Whenever you are trading cryptocurrency, you notice that it’s very easy to get caught up in the excitement and expect big profits right away. But let’s be real—crypto is a volatile and constantly shifting space. With Bitcoin and altcoins making headlines, they may lure you in with their potential, but success in this space requires more than just luck. Unfortunately, without the right approach, it can be more of a loss than a win for beginners. Mistakes are indeed inevitable, but some can be costly if you’re not prepared. Therefore, I am going to list out the top 10 mistakes you should avoid when trading crypto, from lack of planning to poor security, to help you navigate this space wisely.
Key Point
- Avoid impulsive decisions by having a well-structured plan that outlines your goals, risk management, and entry/exit strategies to stay disciplined in crypto trading.
- Making decisions based on emotions like fear or greed can lead to losses. Focus on research and rational decision-making instead of reacting to market hype.
- Use tools like stop-loss orders and diversify your investments to minimize risk exposure and protect your portfolio from sudden market downturns.
- Don’t rely solely on technical analysis. Understanding the fundamentals of a cryptocurrency—such as its purpose, team, and market demand—helps make informed decisions.
- Protect your assets by using strong security practices, including two-factor authentication (2FA) and hardware wallets, to avoid falling victim to hacks or scams.
Skipping the Trading Plan
One of the biggest mistakes to avoid in crypto trading is starting without a well-structured plan. Before going into crypto trading, you should have a well-structured plan. A trading plan should include your goals, entry and exit strategy, principal investment amount, and the maximum loss you are willing to take. Without a plan, you risk making impulsive and emotional decisions, leading to confusion and indecision. A well-structured trading plan helps you stay disciplined, focused, and objective. Platforms like TradingView allow traders to backtest strategies based on historical data.
I remember when I started trading altcoins on the Binance platform in 2020. I jumped in with the intention of making huge profits but without a trading plan. That experience taught me my first lesson in life as I lost over $500 in just four days. My advice is not to make the same mistake—never start crypto trading without a trading plan.
Think of a trading plan as your roadmap in the crypto world. Without one, you might find yourself lost and making impulsive decisions. Your plan should include your goals, how much you’re willing to invest, when you’ll buy and sell, and the maximum loss you’re comfortable with. This helps you stay focused and avoid emotional trading.
A detailed plan should have:
- A Defined Objective: Identify your aim, whether it’s a short-term or long-term goal. Clearly state your financial goals and risks.
- Detailed Risk Strategy: Incorporate mechanisms such as stop-loss orders into your trading plan to limit potential losses over time.
- Entry and Exit Criteria: Base your trading strategy on thorough analysis, whether technical, fundamental, or a blend of both. Ensure it is specific, measurable, and research-based.
- Review and Adjustment Section: Due to the volatile nature of cryptocurrencies and the constantly changing market, include a section for adjustments and reviews to keep your plan up-to-date.
Trading on Impulse
This happens when traders make quick decisions without following established crypto rules, often driven by the allure of quick profits or the fear of missing out (FOMO). Trading on impulse is one of the biggest mistakes to avoid in crypto trading, as it can lead to substantial losses. According to Binance Academy, over 70% of beginners fall into this trap within their first six months of trading.
Impulse trading is like jumping into a pool without checking the water temperature. Just because a coin is getting hyped doesn’t mean you should buy it right away. Always do your homework. Research the coin, understand its potential, and only invest when you’re confident.
I was one of those crypto enthusiasts who rushed to invest in Dogecoin because of the sudden surge and hype after Elon Musk tweeted about it in July 2020. I acted on impulse and spent significant funds that could have been better invested in coins like XRP, ADA, Solana, and BNB. Many novices invested with a feeling of excitement and fear of missing out, without proper research. Sadly, the value dropped sharply, resulting in significant financial losses.
To avoid this while trading crypto, ensure to thoroughly research any coin or token they want to invest in. Avoid making decisions based on greed, emotions, excitement, or fear.
Read Also: Top Crypto Airdrops | How to Earn Free Tokens in 2024
Emotional Trading
Emotional trading is a prominent and dangerous way of trading cryptocurrency. This happens when traders trade out of greed and fear. This could cause impulsive trading and irrational decisions, resulting in losses.
