All crypto traders are hungry for profits. But that hunger can often lead to mistakes, particularly among novice traders, who all too often fall into the same traps. Master a few basic strategies, though, and you’ll be trading smarter in no time.
Awareness is step one, but to really succeed in crypto trading, you’ll need to learn from your mistakes – and the mistakes of others.
In this blog, we’ll dive into five of the most common trading errors and show you how you to avoid them.
1: Ignoring risk vs reward
As a trader, your priority is capital protection. Think about it this way: if you lose your money, you have nothing to trade with. Maintaining your capital allows you to profit.
For every trade you are going to enter, you should assess risk vs reward. This means that you ought to have a target price for the trade where you will take profit and know where you are going to put your stop loss.
Every trade must meet your risk vs reward standard. Generally, traders want reward to be at least 2x greater than risk. If a trade doesn’t meet your standards, don’t enter it. There will be other opportunities.
2: Trading too big
The size of your trade matters. A lot.
The bigger your trade, the greater the risk. Size your trade in line with the calculated risk:reward ratio. If there is a greater risk, you shouldn’t be trading as big.
You can control your risk with position size. A general rule is that a trader should risk no more than 1% of their trading account in a single trade.
With that in mind, calculate how much you would lose if your stop loss were to hit before you enter the trade. If the loss is too large, lower your position size.
Be careful with leverage if you’re an inexperienced trader. Understand what leverage means and how it’s going to affect your trade, position size and losses before you enter. That way, you’ll keep your trade size suitable and your losses to a minimum.
3: Trading without a plan
A trading plan keeps you in check. It guides you when you are looking for potential trades and it helps you manage ones you have open.
Trading with a plan keeps your thoughts structured and removes emotion from your trading.
If you need help devising a trading plan, read this.
4: Trading emotionally
Emotions lose you money. End of story.
If you are going to be an emotional trader, you aren’t going to be a trader for long. Here’s why:
Billy just started trading a couple of weeks ago and has already made a tidy profit, turning 500 USD into 1,000 USD.
Billy enters a Bitcoin long but it goes wrong and he loses 200 USD. He’s not worried. He just enters a new trade to make the loss back. Again, the trade goes wrong and Billy’s PnL is -250 USD. Instead of closing, Billy is determined not to lose a second time. He adds to his position to lower his average entry.
Price continues to go against Billy and he ends up cutting losses, losing a total of $450. Billy’s account balance is now just 350 USD.
Where did Billy go wrong?
He got too confident when he had made 500 USD profit and doubled his money. Then, after risking too much and losing 20% of his trading account, Billy was determined to make it back.
The emotional determination fueled poor trading decisions that led to another poor trade with greater losses.
Don’t be like Billy.
5: Trading with no research
This one’s easy: do your own research before trading. Understand market conditions, fundamental analysis and technical analysis before making a trade.
A shift in just one small factor could change the price and leave you underwater. Make sure you are 100% in touch with what the market is doing before you enter a trade.
How to avoiding these mistakes
Novice traders often know about these mistakes, yet time and time again a new trader will fall into the same traps.
To avoid them, you have to be disciplined. Make a trading plan, evaluate every trade. Build a checklist and make sure that every single point is met before you enter a trade.
If you aren’t sure, don’t trade.
Keep these points at the forefront of your mind and you’ll be a better trader in no time.