Steemit Crypto Academy Contest / SLC S22W1: Mastering Trading Psychology: Emotional Discipline in Cryptocurrency Markets.
Hello everyone, welcome to this awesome community!
This week in the Steemit Crypto Academy Contest / SLC S22W1 we are going to dive deep into Trading Psychology and Emotional Discipline in Cryptocurrency Markets.
This is my first entry as well as my first post in this community and I am really excited about it because throughout this year I have learned a lot about technical analysis, trading psychology, risk management and so on. and today I am on a platform where I can share all that. Hope we all learn something from this.
Question 1: Identifying Emotional Triggers in Trading. Discuss common emotional triggers (e.g., fear, greed, overconfidence) that affect traders. Provide examples of how these emotions manifest during market movements.
Most people come to the crypto markets lured by the prospect of making easy money. But, from what I have learned so far, the financial markets are probably the toughest place to make easy money.
Toughest: Because to succeed here, you must first control your emotions and this can be achieved not just by learning but by constant practising.
Easy: Because once you control your emotions, you are able to make the right decisions at the right time.
Here are some common emotional triggers:
- Fear
Think about when fear overpowers you. I guess it is when you feel insecure and think that something might happen for which you are unprepared. Something similar happens in the market too when you are in a trade and suddenly start feeling insecure because you fear that something opposite of your assumption might happen in the prices for which you are not prepared and this can happen in trade of any direction.
To avoid this, you simply have to prepare yourself for price fluctuations and this will be possible only when you take a position in a trade based on the right analysis and a proper strategy where you will know before taking the trade where your entry, target if the trade goes right, and risk level if it goes wrong. When you know all this beforehand and you are ready with your orders on your system, then fear will never be able to overpower you.
- Greed
Greed is not a bad emotion if it encourages you to do better in life but if due to overgreediness you do not take advantage of the opportunities that come your way then it can cause a big problem for you.
To understand this in the context of the market, suppose you are in a trade and as per your initial analysis, you are getting your target profit much earlier than expected. Here, if you do not book profit in greed thinking that the price has reached your target so fast, so it is possible that in the same momentum, it may go up even higher. Well, in such a situation, it is also possible that the price may fall faster than it rises and may take you from a big profit to a big loss. Because panic becomes more intense during selling and here Anger and Disappointment, two additional emotions get added to your psychology and start powerfully influencing your trading decisions and then you ignore your analysis, rules, market conditions, etc. and stay in that trade only on the basis of hope.
To avoid this, make it a habit to book profit when the target is achieved as per your initial analysis. In a trade, if you are very confident that the price will move further in your predicted direction, then also settle at least half or a little more of your position on the first target and wait for the next move. By doing this, even if there is a sudden change in the price action, you will be able to save yourself from loss and if the price really moves further in your predicted direction, you will also be able to earn some additional profit.
- Overconfidence
It is very important to have confidence in your analysis and strategy, but overconfidence can also lead you to huge losses. In the above example, even at times of greed, we sometimes incur losses due to overconfidence about the price going in our direction and sometimes even after getting clear signals of a trade failure, we delay making the right decision due to overconfidence.
To avoid this, we should make decisions according to live market conditions and understand that no strategy is 100% effective. Sometimes the trade is right but not enough to achieve your target. In such a situation, you should try to understand whether your estimated target has become technically incorrect by doing a price action analysis in the live market and make a decision based on that.
We will understand all these emotions with the example of the price chart but before that let us also discuss the Psychological Barriers mentioned in the second question.
Question 2: Overcoming Psychological Barriers. Share techniques to overcome psychological barriers like fear of missing out (FOMO), loss aversion, or overconfidence. Use examples relevant to Steem/USDT trading.
Fear of missing out is the fear that often comes after seeing huge returns in a directional market. Due to this, you feel as if you have missed a great opportunity to make money and then you jump into an already overbought market without a trade plan, hoping to make money on the momentum. Based on my experience, I am telling you that in FOMO you usually incur huge losses. Why? Simply because you have neither any analysis nor a trade plan based on which you can assume that up to what level of fall in the price you will consider as a healthy correction and where you have to consider the trade as a fail and book a loss.
Here is easy ways to overcome FOMO. Whenever you feel like doing impulsive trading due to FOMO in a rising market, just keep in mind that the probability of profit booking from these levels is as much or a little more than the probability of prices continuing to rise, which means that after your entry, an equal window will be open for the price in both directions. Instead, if you wait patiently for some time for a proper price action to build, then you will be able to know how much strength is there in this recent move. If the price movement is strong, the prices will sustain and you will get the opportunity to plan high-probability trades by managing risk with proper price action.
Loss Aversion: Trading is also a part of business and a successful business should not have any relation with emotions. So what, if your good strategy fails or if you have back-to-back losses? You just have to learn lessons from a closed trade and not have any emotional attachment.
Plan your trade in which you know where to exit with minimum loss in case the trade fails but stop worrying about the loss while you are in the trade because it has a deep impact on your decision-making. Profit and loss are all part of trading. Learning from the losses and focusing on making more high-quality trades and most importantly appreciating yourself for your profitable trades is the way to stay psychologically aligned and consistently profitable.
