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The Psychology of Trading Cryptocurrencies

How To Get Your Mind Right

19 Min Read
Last Updated April 29th 2021

If you are looking for the key to cryptocurrency trading success, then it’s time to explore the complexities of crypto trading psychology. Only by understanding the psychology of crypto trading one can become a successful trader who can build a fortune over time.

Trading any financial market can be challenging. But when you start trading cryptocurrencies, it's a whole different ball game. What nobody tells you about trading crypto is how mental exhaustion leaves you feeling wiped out and confused.

The Novice crypto trader feels baffled by the volatile and seemingly chaotic price action of cryptocurrencies. But, more than that, the novice trader is likely more confused about his erratic and impulsive behaviour. (Note: We refer to the crypto trader as male – to reduce 'his and her' references. Many women are successfully trading cryptocurrencies )

Day after day, the novice trader approaches his trades, intending to learn from the previous day's mistakes.  At first, it may go well, but then the price turns, and another loss takes the trader out of the market.  Frustrated, angry and confused, the novice trader refuses to walk away and calm down. Instead, angrily, he takes impulsive trades, eager to enact revenge on the crypto market and make back his losses.

Reacting to the cryptocurrency market personally may seem crazy. It doesn't care about you. It doesn't know you. And yet, it becomes an irritating foe that you feel you must beat.

Good luck with that.

Why do I Make So Many Mistakes When Trading Cryptocurrencies?

What is happening to you is normal.

The human brain is hard-wired for survival. It wants to keep you safe, which means avoiding risk and managing the inner resources to protect your energy.

The brain, in reality, has not evolved from the stone age. And the crazy thing is, the brain doesn't know the difference between actual risk and perceived risk.

To the brain, an attack by a sabre-toothed tiger is the same as stage fright, a first date, or, wait for it, the potential to lose money trading cryptocurrencies. The fight, flight or freeze response is the same, no matter the risk.

The limbic system is the guy responsible. It's the emotional centre, and, at first, we have little control over how it controls us.

Image courtesy of Teachersbook 

In the above image, the diagram shows the amygdala hijack response to a threat

  1.   The thalamus receives the sensory data – your cryptocurrency trade has just hit your stop loss
  2.   The amygdala receives the information – but it isn't rational, so there is no discussion on 'what am I supposed to do with this information?' Nope, the amygdala is a pure knee-jerk response. This threat assessment takes micro-seconds
  3.   Data goes to the cortex – Yeah, what am I supposed to do with this information?
  4.   The amygdala makes a decision – Oh, right? It's all on me then to get us out of this situation
  5.   The amygdala takes control – your pre-frontal cortex has been blocked, which means you are now INCAPABLE of rational thought. Oh, heck.
  6.   You are now a deer frozen in the headlights – if you are staring at your cryptocurrency platform, you WILL make a poor decision. The pre-frontal cortex (The chairman of the brain and the decision-maker) has exited this meeting. You can't expect any help there, sorry, but no, not happening

This reaction from the brain is a physiological response. Your heart rate elevates. You may be sweating a little. Your muscles are tense, and your body is hunched up near the computer screen.

You have ZERO awareness of any of this.

When you have taken the impulsive trade and lost, all the steam goes out of the amygdala response, and you sit scratching your head, wondering what the heck just happened.

What is the Right Mindset for Trading Cryptocurrencies?

Okay, so we have explained what happens when the amygdala takes over. For the rest of the article, you'll have clear guidelines for how to overcome impulsive trading cryptocurrency forever.

The right mindset for trading cryptocurrencies is a mind that is calm and non-reactive to the crypto markets. You remain as mentally steady for the wins as you do for the losses. You don't revenge trade, and you assess every potential crypto trade before entering the market.

You do not take your results personally. You assume full responsibility for every cryptocurrency trade, and you assess every trade after it has closed.

Why the Mind Matters in Trading Cryptocurrencies

The hard truth is, you cannot succeed trading cryptocurrency until you have developed a trader's mindset.

No matter how confident you are in your trading plan and crypto strategies, the limbic response will take over every time you face risk, every time you take a trade on cryptocurrency.

