Psychology is often talked about in the field of cryptocurrency trading, and rightly so: it is one of the main reasons for the sudden movements of Bitcoin and other Altcoins. A good understanding of market psychology makes it possible to forecast price movements with varying degrees of accuracy (as a reminder: market analysis is a matter of statistics).
Cryptocurrency market psychology is about three things at the same time:
Another way of referring to crowd psychology, that is, the behavior of human beings when they are in a group;
The study of market behavior anomalies;
The attitude to adopt when deciding to participate in the market. While the first two points allow you to understand the evolution of prices, mastering the third is crucial for any trader who wants to be a winner over the long term.
The cryptocurrency market represents the aggregation of different points of view leading to the formation of prices. It can be represented as an organic entity that reflects the actions of the multitude of actors who form it.
These actions - buying and selling assets - can result in:
Emotion (typical of novice traders);
A thoughtful strategy (among experienced traders).
The importance of controlling your emotions
Financial markets exacerbate human emotions: the urge and joy (to win), fear, despair and anger (to lose). This is where we can discuss market psychology. Indeed, the market evolves most often in trend and this is due to human nature which oscillates between euphoria and despair. This trend change is also explained by the fact that humans act by mimicry ... a characteristic that is all the more important in our time with the omnipresence of the Internet and social networks.
Understanding the world of trading is one of the most difficult things for humans to do. Indeed, the practices that make a trader successful go against human nature and our survival instinct. To be successful, a trader must learn to deal with a variety of cognitive biases, such as:
Herd behavior: stakeholders will tend to follow the majority opinion and choose, for example, to enter a long position after a recent rally. This is precisely what leads to the trend change in financial markets.
Loss aversion: A trader will tend to refuse to accept a loss and will rather turn his day-trading position into a long-term position than cut it. Loss aversion can lead a trader to close a low gain position after being in the red for a while.
confirmation bias: pushes us to seek information that goes in our direction. If you think that an asset's price will go up and buy it, you will tend to look only for good news for that security, even if it is in a loss.
These three behaviors when it comes to trading cryptocurrencies statistically lead to losses and are the result of poor emotional management.
One of the golden rules of trading is to build a strategy and stick to it - even if the temptation to succumb to the FOMO “The Fear of Missing Out” is intense, keep in mind that the loss that would ensue. certainly, would be even more painful.