The implications of FOMO - Buying High & Selling Low
The world of cryptocurrency trading can be a rollercoaster. Prices can skyrocket one day and dip the other because of the volatility in the market. No trader can expect to see only green profits. In real life, traders must handle the ups and downs with peace of mind. Reacting to market crashes based on emotions leads to irrational decisions that are fueled by fear and greed. Everyone has experienced this at some point in their trading journey. Many traders have picked up techniques to cope with this, while others have been unable to.
Emotions can be a trader’s worst enemy. Watching as the price of a cryptocurrency collapses sends instant panic messages to the brain to sell. On the other hand, seeing prices grow parabolically creates a massive emotional pressure to buy.
>> The Most Common Mistake
The most common mistake in crypto is “buying high & selling low,” while the logic tells you that you should do precisely the opposite.
Everyone at least once has heard that a coin is ‘pumping’ and immediately felt that urgency to get in. Once you are in this position, you face two options. You can wait for a price retracement, taking advantage of an eventual consolidation before buying. Or you can jump on the trade, YOLO-style.
The second option, of course, is the one that carries more risk. Typically, the price jump will be followed by a decrease in price. This is often psychological, as early buyers start to take profit, selling to those that came later. Especially following significant price pumps, both sellers and buyers become less-price sensitive, leading to even sharper reversals.
The trader then gets out of the position, panic-selling, and resulting in the opposite of “buying high and selling low.” How do you avoid that?
Humans are not machines, but when it comes to trading, humans must ask themselves logical questions:
Has anything changed about this coin that could justify this price increase? It could be news, an announcement, or the breakout from an important resistance. Are you going to buy a significant amount of that coin? How much loss are you able to tolerate if the price retraces?
If you can identify a rational reason for the coin to continue going up in price, you have the first step covered. If at the same time you are not going to overexpose your total portfolio to the risk of this trade by committing too much, you will be able to manage your trading position with much greater peace of mind.
When making decisions on the spot, it is easy to forget the big picture, but all of this can be avoided by having your strategy mapped out in advance.
It is always crucial to have a trading plan in place; if you are a HODLer and see BTC going down, the best reaction is to continue HODLing and not sell. When you have set a plan in place, you should not deviate due to a market downturn, instead, take a breath and zoom out on the graph. More often than not, you will find that that dip has occurred before, and the price is experiencing volatility that has happened before.
>>Be prepared
The price of every coin goes up and down. Price pumps revert into dumps and vice-versa. A more proactive approach would be to prepare for market drops in advance.
Setting up a stop-loss is one of the most efficient ways of managing the risk of your portfolio. When the price reaches a certain level, the stop-loss triggers, preventing further losses on the position. If you are not an expert trader, the chances are that you may struggle to protect your position with an automated order, assuming that the exchange allows you to do that!
Using Coinrule, you can set up stop-losses based on a straightforward If-This-Then-That logic. In the event of a market crash, emotions will not take over, and the rule will protect your funds. On top of that, with Coinrule, you can set up custom stop-losses that allow you to exit and re-enter the position later at a lower price.
>>Automation excludes feelings for the better
"Buy low, sell high" is a principle, not an actionable trading strategy. This principle needs to be translated into a specific set of instructions to drive the trades. Running an automated trading strategy removes the emotional aspect entirely out of trading.
There could be multiple strategies that can fit the "buy low, sell high" logic.
Dollar-cost averaging is one of the most common strategies among beginners and professionals alike. This approach allows spreading the investment across many orders. Buying (or selling) over time reduces the effect of short term volatility and excludes the risk of FOMOing completely. In addition to the classic DCA system, Coinrule allows taking partial profit along the strategy. Selling a part of your position allows taking profits gradually, protecting from downside risk, and reducing the strategy's volatility.
Strategies that include technical indicators, such as the RSI or Moving Averages, also help to spot the best timing for buying and selling. Always keep in mind that, just like with any other technical indicator, they are subject to a margin of error due to their own design. Combining multiple indicators into a single strategy increases the overall results as it leverages on the strengths, smoothing the drawbacks.
Alternatively, you can set up your rule according to your specific preferences to have your mind at ease, knowing that the Bot will execute trades for you.
With Coinrule a trader can take the strategy that was mapped out in his head and translate it into a fully-functioning rule that will execute based on the logic that was pre-set. This can help traders avoid emotional stress and biases since they no longer need to make on-the-spot erratic decisions.
Overall, emotions can lead to bad decision making, resulting in big losses. With Coinrule, this can be prevented in several ways thanks to automation. Automation of trading can prove to be a stress reliever. Taking out the urgency to make on-the-spot decisions can lead to clear thoughts and a trading strategy that is well planned and thought out, pushing each and every trader to the next level of trading. Full automation can be achieved with just a few easy steps, thanks to Coinrule’s easy-to-use interface with no coding required.
Are you interested to learn more about Coinrule? You can now support Coinrule’s Seedrs campaign which is launching this October. You can find out more here.