You could battle on for years, searching for better strategies for trading crypto. You can define your risk management and have a high risk to reward ratio (RTR). But without managing the mind, you will have a boom and bust relationship with your cryptocurrency trading.

How Do Successful Cryptocurrency Traders Think?

Successful winning cryptocurrency traders think differently than novice crypto traders.

They believe that –

  1.   They can remain detached from the crypto markets
  2.   The cryptocurrency markets have no emotions
  3.   Less experienced retail traders are trading emotionally
  4.   Better strategies will not make them win more
  5.   Winning trades are not necessarily better trades
  6.   Being better at market analysis will not create more wins
  7.   Their psychological response to the crypto market is the answer to success

It takes time and effort to develop this mindset. You can't make it happen quickly, and there's no point beating yourself up when things go pear-shaped.

Developing a trader's mindset is like building a muscle. It takes daily effort to strengthen and shape the mind. You are, after all, attempting to undo the natural response of your physiology. The amygdala response is so fast, so, at first, it may be hard to apply your protocols.

Meditation can help when trading cryptocurrency because it slows down the brain responses, allowing you to identify shifts in emotions before they get out of control.

The top crypto traders meditate regularly. Meditation is not 'woo woo'. All you have to do is to be quiet, without distraction. Allow thoughts to pass through your mind without attaching to them. Spend five minutes with your eyes closed before opening your trading platform.

If you have an emotional moment, step back and close your eyes and breathe deeply. When we close our eyes, the brainwaves naturally slow down. And deep breathing helps to steady the physiological response.

How Do You Develop a Trader's Mindset for Trading Cryptocurrency?

Are you ready to commit to the work needed to develop a brilliant mindset for trading cryptocurrencies? If so, read on.

  1. Have a trading routine – it's all very well rocking up to your trading platform when you feel like it. But, having a daily pattern is what separates the winning crypto trader from the losing trader. Start your routine with quiet time. Remove all distraction - leave the mobile phone in another room & turn off social media alerts.
  2. Commit to your crypto trading education – spend time learning. Take a course, read books and study what successful crypto traders do
  3. Control your losses – never risk more than 1% and always have a stop loss
  4. Keep a daily trading journal – you may be surprised how effective it is to write about your trading journey. Document every trade – why did you take it, and what happened? Let go of your frustrated emotions in this journal. Then, once a week, read it back and observe your good and bad habits. Then take that learning into the next trading week
  5. Detach from the outcome – your crypto trade will win or lose. Once you have placed the trade, you have no control. Don't watch your trade, as this stimulates the amygdala and may cause you to act impulsively

How Long Does it Take to Develop a Trader's Mindset?

The time it takes to develop a trader's mindset to trade cryptocurrency is different for every trader. It depends on how much time you commit and how self-aware you are. Once you can quickly observe your habits and emotional responses, you are well on the way to regulating your emotions.

The more daily effort you put in, the quicker you will see results. You could expect to see positive changes within a few weeks or months if you stick at it.

How Do I Overcome Emotional Trading on Cryptocurrencies?

The cryptocurrency market is driven by sentiment. Thousands of retail crypto traders are hitting the buy and sell button every day, under the influence of emotions like greed, fear, FOMO and revenge trading.

It isn't easy to reduce emotional trading. It takes effort, but there are a few positive habits you can start which will help

After placing the trade, walk away – do not stare at the trade. Go for a walk, get a drink or make a phone call. Do anything that takes you away from the charts.

  1. Do not keep checking the trade - Ideally, close your charts, so you don't keep checking what is happening. This bad habit is classic for a novice crypto trader. You will feel elated when the trade is in profit and deflated if it is showing a negative figure
  2. Stop trading after three consecutive losses – tomorrow is another day. Close down the trading platform and write in your trading journal about what happened. Analyse the losses. Was there anything you could have done better?
  3. Choose a less volatile trading session – crypto is volatile at the best of times but study the charts and work out when the market is a little steadier and trade at those times
  4. Check your emotions – how are you feeling? Are you tired or feeling emotional, fearful or worried you might miss out on a good trade? If you are feeling anything less than calm, walk away and come back when you have your emotions under control

How Can I Stop Impulsive Trading Cryptocurrencies?

