In today’s world, anyone with Internet access and some funds at their disposal can trade, use terminals, and exchanges. Due to the astonishing growth of the cryptocurrency market, many novice traders are joining trading platforms in search of quick and easy profits. Several lose their funds in the process of trading due to a variety of reasons.
Let’s examine the reasons behind the losses of new crypto traders and discuss the measures new players should take to protect their funds.
Unique features of the crypto market
The cryptocurrency market is unique and different from traditional markets. Bitcoin is valued at more than $1T, according to a report on April 15th, 2021. In addition to low market capitalization and high levels of manipulation, it is tough to predict the movement of the cryptocurrency market.
Bitcoin’s March 31st drop resulted in over $600M worth of long positions being liquidated in just 15 minutes; total liquidations exceeded $1B in a single day. It is noteworthy that 60% of them had the leverage of 25x or more significant.
The market should be studied and observed before trading cryptocurrencies. For successful trading, it is crucial to follow the news and separate the necessary information from the noise made by the media. Therefore, media manipulation often occurs through the formation of the essential news feed.
Lack of knowledge and experience
The majority of crypto-traders who entered the market during the market growth period lack basic knowledge and previous trading experience. We recommend learning trading fundamentals before starting to trade. Identifying long-term and short-term trends requires fundamental technical analysis.
Understand how to utilize indicators and oscillators, which are used to predict future market movements, and gain familiarity with the main figures in technical analyses.
When learning about the market and trading basics, trade small amounts of your deposit, relying on your own logical conclusions and signals.
Trading successfully requires experience. Whenever you make a mistake, analyze it, learn from it, and never repeat it. By combining the processes of obtaining knowledge and gaining experience, you will have a deeper understanding of the market and make more successful trades.
Fear of Missing Out (FOMO)
A FOMO is a fear of missing out. It is common for cryptocurrency markets to experience this phenomenon. Many new players tend to lose their funds to the FOMO effect because they miss a profitable opportunity.
Traditionally, cryptocurrencies have been manipulated. Manipulation occurs by giving the crowd a false sense of excitement by releasing positive news about specific assets. Many crypto traders are exposed to the FOMO effect and buy an asset at its peak in anticipation of further growth. However, more often than not, the price either drops dramatically or undergoes a correction.
If you want to avoid FOMO, you should not give in to your emotions. Emotions are, in fact, the precursor of the syndrome. Be objective when evaluating the trading situation because the market offers you the opportunity to make money every day. Rather than worrying about the market, look for ideas that may be profitable or take a break from the market.
A Stop-Limit order to sell
The use of stop-limit orders is often forgotten by novice crypto traders when trading digital assets. A stop-limit order is a type of sell order placed when the market price of an asset reaches a certain level. If you do not place stop-limit orders, you will have to close your positions, incur losses, or hold them for an extended period until the price returns to breakeven.
The purpose of stop-limit orders is to protect traders in case the price of an asset falls. You can competently manage risks when you use such orders and trade in an automatic mode.
Leverage
Many exchanges and trading platforms offer margin trading tools, which allow traders to trade an amount greater than their deposit. The exchange lends funds to the user, while the user, in turn, pledges their own funds to the exchange.
With leverage, inexperienced traders can earn tens or hundreds of times more than they would with regular trading. But the risk of losing all the money in such trade also increases. When using leverage, you should weigh all the risks and consider fi are you are willing to lose your funds due to an unfortunate outcome.
Lack of strategy
Take measures aimed at multiplying the invested funds, also known as money management. Make sure your trading strategy is focused on minimizing losses and maximizing deposits.
Establish a set of rules and behaviors that you will follow strictly. If you decide to trade any asset not exceeding 5% of your deposit, do not exceed this bar, even if the idea seems successful to you. The foundation of successful trading is the compliance with rules and discipline you set for yourself.
Greed
Traders often hesitate to lock in their profits, hoping that the price will continue to rise. Greed is driven by the fear of missing out on potential profits, like FOMO. In such cases, traders may lose money they have already earned because of greed.
Make sure you determine multiple profit potentials when planning your trading strategy. You should fix your profit based on your goals when the price changes. You won’t miss out on potential earnings and won’t lose anything you’ve already earned.
Final Thoughts
Whenever you trade cryptocurrencies, you shouldn’t spend all of your available funds on one asset. Ensure you have enough funds available to at least break even or average your position.
You should only trade with money you are willing to lose. Cryptocurrencies are notoriously unpredictable, which is why this rule applies when trading them. Investing in cryptocurrencies can result in enormous earnings, but it can also lead to total losses of all existing funds.
Beware of outside advisories. Trading recommendations can be shared online, and cryptocurrencies facilitated by online access make online trading possible. Scammers and impostors are plentiful in the market, as are those who share their ideas. You act at your own risk when trusting strangers.
Use only verified trading platforms and e-commerce exchanges and take precautions to ensure your security. There have been several cases in the history of cryptocurrencies where even large and established exchanges were hacked or converted into exit scams. Consequently, you should not keep your entire portfolio on an exchange. Keep your money in a cold wallet or use a decentralized exchange.