Cryptocurrencies are one of the most changing markets in the history of finance. Within a few minutes, we can often observe movements in both directions by several percent, on cryptocurrencies, whose capitalization reaches billions of dollars. In addition to a thorough technical analysis and extensive fundamental analysis, it is also worthwhile to analyze your movements and the psychology of investment. Have you ever reflected on your decisions? Maybe that’s where your problem lies, or there’s a hidden golden way to win decent profits? Is it sometimes worth to leave the charts and analyze yourself? But from what angle? You can find the answer here.
When it comes to trading, and especially crypto-currency trading, there are a few steps that can be taken to limit exposure to extreme price fluctuations in the market. And we all know very well how strong they can be in this case. A combination of both technical and fundamental analysis can be used to determine the true value of a stock or asset, providing a better chance of success for a specific investment while reducing risk. What about reading a chart that fits perfectly into Bart Simpson’s pattern, a shoulder-tipped head or a coffee cup when it turns out that the listed company we’re hunting has had the lowest quarterly profits in years. So what if on the one-day chart we just came out of the local triangle, how will we find out tomorrow that the owner of a company whose shares we want to buy will be stopped and judged for corruption for hundreds of millions of pounds. Isn’t it better to buy a cheap and valuable asset that is currently at a low RSI level? Technical and fundamental analysis is a perfect combination. You can use them alternately and get big benefits from them. But for that, you need a plan.
Learn about your movements
The development of an effective risk management plan is essential to minimize unexpected results, which translates into an overall reduction in losses. We invest not to lose, but at least to maintain or at best increase our assets. A successful risk management plan should also work in parallel with the investment results of cryptocurrencies transactions, working together to reduce bad market behavior while justifying the basic expectations of the profits generated. Sometimes the temptation to quickly get rich leads to bad choices and is no more visible than a market-driven by fear and greed. By limiting harmful or negative trading and investment habits, one can hope to increase profit without overburdening one’s wallet or head. A key element of a successful risk management plan is to determine what type of investor you are and what level of your current skills are:
- My investments are usually profitable – when you reach that level, it can mean that risk management is effective, but you are also too risk-averse to take advantage of anything significant in the market or barely able to cover your trading fees.
- My profit is too low – when that happens, it may mean that your risk management is effective, but it also means that you do not allow trading to continue. This is usually due to emotional decisions made in a hurry, such as closing positions too early because of so-called “weak hands”. Some people are not entirely convinced of their decisions and will withdraw from them as soon as they are mildly positive or profitable.
- My profit is too high – when that happens, it is a sign that your risk management strategy works well and that you have reached the peak of risk aversion by applying the size of the deal to the relevant risk. This usually means that you close positions at predetermined prices and let others play your cards. Whatever it may sound like, it’s worth remembering that in some situations it can be fatal to make too much profit over a long period of time.
- My investments are loss-making – when this happens, it may mean that you have limited knowledge of market cycles, you need to continue learning about the asset class you are investing in, and you tend to choose non-liquid projects or coinage. Remember that it is not always about the foundations themselves. Sometimes other aspects, such as liquidity, can also have a huge impact on the profitability of our investments.
Where am I?
From the above points, we can deduce the approximate point at which the investor is currently located in terms of trading mentality. The point is to determine which habits force investors to lose and which habits lead to profit. It is worth trying to stay calm and confident by removing emotions from the psychological aspect of trading by relying solely on information available to everyone, such as price, volume, news, and trends. No matter how tempting or promising a particular investment opportunity may seem, it is never a good idea to bet your entire wallet on one trade. In general, the spread of one particular type of asset class (as well as the abundant combination of different asset classes in the wallet) is a sufficient measure for reducing exposure to larger price movements within a particular industry or market. Market cryptocurrency volatility means that any transaction, even seemingly perfect, can change in the blink of an eye and cause a significant loss. It is therefore recommended that you start diversifying your investments. It is also worth remembering to use the stop-loss function on the stock exchanges and use it to your advantage when we are aiming to automate our investments.
Which way to go?
Time and again new investors do not apply the right exit strategy, often returning to the computer to find the beloved cryptocurrencies basket, which in a week has fallen by 20 percent, and the new trend will continue to pull it down. Leveling such behaviors not only reduces risk but also allows for greater control over losses. Finally, it can be tempting to apply a buy and hold strategy while investing in cryptocurrencies. A specific option to become a typical HODLER. This passive approach is often tempting for new investors because of its simplicity and is often falsely associated with reducing their own risk.
However, it is unlikely that significant profits will be made by playing in this market too safely. So it may be worthwhile to leave the charts for a while and focus on analyzing one’s own behavior and investment psychology. It is worth immersing yourself in your decisions to make sure that you have created a plan with a long perspective. One of the activities helping in this process may be to create your investment diary, in which you will write down all your decisions.