Many begin to trade cryptocurrencies because they want to make a large amount of money with a small initial investment. In the cryptocurrency market, where volatility can exceed more than 25% in a single day, this can often be one of the primary drivers to bring new traders into the market. What is not always immediately obvious to these traders is that they also face the very real risk of losing money.
Although greed, in itself, isn’t necessarily a bad thing. After all, anyone that wanted to improve their financial situation in the past needed the same mentality to want more, right?
The negative aspect of this “crypto trader greed” isn’t so much the greed itself, but rather what it can cause traders to do. Actions that can cause catastrophic impact to their portfolios, their goals, and overall lifestyle.
In this article, I will tell you my experience about retail traders, their approach to trading crypto, and what to watch for as Q1 2018 ends.
Only a fool doesn’t look at the downside. Yet, only a coward allows themselves to be persuaded away from taking risk.
When I started trading forex, with limited research and knowledge of central bank influence over market prices, I was confident that the upward trend for Euro against U.S. dollar would continue in 2014. I was eager to use the 50:1 available leverage that this market offered to make some serious cash. Right after the price retraced to around $1.38 in April 2014, I was ready to initiate my trading plan. I’d entered into a buy position.
My bet was that Euro would rise in value against the U.S. dollar in the coming months. As the price trickled down, I decided to add to my losing position to average down my entry. I started following traders and media channels that would reinforce my position. Based on my scope of information, I was sure that prices could not move lower.
I was about to learn my first big lesson in trading. As you can see in the chart below, EUR/USD continued to fall for almost a whole year. Turned out that European Central Bank expended their asset-backed securities buying program. Simply put, central bank was actively devaluing their currency. Eventually, my position was margin called and closed out at a loss that significantly reduced my portfolio capital.
Keep in mind, I am not saying that technical traders in FX are not successful. I’ve personally profited from using TA strategies that generated profit in forex. Also, it is important to understand that there is a wide scope of previous price action data available to forex traders compared to the crypto market.
Technical traders can analyze and backtest their strategies using price action that goes back as far as the 1990s for EUR/USD. Ether for example, only goes back a couple of years and its limited price action data is distorted by relatively low participation and liquidity.
Retail cryptocurrency traders
I get this question way too often, “Which ICOs will be successful?”
The story usually starts like this:
My friend told me about this project that will rise in value because of xyz. After a brief scan of the whitepaper and limited understanding of the project, classic trader initiates a buy position based on this effect we call “fear of missing out“ (FOMO). Prices start to go down, and the trader decides to follow social media outlets like Telegram to look for reinforcement from the community to hold their losing position.
Rather than following fundamental project development and their delivery of promised goals, trader continues to think that they made a right decision.
As the price continues to move lower, the trader scrambles to find support from channels that promise a so-called “pump.” A specific ICO price is pushed up. It is hyped up by communities to get more traders involved merely based on rapid price increase.
It is not that hard to juggle coin prices when the market cap is low and exchanges suffer from lack of liquidity. There are groups of traders that are able to push prices higher simply because of their order size. Once the price has peaked and retail traders have bought in at an artificially inflated premium, the organizers of this “pump” initiate a large sell off which is often referred to as a “dump.”
Retail traders end up holding the short end of the stick and are forced to either close at a loss or hold a position in hopes of it coming back. Do you honestly think you are going to achieve successful trades with this strategy?
Unfortunately, many traders have found themselves in a contradicting outcome of reality. How come?
No matter how you feel about a project, it is essential to understand how and if it is able to positively impact the industry. Functioning platforms with a growing user base greatly separate themselves from projects that have yet to deliver anything besides a concept.
Source: ICO Alert