Question 3: Developing a Trading Routine. Propose a daily or weekly trading routine that includes psychological preparation, such as journaling trades, setting realistic goals, and practicing mindfulness.
Good habits make time your ally, that is why it is said that a good routine plays an important role in your success. So obviously, to perform well and keep doing well in trading, it is necessary to have good structured routine.
The first thing I do at the start of a trading day is meditation which improves my focus, helps me stay calm and composed, and improves my decision-making abilities.
Then before the market opens I take a look at major global news events to determine overall market sentiment.
After that I spend some time analysing the recent price action on the charts from bigger time frames to smaller time frames and also mark the important levels.
Then I review the important lessons noted in the journal of the past day. By doing this, the chances of repeating recent mistakes are greatly reduced.
After this I set some realistic goals for today's trading day. How realistic the goals are depends on your trading capital and historical performance. For goals, I focus on percentages, not money. By looking at profits in terms of money you may get trapped in its illusion, due to which fear and greed will quickly overpower you.
Also, during the trading hours, I keep repeating things to myself like: it is not necessary to get good trades every day, I am a very patient trader, I take less number of trades but they are all of high quality, I make positions only when the right price action is formed and with proper trade setup, etc.
By reminding myself of all this, I am able to keep calm and composed and wait for the right opportunity and not fall prey to FOMO.
Question 4: Case Study on Emotional Trading. Analyze a hypothetical or real-life scenario where emotions led to a significant trading mistake. Explain how emotional discipline could have prevented the loss.
For this, I have a perfect example of Steem Token itself.
The candle highlighted by circling it in the chart above is of November 13. After setting a new low in August, the Steam token was trading in a range. After which, a few days of continuous buying at the beginning of November, on November 13, this token suddenly saw a sharp upmove and made a high of about 35% in a single day, but due to the heavy dominance of sellers at those levels, the price could not sustain and by the end of the day, the entire move failed.
Imagine how shocking a price fall of 35% in just a few hours would have been for those who, in their greed to earn more in a short time, lost control of their emotions and created positions in FOMO at the upper levels of this candle.
Instead, if you had patiently waited for the price to sustain without greed and had followed your trading discipline and rules while staying away from FOMO, the result would have been quite different.
Imagine, those who bought on price confirmation and with proper discipline in the next few days would have captured a good 40 to 50 per cent move in the trend continuation.
But there would also be some traders who either in greed and overconfidence did not book profits at those higher levels (the circled area in the image above) or created fresh positions near the same higher levels due to FOMO. Then, the prices fell by almost 30% in the next few days. As I said, panic is intense during the time of selling and this FOMO works the same way in a falling market too but whatever the direction, trading in FOMO is literally like trying to catch a falling knife where the chances of getting deeply hurt are many times more than the chances of success.
Question 5: Building Resilience in Volatile Markets. Discuss how to build mental resilience to handle high-stress trading environments, including techniques for staying focused during volatile conditions.
Mental resilience in highly volatile markets is as important as oxygen is for life. It is very effective in maintaining your stress and keeping you calm in volatile markets, and it also makes you strong enough to make rational decisions and take high-quality trades. Let's discuss some foundation techniques to build this resilience.
Create a separate trading journal for the trading days of such markets. Because this will help you analyze your behavior, right-wrong decisions, and emotions and know where you need to improve. Analyzing yourself, identifying your emotional triggers and improving your behaviour should always be the first step. Because the more aware you are about yourself, the better and rational decisions you will be able to take.
Knowledge is power. After being self-aware, you must also be market-aware. The right knowledge strengthens your confidence in your own analysis and despite volatility, you trust your trade setups which helps you to stay calm and make the right decisions.
Follow a balanced trading routine. In a volatile market, your mind will give you trading signals every moment, but you should stick to your trading routine and check every factor step by step and execute the trade only when you are fully confident.
**Manage your risk effectively. Although this topic is so big and important in itself that 1000s of words can be written on it separately, but in short, understand that if you see this market as a serious business and want to remain profitable in it, then managing your risk effectively will be another very important part of your success. Understanding the risk to reward ratio is the most important factor in evaluating a good trade and I believe this should be set by each individual based on their trading behaviour.
There is always a price range, sometimes very big, sometimes a little small. Sometimes it happens that after 1-2 losses you get to know about this range but that's okay, making a mistake once is not bad but repeating that mistake again and again is. Know the price range of the volatile market and plan your trades by considering them as key levels. This way you will be able to focus more on high quality trades.
This is a 15-minute chart of Steem Token from 4th to 6th December. The price range on the screen is of more than 7 percent and I have marked the key support and resistance as well as an inside range. Now knowing all this, I am able to stay calm and composed in the noise of the market every moment and at the same time I am able to focus more on high-quality trades while evaluating my risk.
It took me 4 days to write my entry blog because firstly I did not get enough time and secondly I wanted to write it as well as possible. To be honest, a lot more can be written on these topics and we will definitely continue to discuss this in the future. I hope the professors and students of this academy will also find my post interesting and useful. Thank you for this amazing contest! Merry Christmas!