Mastering Trading Psychology: Emotional Discipline in Cryptocurrency Markets

Hello everyone! I hope you are all enjoying the final month of year and the Holiday Season. I decided to join the Crypto Academy Challenge and even if I have some experience with crypto and trading, I am mostly focused on DCA bots. However, I will try to answer the questions as best as I can. So, without further ado let's dive into it.

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Question 1: Identifying Emotional Triggers in Trading

Since we are all humans and have different emotions triggered by everything around us, it's only natural that when we put a portion of our money or even risk our entire savings just maybe we can multiply them by trading, we get flooded by emotions.

Let's talk about Fear. This emotion is a response to dangers or threats. It's something natural, a survival mechanism but it also impacts our decision making.

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When this emotion gets a hold on us, we may take some wrong decisions regarding our trades.
Let's say we hold 1000 STEEM we bought at 0.20$. If the market experiences a sudden crash or a correction and the price drops to 0.15$, we may be compelled to sell our tokens just because of the fear of further losses, taking a significant loss. This represents Panic Selling.

We can also miss opportunities because of the same emotion. For example, I have a good set strategy to buy STEEM whenever the price dips below a certain support level. But the fear of potential losses makes me overthink the strategy and I don't execute the trade even if the price hits the set level. This fear causes me to miss out on possible buying opportunities and also the profit.

Another common emotion for a trader is Greed. Something that all traders experience at least one in their life is the Overtrading. If I do a couple of profitable STEEM trades, I will get a lot more confident in my abilities. So, naturally, I will start to trade a lot more often and with more money, maybe even more than I can afford. Automatically, this will lead to losses, perhaps even significant ones when there is a shift in the market whipping also the initial profits I had.

Because of Greed, we may also be tempted to ignore the Stop-Loss Orders we had set. I am placing stop-loss order for an open STEEM trade to avoid eventual losses and I set it at 0.18$. As the price gets near this level, greed steps in and I move the stop-loss down in hopes that the price will get back up. This decision will boomerang when the price continues to fall.

We also get influenced by Impatience, Regret and even Overconfidence. Each of these emotions making us lose money and even trust in our abilities. By managing these emotions through self-awareness, managing our risk, periodic breaks and learning, we will succeed.

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Question 2: Overcoming Psychological Barriers

Psychological Barriers like FOMO, loss aversion and overconfidence can often impair our judgement, lead to poor decisions and impact our trading results.

Fear of Missing Out (FOMO) often leads us to chase trades without a correct and in depth analysis.
Let's say for example that I see a 20% rally on STEEM/USDT and because I am expecting more gains and I experience FOMO, I am buying the parity at a high only to experience a sharp decline.
However, we can overcome this feeling by acknowledging and accept it as a natural emotion, Accept that some trades may be missed, there will always be opportunities. Also, if I focus and follow my set strategy, I will avoid making impulsive decisions caused by my FOMO.

Loss Aversion causes us to hold onto some losing positions for too long or get out of winning ones to early.
Example: I buy STEEM at 0.25$ and I refuse to sell it at 0.18$ hoping for a rebound but only to take further losses on this trade.
This can be controlled by accepting that losing is part of trading, having stop-loss orders set to take the emotions out of the equation. I can also consider the loss as a "learning fee" and found out that keeping a journal helps massively.

All of these Psychological Barriers are natural and it's up to us to understand and address them to become more profitable, increase our success and make better decisions.

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Question 3: Developing a Trading Routine

For a trader to be successful in the long run, a well structured routine will improve all areas of our lives. It doesn't have to be something out of the ordinary, it can be fairly simple.

As a daily routine, we can implement:

• Some brief mindfulness exercises in the morning will help us to calm our minds and reduce anxiety, if we struggle with it.
• Can also do a bit of journaling if we are a bit overwhelmed by the previous day.
• Read some market news and see if anything relevant for us happened overnight.
• Set realistic goals for the day ahead
• Before doing any trades, we need to analyze the market and plan the trades accordingly to our goals and risk-reward appetite.

For a weekly routine, I think it can se a bit simpler:

• look back at the trades and decisions made that week and understand why you did it that way. Also, a separate journal for weekly reviews might come in handy.
• set the goals for the upcoming new week
• dedicate time for learning and improving the setup on a demo account
• reset psychologically, leave the emotions behind

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Question 4: Case Study on Emotional Trading

A trader named Alex is closely following how the STEEM price evolves. He notices that a bullish trend is forming on the weekly chart with positive announcements that makes the price go higher. Alex is excited by the possible gains that may come so he invests a big portion of his portfolio in STEEM.
But, as the price starts rising, he gets anxious. The FOMO he is experiencing of even more profitable trades, drives him to increase the capital. With the price still going up, Alex gets euphoric and overconfident in his abilities. He neglects the risk/reward ratio, thinking that he is understanding the market.

All of a sudden, the price of STEEM plummets. Alex is hit by panic and fear of further losses so he sells all of his position.
Because of his lack of Emotional Discipline, Alex takes a very loss and a hit to his ego. This could be prevented by:

• creating a plan and sticking to it during trading, thus preventing impulsive decisions
• having predefined exit points
• getting partial profits
  
  
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Question 5: Building Resilience in Volatile Markets

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Volatile markets can be emotionally challenging even for experienced traders. Having good mental resilience helps to get through tough times and make good decisions. There are some strategies we can use to improve it and focus:

• have a predefined trading plan that includes clear entry and exit points, a risk/reward ratio that you are comfortable with, do backtesting on strategies using a demo account
• improve emotional intelligence by recognizing, accepting and managing the emotions you experience; journal everything you feel will help you in the future; don't be afraid to ask for help for more experienced traders to gain different perspectives.
• avoid getting fixated on short-term win
• prioritize mental and physical health
• continue learning

In the end, emotions will always be a part of human nature and they will always affect our mood and decision making and it's up to us on how we control them.

I am inviting .@ady-was-here, @radudangratian, @cmalescov to also take part in this challenge.