There are so many psychological aspects of trading cryptocurrency that affect performance. Fear plays a significant role in trading, as well as in life itself. The ability to recognize fear, and keep it in check, can help traders make more rational decisions and see more consistent results.
In general, fear causes people to make irrational decisions. This can perhaps be seen most clearly in sports. In hockey, for example, one missed scoring chance can turn into a bad game, which can then turn into a slump, which can negatively impact a player’s entire career, if they let it.
Studies have shown that “anxiety can create cognitive overload and impede performance on cognitively demanding tasks”. This directly applies to crypto trading. The effective crypto trader uses significant mental capacity to assess the whole situation and takes into account all the circumstances and possibilities.
Fear has the ability to sidetrack traders, leading them to focus on previous bad trades or failures. TraderFeed explains that “When we become negative in the face of disappointing returns, we can unwittingly create a downward spiral, where we limit our insight and productivity just when we need them most”.
Sam Evans, lead instructor at Forex XLT, notes that “Fear is the biggest hurdle any retail trader must face and it will hold you back more than anything else ever will”.
Fear and Crypto
Fear especially applies to the crypto space, as there are added factors not seen in traditional markets. Crypto is extremely volatile, amplifying the effects of fear on any given trade or market cycle. People may also fear that the crypto market, as a whole, will fail, leading to constant fear in the back of one’s mind.
It is possible for a trader to make a consistent profit in the long run, making successful trades only 60% of the time. However, this means that they are wrong on 40% of their trades. What if that 40% just happens to be 5 or 10 trades in a row? If the trader lets fear impact them, they may have a greater chance of losing more than 40%, because that fear may cause them to deviate from their trading plan.
Several consecutive wrong trades can lead to traders making irrational decisions, in an attempt to regain their loss. Traders may decide to trade with a larger position size than their normal plan permits, or take less than optimal trades in an attempt to “get back on track”. These decisions can contribute to a further downward spiral.
Or perhaps fear may make traders far more hesitant than they should be, setting stop losses too tight, or being scared to take strong trade setups.
Experience may play a significant part in the whole process. Many times, experienced traders have greater mental toughness, because they have seen so many different situations, and know how to handle their thought processes accordingly.
A complete lack of fear, on the other hand, may also not be the best approach, as overconfidence may lead to many other mistakes. Experience and education may be two excellent ways to aid in mental toughness and improve long-term trading results and consistency.
For more crypto trading guides – visit our investor’s guides section.