One of the key things that every trader has to deal with is their emotions. In fact, successful traders are known to be great at controlling their emotions. This is great because emotional grading can result in huge losses.
As a result, one of the biggest challenges that many traders face is dealing with their fears and panicking. And most traders work hard to defeat that. Yet, there’s an even more dangerous emotion that people underestimate- overconfidence.
It can be just as dangerous –if not more- than fear. With fear, you’re cautious at least or able to go into damage control mode. With overconfidence however, you’re all cocky and assured, which means you’re likely to be careless, investing more capital than is necessary.
This is the single biggest cause of huge capital loss in cryptocurrency trading and investing. And it’s not surprising because it is hardly ever addressed, sought out or even explored.
Why Overconfidence Is Dangerous
The problem with overconfidence is that people tend to underestimate circumstances, take dangerous steps, become more relaxed and overestimate their abilities. A combination of all this results in something called optimism bias.
This is a situation where you think you’re very capable of something or in control of that thing, but in reality, you have zero or minimal control at best.
When crypto traders and investors become cocky like this, they tend to make terrible mistakes. Most instances of overconfidence in cryptocurrency trading comes from previous successes, which were often as a result of pure luck.
Many traders –particularly the beginners– assume that because they had the luck, they were likely to continue being lucky. We saw this play out a lot during the height of the crypto market appreciation in January 2018.
Beginners whose trading knowledge came from watching YouTube videos started thinking they were experts. As a result, only very few saw the market crashing, with many others losing a ton of money in the process.
Of course, many people made a lot of money, with Ripple being the biggest surprise –yielded a return of $350 for every $1 invested. But the smart ones knew that the market couldn’t sustain itself. So, their cautiousness got them to get out before the market crashed at the end of January.
The problem with overconfidence is it can result in poor or bad judgment calls, costing you a lot of money in the process. No one is immune to it. Even experienced crypto traders fell victim to it and lost sizable sums. This is why you must guard against it with everything you’ve got.
How Can You Tackle Overconfidence In Cryptocurrency Trading?
As simple as it sounds, the first step is realizing that it does exist and can hurt you. If your trades are going too well, and you get to that point where you feel you’re lowering your guard, that’s when you should become very careful. This is important because traders make a lot of trading mistakes when they feel there’s nothing to be afraid of.
Stop Underestimating The Market
For starters, no matter how well the market is currently going, do not make the mistake of underestimating the market. Pay attention to market sentiments, take a good look at the current charts, listen to the news and do your due diligence before trading cryptos.
Be very alert and remember that trading is ultimately a zero-sum game. Which means for every person who wins, there are others who don’t.
The first thing all seasoned traders know is that the tides can turn in a second. It is possible for the market to look great and bullish this minute and bearish the next minute.
All it takes is a major announcement that negatively impacts the market, a global event, tariffs and so on. As much as possible, stay cautious even if your trades are going well.
Adopt An Objective Stance
In cryptocurrency trading, strategies typically remain fairly constant… as well as their outcomes. But, those are often backed by in-depth analysis and the consideration of many other factors.
You should always keep your perspectives objective. Analyze all data, weigh all information, and stay rational. This is the best way to consistently keep overconfidence at bay, thus ensuring your trading success.
Prioritize Risk And Money Management
Adopt proven money and risk management protocols. Minimize your risks as much as possible and stick to tried and tested money management strategies. This is the only way to keep your emotions in check.
It is easy to want to go all in with your capital when you see that the market is performing well. While that can work and generate some significant amounts of cash for you, the reality is you can as well lose everything in the event of a market downturn.
Overconfidence should be eliminated as much as possible. It doesn’t matter how well the market is performing or how much you have made in past trades. If you are reliant on the success of your past trades for your new ones, you’re clearly trading with overconfidence. This can cost you a lot and result in significant losses.