A vast majority of traders of traditional and cryptocurrency (e.g Bitcoin) markets lack balance in their portfolios, especially as digital assets get increasingly popular. Often, we overlook planning for contingent events. We summarized trading strategies in an earlier article. Today, we look at the common mistakes of trading and investment.
Starting Out with Cash
There is no justification for a novice trader to use real money when there are countless alternative platforms for paper trading, like Tradingview. Anyone interested in becoming a skilled trader, especially in Bitcoin, should first build a framework based on a basic set of entry, exit, and risk management guidelines. Practice paper trade until you are prepared enough to lose.
The most important skill that a trader must have is accepting losses and moving on to the next trade. Traders who are starting out tend to trade emotionally, demonstrating the inability to accept losses quickly and cause serious emotional problems especially in a volatile market like Bitcoin. To avoid such occurrence, traders, especially novices, should set a stop loss and not touch it when the trade goes against favor — failure to do this is the key reason traders are losing their capital.
Not Keeping a Trading Journal
Effective traders have a plan in motion. Part of trading with a strategy is to keep yourself responsible for your actions. The only way to do this is to document a trade’s specifics — The perfect way to learn to prevent repeated trading errors. Keep the diary and go back to it. Document your thinking process, your emotional state, and your business outcomes. Journaling is going to support you immensely.
Leverage should only be used by advanced traders who have been reliably successful for years to come. According to a renowned investment saying, leverage is a double-edged sword because it can raise returns on successful transactions and exacerbate losses on trade losses. There is no better way to lose money quickly than to use leverage to compound your losses swiftly.
Successful traders all maintain a healthy portfolio. Let’s illustrate an example with Trader Lee.
Trader Lee only has 10% of his crypto wealth. Inside his crypto portfolio, 70 percent is long-term holdings (heavy weighted to bitcoin), holding 15 percent and 15 percent in trading. Lee trades 15 percent of his portfolio, and the portfolio as a whole is only 10 percent of his net worth.
Rebalancing is the method of restoring your portfolio to its intended asset mix, as illustrated in your investment strategy. Rebalancing is difficult because it may require you to sell the asset class that is doing well and purchase more of the worst-performing asset class.
Adding to a Losing Trade
Let’s be reminded that trading and investing are two different things. Investors average down positions in fundamentally sound assets over a long horizon of time. Traders typically identify risk and invalidation levels for their trades, so when their loss ends, the trade has been invalidated and they can switch to another asset. Don’t ever average down as a trader.
Risking More than What you Have
In cryptocurrency, people are attracted to the concept of making heaps of profits by being in the right place at the right moment. As a result, they often go all-in, investing everything in crypto and betting everything on it like a lottery ticket.
It takes money to make it, as the saying goes. The prospect of earning passive income blinds many early traders — This is a false fact unless they have substantial resources to trade with.
A trader who wants to be a professional needs to finance his entire life by selling-that means that his profit would cover his living expenses without having to eat into his trading capital. — This requires at least $50,000 — $100,000 to trade in most parts of the world and a steady profit of 10% a month.
In reality, this isn’t easy to achieve. As a result, numerous novice traders find themselves under a lot of stress when their anticipated return on trading fails to match the actual results they achieve.
Acting Blindly on Trading Patterns
Beginning traders are typically inexperienced in technical research and define trends on a map that are not present or incorrect on the basis of meaning and chart placement. Beginners should build an obvious trading framework, start with simple support and resistance, and avoid making assumptions about trends or indicators they do not entirely understand.
Further Blindly Following Herds
Most cryptocurrency traders, even novices, often follow calls made by seemingly experienced “Pros” on Twitter without considering that they could be following manipulative calls to the “Pros’ advantage. As such, these traders often end up buying too much of a popular coin. Experienced traders generally are accustomed to exiting a trade when it gets too crowded.
The crypto market has shallow entry barriers. As long as you have an internet connection, a smartphone or a device, and some capital, you could theoretically become a trader. However, to be an effective trader, it is crucial to be adequately capitalized, do paper trades and practice risk management.
For related articles, read DigiFinex Academy.