With the advent of global equity and digital currency markets, trading has become more accessible to ordinary individuals than ever before. While there is no denying that effective trading can be immensely rewarding and profitable, most asset classes are known to be unforgiving to even the tiniest of mistakes. The good news, however, is that most of these mistakes can be easily avoided with some prior knowledge and determination.
In this article, we take a look at some of the most common mistakes made by amateur cryptocurrency traders and how you can avoid making them in your investment career.
Not Setting Plans Ahead of Time
Inexperienced and amateur cryptocurrency traders often make the mistake of entering and exiting positions without much forethought or planning, relying purely on their intuition instead. However, as with any other tradable market, too many wrong moves in quick succession can wipe out your entire built-up capital. The only way to avoid impulse purchases and panic selling are to ensure that every transaction has a purpose and is in line with your risk appetite.
Risky situations like these can be easily avoided if you set price and time targets before opening a new trade. Contingency plans also go a long way towards protecting your original investment, in case a particular trade suddenly goes south or does not perform as expected.
Knowing the exact entry and exit points for trade are only half the story, however, especially since inexperienced traders are known to deviate from their plans every now and then. While timing the market or trading based on short-term price movements may yield some profit every now and then, the cryptocurrency market’s volatility and uncertainty make these strategies unreliable at best and financially dangerous at worst.
Even professional investors and hedge fund managers delineate a clear goal before investing to ensure that they do not get carried away by emotion. Multi-millionaire investor and crypto hedge fund firm founder, Anthony Pompliano, told CNBC,
“Around $3,800, in March of this year, we put an investment on Bitcoin for public pensions and obviously that investment is doing really well. We have a price target as to when we think that the longer-term horizon is and what I came out and said was $100,000 by December of 2021.”
Getting Carried Away by Hype, Greed, and FOMO
New traders are also significantly more likely to let greed and fear of missing out (FOMO) take control of their portfolios. During a bull run, retail investors and traders convince themselves that they are potentially missing out on great returns and enter a trade. This not only artificially inflates the cryptocurrency’s demand and price, but also sets them up for disappointment when the inevitable correction comes along. At that point, the vast majority of them are tempted to liquidate their position, cut any losses, and move on.
Failing to Manage Expectations and Risk
Assets that tend to offer high returns almost universally come with the caveat of high volatility or short term uncertainty. The cryptocurrency market is no exception to this rule and has been known to gain or lose 30% of its total market capitalization within a single day.
In 2017, a few investors announced that they had taken a mortgage or loan to double down on their cryptocurrency position in light of the market’s recent stellar performance. In 2018, however, the cryptocurrency market shed billions of dollars in value, and likely wiped out any gains made by these investors. Put simply, do not trade with money that you cannot afford to lose. Applying for credit to trade in the cryptocurrency market is a slippery slope and not a sound financial strategy.
Falling Victim to False Signals
While market noise may skew a trader’s perspective, it isn’t nearly as destructive to their financial position as a well-executed scam. Pump and dump schemes, for instance, artificially boost the demand and price of a token, triggering investor FOMO and greed. As the price snowballs far beyond its original value, the scheme’s organizers sell their position and make a massive profit at the expense of other buyers.
Perpetrators of pump and dump scams generally target novice investors on Telegram, Discord, and other chat applications. Once a sufficient number of gullible participants have been reeled in, the organizers can execute the scheme in as little as 18 seconds.
While pump and dump schemes have been around for decades, regulatory involvement and crackdowns have more or less eliminated the vast majority of them from equity markets. However, the cryptocurrency market’s global and digital-first nature has allowed organizers of such schemes to reach a wider audience. Having said that, with a little bit of prior research and due diligence, you can easily discern scams from genuine, high-quality projects.