Detach from the outcome.

Ask yourself if you are over-trading or risking more than 1% on your cryptocurrency trades.

Greed and fear are two emotions that dominate the novice cryptocurrency trader. FOMO is another. Missing out on a big move can feel frustrating. But, look, this mentality is a bit crazy. The crypto market is enormous, with the potential for multiple trades every day. If you miss one trade, so what? Just look for another.

While you focus on what profits you missed, you waste time caught up in your emotions when you could be catching the next best trade.

Don't be greedy. Small, incremental profits grow your crypto account steadily.

A significant loss may follow one big win.

Aim for the long game, increasing your crypto account one dollar at a time. Do you know the tortoise and the hare story? Yes, be the tortoise because the profits you gain must be nurtured and protected. The losses will come but treat those wins like gold dust.

How Do Professional Cryprotcurrency Traders Manage Their Trades?

Professional cryptocurrency traders have no attachment to the outcome of their trades. They patiently wait for a good trade set up, and when the price hits their target entry area, they take the trade. Then, they walk away and let the trade play out. Win or lose, the professional crypto trader does not get excited or angry about the results.

They know that a 50% win rate with a 1% risk and a high RTR will always put them in profit if they remain calm and detached.

Once a crypto trade is running, the professional trader does not micro-manage it. At a certain point, the crypto trader may move their stop loss to breakeven. Other than that, they leave it alone.

They may check the trade once a day. If the price has gone against them, the successful crypto trader may close the trade to avoid hitting the stop loss and wait for another entry point. Or they will move on to another crypto to trade.

Will a Trader's Mindset Increase My Profits on Cryptocurrency Trading?

Yes, without a doubt, 100%.

Most novice crypto traders believe they need a better strategy or a better trading plan. They flit from one system to another, trying for a few weeks before declaring that strategy didn't work.

The one thing that few novice cryptocurrency traders look at is their mindset. They believe the crypto market is rigged against them. They blame their teachers or the books they've read.

At no time do they look in the mirror and say, "perhaps it's me."

There's a reason why there's a 95% failure rate with novice traders, and that is the refusal to commit to building the trader's mindset.

The 5% of successful traders have worked this out. They know that their survival mind was holding them back, and they took steps to change how they reacted to trading cryptocurrencies.

They have changed their beliefs and attitudes to trading cryptocurrencies. They focused on the psychology of trading cryptocurrencies.

The top 1%-5% of successful crypto traders commit to daily meditation. They won't go near a crypto chart until they have spent time calming their mind ready to trade.

Spend the time working on your trader's mindset, and you will see positive results.

What are the Benefits of Working On My Mind for Trading Cryptocurrencies?

The benefits are endless, but here's a quick reminder of what you can expect when you master the psychology of trading cryptocurrencies

  1. You will win more often – no more the boom and bust of the novice crypto trader. A trader's mindset will keep your trading steady and consistent
  2. You will take fewer trades – professional traders say that it isn't the winning trades that make them successful. It is the trades they don't take that results in the ongoing growth and capital gains. No more impulsive trading
  3. You will enjoy trading more – the anxiety of trading often leads to burnout and exhaustion. It is stressful when you are attached to an outcome and cannot control your emotions when you have losses
  4. You gain confidence – not just about trading crypto. Developing a trader's mindset has multiple benefits that carry across all levels of your life. Your confidence in trading cryptocurrencies helps you take the trades when you see them and not take the poor crypto trades. Losing traders have crippling self-doubts, which compound with every loss. Winning traders have no such doubts, whether they win or lose

What is the Psychology of a Winning Crypto Trader?

The winning crypto trader has spent time perfecting his trading style and mindset. This mindset won't have happened overnight. Many successful traders admit they spent years losing money, busting their banks and pulling their hair out with frustration.

But, they didn't give up.

