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The Trap Of Trading Temptations

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2023-10-19
The Trap Of Trading Temptations

In the first part of our Master Trading Psychology, we intend to share our insights about market psychology, which should be of great help for traders and investors alike. Understanding how our individual as well as collective mind works allows us to make better decisions, which strives towards the ultimate goal of any market participant is to generate profits.

We Are Human

One key foundation of economics is the assumption that people behave in a near perfect rational manner, meaning the decision making process involves only exact calculations that should lead to the desired outcome, without being affected by the environment or personal emotions. However, that is far from the truth in reality: psychologists agree that we are emotional beings by nature; as a result, emotions are a natural part of trading.

Think about the last time you heard a not-so-good news. Did you feel that uncomfortable feeling growing in your stomach first or think about what to do next first? On the other hand, if you see green on the screen and close your positions with a plus, do you feel on cloud nine, and therefore more confident about your ability to execute more successful trades? The emotional response often takes place before the logical train of thoughts, hence a few quiet moments upon making the decision can help you avoid impulsive actions and proceed with mindfulness.

The crypto industry has its own measure of sentiment known as the Fear Greed Index. There are some specifically on Bitcoin sentiment (alternative.me and lookintobitcoin), and some tracking multiple coins as a broader market sentiment (CoinStats, CFGI.io and Alpha Data Analytics). In between the two extremes of fear and greed is the neutral sentiment, which can be seen in periods of less activities. Fear evokes caution, even to the point of withdrawals or trading idleness, whilst greed is, more often than not, associated with the market's euphoric stage, for example the 2019’s bull market, 2020’s DeFi summer, or when Bitcoin almost hit US$70,000 at the end of 2021.

It’s also common for traders to mimic others' behaviours, especially at the beginning of any extreme stages. That is simply another expression of another human characteristic called herd mentality. As social creatures, we unconsciously look for external clues before making the decision, and when we see that the ‘majority' are selling or buying, that bias can very well creep in, clouding our judgement.

Massive Information Influx

Other market participants can exploit the fact that ‘humans have a social nature' to boost their profits. News outlets, social media networks such as Telegram and X (formerly Twitter) are among those main channels for the average trader to know what is happening in the market, what can and will affect prices, what big players are buying and selling, where smart money is flowing to and out of. Those are our daily reminders, if not moment-by-moment reminders (‘cause crypto never sleeps and is extremely fast-paced) screaming that we should do something, we must do something to keep up with the rest of the market. Under that constant pressure, it may feel like we could never win if we don't do anything immediately.

That's not to mention FOMO a.k.a. fear-of-missing-out as a byproduct of social networking. People showing their profits and lux on social media and/or the community talking about two, three, four+++ digit-gain overnight equally contributes to that feeling of scarcity (such opportunities don't knock twice or such assets have a limited supply only) as well as anxiety (others are making money and I’m not), thus triggering compulsive behaviours.

Last but definitely not least, information around us contains a huge amount of half-truths and fake news. A big media outlet recently shared a false update on the approval of a spot Bitcoin ETF, and though it wasn't on purpose, it did cause Bitcoin price to jump by 10% then recede to its previous levels within a few hours.

Be An Observer

Is it possible to remove emotions when trading? We believe not. But can we learn to reduce their impact? Of course we can; that's why our Master Trading Psychology series is created: to equip you with the necessary tips and tools to navigate through the noises.

The first one has already been mentioned above, that is, take some time before acting upon literally anything. We advise you to let your emotions go by first, then do the next step. If it's a big hit, wait until the emotion is past its peak. Ask yourself why you choose this trading pair or opening/closing this position or why a trade of this size: out of precise calculations or out of temporary fear/greed?

Secondly, remember the theory of a Keynesian beauty contest? If you are not familiar with this term, it's about how people are rewarded for choosing the girl considered most beautiful by others rather than choosing the girl they themselves see as most beautiful. In short, we should learn to be in this market, but not of it. If you feel good about a piece of news, know that chances are that others will feel the same and even bet big on it. Now analyse how long it can last and what the best exit strategy for you is, the best case scenario, the worst one and how to get yourself out of that situation. Being prepared for any outcome is the premise for your personal trading success.