistake: Diversifying for the Point of Diversification
Almost all investors of any type know that diversification is a smart move. The idea behind diversification is that your overall funds remain stable since some will stay steady or rise while others fall. While diversification is also important in cryptocurrency for similar reasons, there is a caveat. You do not want to diversify just to create diversification. Instead, make sure you do your research before investing in a cryptocurrency.
In other words, do not assume that it is a good idea to invest in a small altcoin or crypto with a small cap solely due to diversification. Many new cryptocurrencies fail, and some new projects may be scams. If you diversify without research, you increase your risk of potential losses. Instead, look to diversify your crypto portfolio, but always after researching your new investment.
Mistake: Not Researching the Crypto Before Investing
The need to research before diversifying your portfolio also applies to every single cryptocurrency you purchase. You should never invest in any cryptocurrency without first doing your research, including big names like Bitcoin.
In the case of smaller cryptocurrencies, your research should help you confirm that the digital currency has potential for the future and can be successful. Your research should also confirm that it is a legitimate project and not a scam. Take the time to look at the project’s website, team, timeline, achievements, and any other information available before investing, especially in the case of an initial coin offering or ICO.
Regardless of the crypto you want to invest in, your research will also guide your entry point. While it is unlikely that big names like Bitcoin or Ethereum will disappear overnight, you still want to time your investment carefully so you can maximize profits and minimize losses. As with anything else, your goal should be to buy low and sell high. To figure out those low and high points, you will need to evaluate the market, including influences and price history.
When conducting research, pay attention to the opinions of experts, and then create your own opinion. You do not want to base your decision solely on what others say, as this will not teach you anything. Instead, read expert analyses and look at the information to see how they came to that conclusion. Then see whether you agree.
Mistake: Not Using Analysis Tools
As mentioned, your research before trading cryptocurrency should involve some of your analysis. To get the most from your analysis, use the trading tools that you have at your disposal. Most crypto exchanges will offer indicators, drawing tools, and other features that help you evaluate the charts and past data and to look for patterns. Learn how to use these tools and then do so. At the same time, do not go overboard with the indicators or other tools. You may overwhelm yourself with information, making it harder to follow the price movements. Find the perfect balance for your trading style, which may take some time to happen.
Mistake: Letting Emotions Influence Your Decision
Experienced cryptocurrency traders will tell you that you should always base your decisions on facts instead of emotions. You do not want to let emotions or excitement influence your decision. While public sentiment will play a role in the rise and fall of cryptocurrencies, you need to remain objective when analyzing it.
Do not give in to the fear of a crypto crash or the excitement of a boom. Before buying or selling, take the time to confirm the change in market sentiment is widespread. At the same time, you should see what experts say about these sentiments. Do not let the fear of missing out influence your decision, although you can let it guide you towards cryptocurrencies to research.
Mistake: Not Sticking to Your Strategy
When your cryptocurrency purchases are doing well or poorly, you may feel a temptation to change your trading strategy. This will usually be a mistake, although there are some exceptions to the rule. In nearly every case, you should always stick to your initial strategy, even if you already notice a loss or a profit. Trust that your stop losses and take profits will keep your assets under control.
Waiting out the changes and sticking to your initial strategy will typically result in lower losses or higher profits over the long term. After all, you carefully created that strategy based on research and the latest information. You will not be able to complete the same level of assessment in a quick enough time to react, so you will essentially make any changes blindly.
Mistake: Not Having a Strategy
If you do not stick to your trading strategy, there is not even a point to having it in the first place. Unfortunately, not having a trading strategy is another common crypto trading mistake. Before you make any investment in your life, you take the time to research and come up with a plan. After all, you would not go to a car lot and buy the first auto you find without asking about features or taking it for a test drive. The same is true for cryptocurrencies.
If you do not create a trading strategy, you will set yourself up for failure. You could still potentially make a profit, but you have a much higher risk. Furthermore, you will not be able to recreate your actions in the future to repeat that profit since they were not guided by anything. On the other hand, if you lose money and do not have a strategy, you will not be able to tell what caused your mistake so you can avoid it in the future.
Mistake: Trading Too Frequently
Most successful cryptocurrency traders feel that you should avoid overtrading if you want to experience success. Everyone has a different strategy for crypto trading, with some preferring day trading, and others, preferring long-term trading. The thing to remember is that you will need patience if you want to make significant profits. Even with the volatility of crypto, a short-term profit is not likely to be very large.
Of course, this will depend on your preferences and trading strategy. Just remember that once you decide whether you want to trade for long- or short-term gains, you should create a strategy that fits that plan and stick to it. Just remember that even day traders can get healthy returns with only several trades every week.
Mistake: Not Following Trends As a Beginner
When you have more experience with cryptocurrency trading, you may make a profit if you trade carefully against the trend. However, this is very unlikely to happen for beginners. If the whole cryptocurrency market is doing poorly, you are unlikely to find good trading opportunities. As a beginner and intermediate trader, you should follow the market trends when choosing trades. Even experts should follow this rule, although you can take a risk if you are confident.
Mistake: Not Recording Past Trades
As with any other type of trading, cryptocurrency traders should make it a point to keep track of their past trades, including their profits and losses. Specifically, pay attention to what strategies work well and which ones do not. This can help you select the future strategies that you can use. You can also analyze your past trades to gain perspective on your past success.
Looking back at your past trades can also help with the previous point of sticking to your strategy. You will likely notice that the trades where you closed a position manually did worse than those where you let your strategy play out to the full stop loss or take profit. This should reaffirm your decision to avoid changing your strategy after making an investment.
Mistake: Choosing the Wrong Exchange
Choosing the right cryptocurrency exchange is also a crucial part of any crypto trading, and many people make the mistake of just selecting the first one they come across. Avoid future problems by going with an exchange that is secure, transparent, and reputable. Make security a priority, so you do not lose funds to hackers. You can also maximize your security by minimizing the funds you store on the exchange; just put in what you need there.
Of course, your chosen exchange should also have the cryptocurrency pairs that you want to trade. You also want to look at its trading interface to confirm it has the features, indicators, and tools you need, and is intuitive to use. This way, you will not waste time having to gather information on another website before trading on the exchange.
When you trade cryptocurrencies based on research, there is a great deal of potential for profits. By making yourself aware of the common mistakes associated with crypto trading, you can avoid them and be on your way to maximizing profits.