There are many pitfalls one can easily get caught in when using, storing, investing or trading cryptocurrencies. While some mistakes could cost you a fortune, most of the common ones can easily be avoided.
The crypto market has extremely low barriers to entry, meaning anyone with an internet connection, a smartphone or a computer and a bit of starting capital can theoretically become a trader. Sadly, most of these beginners learn hard lessons and go broke. Here are 10 common mistakes made by beginning traders that you should avoid at all costs.
1. Starting with real money rather than paper trading
There is no reason for a beginning trader to use real money when there are endless resources and platforms for paper trading, including Tradingview. Anyone interested in becoming a professional trader should first develop a system based on a simple set of guidelines for their entries, exits and risk management. This should not be done with actual money. Paper trade until you are ready to lose your mind, then paper trade some more.
2. Trading without a stop loss
Beginning traders tend to trade emotionally, which manifests in refusing to quickly accept losses. The most essential skill that a trader must possess is the ability to accept a loss and move on to the next trade. Failure to do this is the main reason traders lose money. Set a stop loss, and do not move it when the trade goes against you, as this behavior is likely to blow up your account.
3. Failing to maintain balance
Successful traders maintain a balanced portfolio. Personally, I only have 10% of my wealth in crypto. Within my crypto portfolio, 70% is long term holds (heavily weighted to Bitcoin), with 15% in cash and 15% for trading. I only trade with 15% of my portfolio and that portfolio as a whole is only 10% of my net worth.
Rebalancing is the process of returning your portfolio to its target asset allocation as outlined in your investment plan. Rebalancing is difficult because it may force you to sell the asset class that is performing well and buy more of your worst-performing asset class. This contrarian action is very difficult for many novice investors.
4. Adding to a losing trade
Investing and trading are different! Investors average down positions in fundamentally sound assets with a long time horizon. Traders have defined levels of risk and invalidation for their trades. When their stop loss hits, the trade has been invalidated and they should move on to another asset. Period. Never average down as a trader.
5. Failing to keep a trading journal
Successful traders have a plan. Part of trading with a plan is holding oneself accountable for your actions. The only way to do this is by recording the details of a trade. This is the best way to learn and avoid repeating trading mistakes. Keep a journal and refer back to it. Record your thought process, emotional state and the trade results. It will help you immensely.
6. Risking more than they can afford to lose
In crypto, people are drawn to the idea of earning life changing money by being in the right place at the right time. As a result, they go all-in on crypto, risking everything on what is effectively a lottery ticket.
7. Being undercapitalized
As the saying goes, it takes money to make money. Many beginning traders are blinded by the promise of making boatloads of cash without leaving the comfort of their couch. This is a false reality unless they already have significant capital to trade with.
A trader who wants to be a professional needs to be able to support their entire life with trading - that means their profit must cover their living expenses, without eating into their trading capital. In most parts of the world, this requires at least $50,000 - $100,000 to trade with, and a steady profit of 10% monthly.
In reality, this is very difficult to achieve. As a result, many beginning traders find themselves under a great deal of stress when their expected trading returns fail to align with the actual results they produce.
8. Using leverage
Don’t do it!!! According to a well-known investment cliché, leverage is a double-edged sword because it can boost returns for profitable trades and exacerbate losses on losing trades. Leverage should only be used by advanced traders who have been profitable consistently for years. There is no surer way to lose money quickly than to use leverage to rapidly compound your losses.
9. Acting on trading patterns and indicators that are not clearly understood
Beginning traders are terrible at technical analysis. They often identify patterns on a chart that are not there or are incorrect based on context and chart placement. Beginning traders should develop a very simple system for trading and avoid making decisions on patterns or indicators that they do not fully understand. Start with simple support and resistance, or indicators that are clear like exponential moving averages.
10. Following the herd
Another common mistake made by new traders is that they blindly follow the herd; as such, they may either end up paying too much or FOMOing into a hot coin. Experienced traders are accustomed to exiting trades when they get too crowded. New traders, however, may stay in a trade long after the smart money has moved out of it. Novice traders may also lack the confidence to be contrarian when required.
As previously discussed, most cryptocurrency traders are blindly following calls by strangers on Twitter. There is no surer path to financial ruin than spending your hard-earned dollars on assets being shilled by avatars who are likely manipulating you for their own profit.
The bottom line
Trading is hard. However, if you are properly capitalized and take the basic steps required to learn trading and risk management, one can succeed and become profitable. The key is to have a plan, and no matter what happens, stick to that plan.