If last week we’ve talked about the right crypto allocation, today we want to get back with an article on trading psychology. Considering people are generally inclined to find a solution outside of them, we forget about our psychological limitations and the impact on performance when dealing with crypto. This is a highly emotional market and because of that, your discipline and emotional stability will play a key role in the whole process.
What is risk tolerance and how can you measure it?
Without using over-complicated terms, risk tolerance is the maximum level at which you can operate optimally in uncertain conditions. There is no number to measure but we can notice it when we experience anxiety or fear, two of the basic human emotions.
Even though cryptocurrency trading/investing should be a rational activity, based mainly on rules, the reality is that emotions interfere in our decision-making process and sometimes alter our ability to operate at our peak. You shouldn’t be focused solely on what are the hottest cryptocurrencies and which is the best trading strategy, but instead make sure that in the process, you are not reaching beyond your maximum risk tolerance level.
Implications of crypto volatility
When getting involved in the cryptocurrency market, volatility is the main challenge we must face. Sudden price moves will mean profits wiped out and most of the time, inexperienced individuals will act more based on instinct rather than their already-established plan. Volatility should be dealt with in a professional matter, considering how wild all cryptocurrencies can perform.
The main motivation for getting involved in this industry is profit for most of the people, but we would like to encourage a more responsible approach and consider the potential for loss, equally.
Trading psychology – increasingly important in this industry
Short-term cryptocurrency trading, as well as long-term investing, will challenge us mentally. We will need to figure out not only when to buy but all when is the right time to sell cryptocurrencies and take profits. These tasks can’t be done when fear and anxiety clouds our judgment.
There is no magic pill for dealing with risk, but one way to do it is by constantly exposing ourselves to a level little above our maximum capacity. Over a longer period, that will result in us being able to deal with harder conditions and not let emotions interfere when we need to take important financial decisions.