Consider a scenario where a trader sees a surge in a coin; out of fear that it will rise further and not make a profit or begin at a loss, they purchase that coin; unfortunately, the price plummets back to its original price, leaving the trader at a loss.
Emotional trading can lead to impulsive trading, neglecting the fundamental analysis and even risk management.
Take this quick self-assessment quiz to find out how much your emotions affect your trading decisions. Answer honestly to get personalized tips on managing emotional trading.
Emotional Trading Self-Assessment Quiz
Neglecting Risk Management
Ideally, risk management is the framework that defines how a company or investor handles a financial risk. Risk management is a strategy designed to help traders minimize potential losses. The 1% trading rule is a method traders use to limit the losses to a maximum of 1% of their capital. In risk trading, stop-loss orders and diversification in the market are put in place to help traders make a profit and better portfolios. In simple terms, don’t invest everything in one place. Spread your investments around so if one thing fails, you don’t lose everything." By implementing methods like stop-loss orders and setting clear risk limits, traders can better protect their investments and reduce the impact of sudden market downturns.
Now imagine what would happen if a trader failed to implement risk management measures such as stop-loss orders or portfolio diversification. This will lead to unnecessary risk exposure. Without proper risk management, a trader stands the chance to lose a significant portion of their account with a single trade. It's important to understand the risk-reward ratio and implement a proper stop-loss order.
The risk-reward ratio calculates the risk a trader will be taking relative to the potential reward.
Ignoring Fundamental Analysis
This is one of the major reasons why some traders fail in crypto. Many traders focus too much on technical analysis, like charts and patterns, while overlooking the importance of fundamental analysis. This can lead to a limited understanding of a token's true value, which is based on factors like the project's purpose, the team behind it, and market demand. Balancing both analyses helps make better-informed decisions. This is as crucial as making a trading plan. In crypto, fundamental analysis can be done by looking at things like network activities, checking their value proposition, team experience, tokenomics, usage and adaptation, sentiments, and so on. There's no one way of checking fundamental analysis but a good blend of fundamental and technical analysis is a part in the right direction.
Paying High Brokerage Fees
There are so many ways to buy crypto but people often forget the fees that come with it. Their blockchain fees, exchange fees, and many more. Not accounting for these can be the most expensive of all mistakes to avoid in crypto trading. Brokerage fees refer to the fee charged by a broker to execute a trade, manage accounts, and provide services. This erodes trading profit and increases trading fees. You ought to check out all these fees before you invest, otherwise, you lose all your funds before you start trading or get the opportunity to lock your coins.
Avoid High Leverage
The stories of "grass to grace" in cryptocurrency can be enticing, especially to new bees in the trade. This might make you take out high leverage to purchase a token. The problem here is leverage always comes with upfront collateral and carries the risk of liquidation when the market faces a pitfall direction. Using high leverage can lead to liquidation and is one of the riskiest mistakes to avoid in crypto trading.
For instance, you have $2000 to purchase 1 Bitcoin with spot trade (i.e., buying from your account); you can only purchase what your money is worth, which is 1 Bitcoin. In leveraged trading, you can take out $4000 to buy 2 bitcoins; this gives you more buying power. The problem is, if the price goes up, your profit doubles; if the price goes down, your loss doubles. This could get risky during volatility. One complexity is your profit and loss, which is a live number that shows how much money you've made or lost at any given instance. This is designed exclusively to leverage trading since you technically are not holding the coin itself but rather a trade position. This opens a more drastic fluctuation because your exposure is amplified by the extra leverage position.
Once your liquidation threshold has been reached, your money is gone for good, even if the price reverses within a second.
To help you better understand the potential risks and rewards of leverage trading, use the simple Leverage Trading Risk Calculator below to calculate your exposure, profit/loss potential, and liquidation point.
