There are common mistakes made in cryptocurrency trading that will save you – and your money – if you can avoid them. In this, we’ll try and help you out.
Don’t trade without a plan
It is imperative to have a plan for how you will invest in a cryptocurrency. The market is famously volatile, with high risks matching its high rewards. A trading plan is an excellent way to mitigate these risks.
A trading plan involves setting a high and low limit for when to withdraw your investment. A high limit is the set point at which to withdraw your investment, which has a value higher than your initial placement. For example, if a trader invests $500 USD into Dogecoin (DOGE). He decides that he will withdraw this investment if its value reaches $750 U.S.D. A low limit is the reverse of this; the set point lower than your initial investment, at which point you withdraw. So, if the value of his investment dropped from $500 to $400 USD, he would withdraw then, as that is his low limit.
A trading plan mitigates the risks of cryptocurrency trading. Let us assume that the trader had not set a trading plan. If the value of his investment began to rise, when would he withdraw? Very often, investors who are experiencing a rise do not withdraw and instead hold on to the investment expecting it to reach even higher. This does not pay off most of the time. Instead, the value drops greatly, as cryptocurrency tends to do. Yet as it does so, new investors tend to hold on to their investment hoping it will rebound. Eventually, they end up withdrawing at an all-time low. This happens often. High and low limits ensure that you never incur a huge loss.
Reduce the risk of volatility
Knowing how much to invest at a time is an important part of mitigating risk. Daring new investors often make the mistake of going ‘all in’ on a certain cryptocurrency that they feel good about. This emotional trading leads to great risks of loss.
Investing large sums into a cryptocurrency will give you an extremely high level of sensitivity to the market. While you have the potential for huge gains, you also have the potential for huge losses. Pro-traders, who are used to the field, may do this while also mitigating their risks, but it is a different story for newcomers.
New traders with large sums invested are likely to feel a strong emotional attachment to their investment. This means they are prone to either withdrawing too soon or holding on for too long. For example, if a trader decides to join the ‘Bitcoin craze’ and invests $1 million USD into Bitcoin (BTC). He will likely feel a strong sense of attachment to that investment which will affect the decisions he makes. He may ignore his own trading plan, hoping to either make a larger profit or come back from an ever-increasing loss. As discussed before, this sort of trading will almost always lead to a disastrous loss.
Keep your trading simple and focused. Investors often fall into the trap of trading on too many currencies at once. They spend several hours determining entry points into all the currencies that look profitable and decide to invest in all of them. This method tends to lead to emotional trading which in turn leads to loss.
For example, if a trader decides to invest in Bitcoin, Dogecoin, and Ethereum (ETH). She places $200 USD into each trade. She sees that Dogecoin and Ethereum are on a rise, so she decides to hold onto her investment, even though Bitcoin is beginning to drop. By the time she pulls out her investments, Bitcoin has dropped to the point where the profit she made from Ethereum and Dogecoin is negated.
The best way to handle trades is to focus on just one or two. This relieves you from the arduous task of managing all those investments and makes you less prone to emotional investing.
These three tips are essential to successfully mitigating the risks of cryptocurrency investing. While you cannot always ensure a profit, you can at least always ensure a small loss.