Reasons why new crypto traders lose funds
These days, anyone with Internet access and some funds in their account can use trading tools, terminals and exchanges. Rapid growth of the cryptocurrency market has led to many novice traders to join trading platforms in pursuit of quick and easy profits. As it often happens, for a number of different reasons, many of them lose their funds in the process of trading.
In today’s article, we will review the reasons behind the loss of funds by novice crypto traders, as well as discuss the measures new players in the market should take in order to save their money.
Peculiarities of the crypto market
The cryptocurrency market differs from traditional markets and has its own unique features. As of April 15th, 2021, the capitalization of all cryptocurrencies hovers around $2T, with Bitcoin accounting for more than $1T. The low capitalization and high degree of manipulation of the cryptocurrency market by big industry players make it extremely hard to predict its movement.
After Bitcoin’s rapid March 31st drop, more than $600M worth of long positions were liquidated in just 15 minutes; total volume of liquidations reached $1B in a single day. It is worth noting that 60% of them were positions with 25x or higher leverage.
Before engaging in cryptocurrency trading, one should study the market and observe it. Often, price manipulations occur through the formation of the necessary news feed. Therefore, for successful trading, it is essential to follow the news and to distinguish the necessary information from the noise created by the media.
Lack of knowledge and experience
Many novice crypto-traders, especially those who entered the market during the market growth period, do not have basic knowledge and previous trading experience. Before starting to trade we recommend learning the fundamentals of trading. By understanding basic technical analysis you will be able to identify long-term and short-term trends.
Familiarize yourself with the main figures of technical analysis and learn about the utilization of indicators and oscillators, which are used for getting signals and confirmations about further market movements.
While studying the market and the basics of trading, try to trade small amounts of your deposit, relying on your own logical conclusions and signals. Successful trading requires experience. If you make mistakes, try to analyze them, learn from them and do not repeat them. By combining the processes of gaining experience and theoretical knowledge, your level of understanding of the market and the number of successful trades will increase significantly.
Lack of strategy
Maintain so-called money management, or a set of measures aimed at multiplying the invested funds. Develop your trading strategy and allocate funds so as to minimize losses and multiply your deposits.
Draw up certain rules and patterns of behavior, which you will strictly follow. If you decide to trade an asset to the amount not exceeding 5% of your deposit, then do not surpass this bar, even if the trading idea seems successful to you. The basis of successful trading is the compliance with rules and discipline, which you set for yourself.
FOMO (Fear Of Missing Out) is a syndrome of lost profits. This phenomenon is very common in the cryptocurrency market. Many new players in the market lose their funds succumbing to the FOMO effect because they do miss a profitable offer.,.
As previously mentioned, the cryptocurrency market is often manipulated. Manipulation takes place by giving the crowd a sense of a missed moment, such as releasing positive news about a certain asset. Exposed to the FOMO effect, many crypto traders buy an asset at its peak in hopes of its continuous growth. But more often than not, the price either falls dramatically or undergoes a correction.
In order to avoid FOMO, you should not give in to emotions; they actually are the precursor of the syndrome. Try to evaluate the trading situation through a neutral lens, because the market gives you an opportunity to make profits every day. Instead of worrying and constantly checking the market condition, look for potentially profitable ideas or take a break from the market.
Very often traders are unwilling to lock in their profits, hoping the price will continue to rise. Greed, like the FOMO syndrome, is driven by the fear of missing out on potential profits. In such cases, remember that greed exposes traders to the risk of losing money that they have already earned.
In order not to lose your funds, determine several profit opportunities when drawing up a trading strategy. When the price moves, fix your profit according to your goals. That way you will not miss potential earning opportunities, as well as not lose the money you’ve already earned.
Many exchanges and trading platforms offer traders tools for margin trading, in which a user can trade for an amount exceeding the size of their deposit. In such cases, the user borrows funds from the exchange, while the exchange, in turn, leaves the users’ funds as a pledge.
Leverage is a popular tool for inexperienced users because it allows them to earn tens or even hundreds of times more than in regular trading. But, the risk of losing all funds in such trading also rises. Before using leverage, you should weigh all the risks and decide if you’re prepared to lose your funds in the event of an unfortunate outcome.
A Stop-Limit order to sell
When trading cryptocurrencies and digital assets, novice crypto traders often forget about using stop-limit orders. A stop-limit order is a type of an order to sell, which is placed when the market price of an asset reaches a certain level. Lack of stop-limit orders leads to position closing and losses. This can also result in deposit drawdown and prolonged holding of position waiting for price to return to breakeven.
Stop-limit orders are used by traders to secure themselves in the event of a possible drop in the price of an asset. The use of such orders will allow you to competently manage the risks and to trade in the automatic mode.
When trading cryptocurrencies and digital assets, don’t buy one asset with all of your available funds. Keep some funds ready so you can average your position and at least breakeven.
Only trade with funds you are prepared to lose. This is one of the main rules in the cryptocurrency market, due to its unpredictability and uncertainty. The cryptocurrency market allows you to earn orders of magnitude more than in traditional markets, but it can also lead to losing all existing funds.
Be careful of outside advisories. Cryptocurrencies and Internet access allow anyone to trade and share trading recommendations online. There are a huge number of scammers and impostors on the market, as well as just inexperienced users who share their ideas. You act at your own risk when trusting strangers.
Use only verified exchanges and trading platforms and don’t neglect security measures. In the history of cryptocurrencies, there have been enough cases when even verified and large exchanges were hacked or made exit-scams. For this reason, don’t keep all of your funds on an exchange. Use decentralized exchanges and platforms or keep the bulk of your funds in a cold wallet.
Hope we’ve brought insightful information and trade safely!