Leverage Trading Risk Calculator
Leverage Trading Risk Calculator
Read Also: 5 Best Crypto Wallets for Airdrops: Secure Your Digital Assets in 2024
Chasing Losses
Knowing when to cut your losses and walk away is crucial in trading. It’s important to recognize when a trade isn’t working out and avoid holding on too long in hopes of a rebound. Accepting defeat at the right time can prevent deeper losses and protect your overall investment.
Not all coins are worth investing in. You should cut your losses; most investors can't avoid making mistakes of chasing a particular coin or constantly investing back immediately to earn what they just lost when crypto trading. This can be emotionally and psychologically draining. This kind of exhaustion can lead to making impulsive decisions, neglecting risk management, and draining the funds in your account. It’s natural to want to win back what you’ve lost, but chasing losses can lead to more mistakes. If you’ve had a bad trade, take a break, reassess your strategy, and return with a clear mind. Trying to recover losses impulsively usually backfires.
Prioritizing Short-Term Gain
Traders who aim for short-term gain in the crypto space with the mindset of "get rich quick" end up losing out on major investments. In as much as it's important to know the potential of every coin before you invest in it, it's equally important to look for coins that have more long-term goals, that way you can invest and rip your benefits while still having a hold on the trade.
For instance, a novice who sees two to three coins that are surging in price and buys them without checking if they are long-term and how reliable their community is will end up losing more money than making an actual investment.
Lack of security measures
In crypto, neglecting security is a serious mistake that can lead to significant losses like hacks or theft of assets. Using unsecured exchanges or weak protection leaves you vulnerable. To safeguard your investment, always implement strong security measures such as two-factor authentication (2FA) and hardware wallets. These steps provide extra layers of protection, reducing the risk of falling victim to scams or hacking attempts. Online wallets, in particular, are prone to attacks, so ensure your crypto is well-guarded by using proper safeguards.
What Mistakes Do New Crypto Investors Make?
Many beginner crypto investors often make the mistake of investing in an unfamiliar asset class, resulting in substantial losses. It is essential to conduct thorough research before making any investment decision, regardless of the area of interest.
What Are Five Mistakes New Investors Make?
- Overconcentration in individual stocks or sectors: Diversification is key in investing. Relying too heavily on specific stocks or sectors can expose you to significant risk.
- Owning stocks you don't want: Holding onto stocks that no longer align with your goals or preferences can be detrimental to your portfolio.
- Failing to generate "tax alpha": Missing opportunities to manage your investments in a tax-efficient manner can negatively impact your returns.
- Confusing risk tolerance for risk capacity: Investors often mistake their emotional comfort with risk for their actual financial ability to handle it.
- Paying too much for what you get: Overpaying for investments or financial services can reduce the overall value of your portfolio.
How Do You Succeed in Crypto Trading?
How to Become a Successful Crypto Trader
- Diversify Your Portfolio: Spread your investments across various cryptocurrencies to reduce risk and protect against market volatility.
- Cost Management: Keep a close eye on transaction fees, trading costs, and other expenses to maximize profits.
- Flexible Trading Schedule: Crypto markets operate 24/7, so being adaptable with your trading schedule can help you capitalize on opportunities at any time.
- Stay Informed: Keep up with the latest news, trends, and market developments to make informed trading decisions.
- Technical Analysis: Learn to interpret charts and use technical indicators to forecast market movements and inform your trades.
- Risk Mitigation: Develop a strategy to manage risks, such as setting stop-loss orders and defining exit strategies to protect your capital.
- Education and Research: Continuously educate yourself about the crypto space, market behavior, and new trading strategies to stay ahead.
- Practice with Demo Accounts: Before diving into live trading, use demo accounts to practice and refine your skills without risking real money.
Conclusion
The crypto space is a volatile one, and traders need to avoid these mistakes by making proper trading plans before starting and avoiding making impulsive and emotional decisions. Neglecting Risk management can lead you to not make a proper fundamental analysis. Check the fees you're charged in order not to make more losses than profit. Leverages are designed to take advantage of the average trader or investor, so avoid high leverages. Cut your losses and know when to stop. See crypto as a long-term gain, not a get-rich-fast scheme. Most importantly, always putting in adequate security measures.
Reference
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