10 Mistakes to Avoid in Crypto Trading
The number of cryptocurrency traders worldwide has surpassed one hundred million. However, only a small percentage, roughly 10-15%, can consistently generate profitable trades. To be counted among them, it is crucial to avoid making mistakes. You can learn about the most common pitfalls in our article.
On this page
- 1. Lack of a trading system
- 2. Absence of trading strategies
- 3. Ignoring money management rules
- 4. Ignoring risk management rules
- 5. Opening positions without conducting technical analysis
- 6. Opening positions without conducting fundamental analysis
- 7. Lack of trading discipline
- 8. Giving in to greed and fear (FOMO and FUD)
- 9. Excessive use of margin trading
- 10. Holding losing positions for too long
Becoming a successful crypto trader requires knowledge of the intricacies of exchange trading and experience. It's a challenging endeavor that often takes a toll on a trader's nerves and assets. What's even more unpleasant is that both are highly valuable!
To minimize the risk of failure when trading digital assets, we've compiled a list of the most common mistakes made by crypto traders. This information is a “must-read” for beginners who are taking their first steps into the world of crypto trading. However, even seasoned traders can benefit from refreshing their memory.
1. Lack of a trading system
A solid trading system is the cornerstone of trading success. Without adhering to a trading system, executing trades becomes akin to playing roulette, where the “house” (i.e., the exchange) or more experienced “players” always have the upper hand. Every trader should follow a clear plan and defined rules, acting accordingly during uptrends, sideways markets, and downtrends. This includes determining a trading style, degree of automation, risk management, trade duration, entry and exit points, profit-taking strategies, and other crucial aspects.
2. Absence of trading strategies
In various scenarios within the cryptocurrency market, traders develop a range of strategies and tactics. Strong market movements and changes shouldn't derail a trader. Instead, they should adapt their strategies and continue to act successfully in any market conditions. Each strategy may involve specific tools of technical analysis, indicators, fundamental analysis, risk management, and money management techniques. Different trading styles, such as scalping, intraday trading, and swing trading, usually employ distinct trading strategies that consider different market cycles, whether bullish, bearish, or ranging.
3. Ignoring money management rules
Adhering to money management rules significantly increases a trader's chances of preserving their capital and avoiding a rapid liquidation of their deposit. Money management encompasses various aspects, including:
- Portfolio allocation across different asset classes in appropriate proportions, taking into account risk levels.
- Diversification of the investment portfolio by trading on different markets and platforms, as well as setting aside a reserve fund in secure wallets.
- Calculating position sizes for each trade based on a predetermined risk percentage or using a differential approach.
- Regular portfolio maintenance and rebalancing to ensure optimal performance.
This category also includes criteria for selecting exchanges, trading platforms, P2P, and OTC platforms, considering market specifics (spot, margin, futures, etc.), available assets, minimizing commission expenses, and establishing efficient fiat entry and exit methods.
4. Ignoring risk management rules
Ignoring risk management rules is just as serious a mistake as the previous ones. It can lead to irreversible consequences for your capital and deposits. Risk management is typically implemented alongside money management. It involves calculating and maintaining the appropriate risk-to-reward ratio for each trade (usually 1 to 3), adhering to a win rate in trading (the ratio of losing to winning trades), and more. Well-known risk management tools include stop-loss (SL) and take-profit (TP) orders, which help minimize losses from unsuccessful trades and prevent succumbing to greed (FOMO).
5. Opening positions without conducting technical analysis
Technical analysis (TA) is a fundamental tool that no trader can do without. It helps identify trends, market phases, support and resistance levels, and more. By utilizing various TA tools, indicators, and the ability to interpret chart patterns, traders can predict the price movements of different assets. This forecast takes into account the historical price data of assets and the current market situation. During TA and chart analysis, different timeframes are employed, along with various types of analysis such as order book analysis, candlestick analysis, volume analysis, market depth analysis, and more.
6. Opening positions without conducting fundamental analysis
In reality, relying solely on technical analysis while disregarding fundamental analysis can result in significant losses. Fundamental analysis provides insights into the current state of various trading platforms, cryptocurrency projects, and assets. Don't ignore the early warning signs of potential exchange bankruptcies (e.g., FTX), the initiation of legal actions against project founders and coins (e.g., Justin Sun and Tron), ongoing legal battles between the SEC and blockchain teams (e.g., Ripple), attempts to exploit vulnerabilities in protocols, DEX exchanges, and smart contracts. Only by paying attention to these factors can you protect your capital and timely divest from certain “problematic” assets while they still hold some value.
7. Lack of trading discipline
Trading discipline is built upon the rules of your trading system. If you remain focused and strictly adhere to your trading plan, it will have a positive impact on the growth of your portfolio. However, constantly switching between trading styles, succumbing to the temptation of impulsive trades based on visually appealing charts, or going against the trend will only lead to losses and disappointment.
8. Giving in to greed and fear (FOMO and FUD)
Greed and fear are the greatest adversaries of crypto traders. Remember that you should buy during market downturns and sell after reaching the take-profit level determined by your technical analysis. Trades made under the influence of FOMO during significant price fluctuations or manipulations will not yield favorable results.
9. Excessive use of margin trading
Margin leverage should be chosen in accordance with risk and money management principles. Optimal leverage typically ranges from 3 to 5 times, and experienced traders may go up to 10 times. Engaging in highly leveraged trading with 100 times leverage in the volatile cryptocurrency market significantly increases the risk of depleting your deposit (margin call). Beginners should avoid margin trading altogether and gain initial experience in the spot market.
10. Holding losing positions for too long
This mistake happens to all traders without exception. If a trade remains in a losing position for an extended period and the situation doesn't improve significantly through averaging down, it's better to let go of that particular cryptocurrency. Instead, sell it and buy a more promising coin whose potential profit from the sale can offset the losses from the closed trade.
By the way, the number of trades also matters. Managing more than 7 to 10 open positions can be challenging unless you engage in algorithmic trading using trading bots. Therefore, it is advisable not to exceed this limit.
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