The successful cryptocurrency trader has specific characteristics that support their success in trading cryptocurrency

1. They are comfortable with risk

If you have a low tolerance for risk, it will be hard to accept losses. With an average 50% win rate, you also have a 50% loss rate. Successful traders embrace uncertainty and do not invest their emotions in the outcome. There is never a guarantee of a win.If you want to become a successful cryptocurrency trader, your first step is to increase your tolerance for risk and uncertainty

2. They can adapt to market conditions

Confirmation bias is a genuine problem for novice cryptocurrency traders. Winning crypto traders aren't attached to their analysis, and they can quickly switch their view on probabilities for future price movements.

To overcome this, when analysing a trade, always look at the opposite scenario. For instance, if you want to take a buy trade for ETH, analyse a sell trade. This exercise allows you to see both sides of the coin without confirmation bias.

In trading, confirmation bias is the enemy. The brain seeks confirmation of your choice. So back to the ETH trade, you can ONLY see the potential for a buy and may stay in the trade too long if it goes against you.

3. They are disciplined

They view the crypto market objectively, no matter what is happening with their open trades.

4. They are not emotional about wins or losses

Successful crypto traders don't get excited about winning, and they don't despair if they lose. They are in control of their emotions and do not allow their emotions to control them

5. They have strict money management and risk management

They do not recklessly gamble on an outcome, and they stick to their risk percentage per trade, typically 1%. The successful crypto trader balances out potential risk to reward before entering a crypto trade

Winning traders understand that a winning trade may not have been a good trade, and a losing trade may not have been a bad trade.

If you lose money, but you had done everything right in approaching the trade, that's your job done. The fact that it lost is immaterial. A good trade is one with a higher potential reward than risk.

Successful crypto traders think in probabilities and only take trades with a high probability of winning. Anything less than this approach is a gamble. An impulsive trade that ends in a win is not a good trade.

This attitude is the main difference between losing crypto traders and winning crypto traders.

How Can I Improve My Crypto Trading Habits?

Regularly evaluate your trading performance. Trading cryptocurrency is a skill that you can master with time and a lot of practice.

Let go of your ego because it will dominate your behaviour. View the market objectively and stop working with trading practices that aren't working or are increasing your stress levels.

When you see an opportunity for a trade, take the trade. Novice traders often hesitate, wondering if they are misreading the market.

Check both sides of the trade – the buy and the sell – and if the probability is high, with good RTR potential, enter the trade.

Always look at how much you could lose before getting excited about how much you can win.

Practice self-discipline. It's so easy to trade cryptocurrencies. All the choices are yours. All you need is an account to trade cryptocurrencies and money to trade.

But this ease of trading crypto can be the downfall of many novice crypto traders. The onus is on you to self-regulate, which mostly fails to happen. You can lose your account overnight, and there's no comeback other than feeling bad about the loss.

Set your rules and stick to them. It can help to create a poster with your rules which you pin next to your trading station. Before you start trading crypto, check your rules, read them out loud and keep reminding yourself throughout your trading day.

Recap of the Psychology of Trading Cryptocurrencies

Trading is difficult to master, and trading cryptocurrencies is incredibly challenging. It's a volatile market with a lot of choice for trading.

The fact is very few traders become successful at trading cryptocurrencies. But, if you are prepared to make an effort, it can be done, and the rewards can be significant.

Preparing your mind for trading cryptocurrency is the secret sauce. Self-discipline and patience are the key components to success. You have to create good trading habits and not deviate from them when things get tough.

Developing a trader's mindset will change you on many levels, improving your responses to risk and reducing knee-jerk reactions to frustrating situations. You will deal with life more efficiently and with less emotion.

Trading cryptocurrencies should be fun, not stressful. A trader's mindset releases you from stress and makes it more pleasurable and profitable to trade cryptocurrencies.

Start today and reap the rewards of seeing your crypto account grow as you learn.

Please note that the above information is not providing advice on tax, investment, or financial services. We provide the above information without consideration for risk tolerance and a specific investor's financial circumstances.

Trading or investing in financial instruments such as cryptocurrencies may not be suitable for all investors. It does involve risk and the possibility of a loss of capital.

eToro – The Best Platform to Trade Cryptocurrencies

eToro have proven themselves trustworthy within the Crypto industry over many years – we recommend you try them out.

Virtual currencies are highly volatile. Your capital is at risk.

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