Traders Four Most Common "Sins"

This blog is on the most common mistakes (I would call them sins) that new traders make during their entry into crypto trading. There could be dozens of other related mistakes also. However, I would prefer to restrict myself to the Four most common sins that new traders may commit due to their lack of knowledge about the cryptocurrency market dynamics. The below discussion is based on these four most common yet most important mistakes that new traders should avoid.

1.   No distinction between Investing and Trading

Let’s make a distinction between these two common terms first because the majority of new entrants in crypto trading, do not know the difference nor do they know why they are entering this market(i.e., do they want to invest or trade). Their initial ignorance leads to wrong expectations, psychopathic behaviour, ultimately unbearable losses and exit from the crypto trading/investment market.

 
Figure 1: Photo by Burak Kebapci from Pexels

 

In simplest words, trading refers to buying and selling. For example, you buy a coin at $10 at a certain point in time, and later on (say after a day) you sell it at $ 10.5, thus you made 5% (0.5/10 * 100 = 5%). This is called trading. You buy cheaper and you sell it slightly expensive when the market price rise. Trading is done with capital. You cannot trap all your “capital” for a longer period and continue waiting. Rather you must always have an exit strategy (irrespective of loss/profits) to be a successful trader.

           On the other hand, investment in the crypto context is a different game. I will start with an example, that imagine if you have surplus capital. You check for some ongoing (or new) cryptocurrency projects that have good long term prospects. For example, some firms may be launching a new coin that has some interesting real-life usage, it has a strong team behind it, and after doing in-depth research, you think, this is the best project to put your money in it. Some influencers call these projects gems. These projects/coins have low prices at lunching time. For example, just a few years ago ETH (Ethereum) was just a few $100. So, you put your surplus money into these projects. Now you must have patience for holding these crypto-assets for a long time. You just cannot get in and out in the market in such a case, as you can do in trading.

           Investment can be better understood in terms of a property business.  When a new housing society starts people buy plots in it and then hold it, waiting for the prices to rise for a longer time. Now, if someone buys a plot and sell it instantly for very little gain, it can be considered as trading (i.e., just buying-selling). But such buying selling in this particular case would not give good returns. However, if that person waits, till society get developed, some people start living in it, roads are constructed in it, now, if he wants to sell his plot, for sure the person will make a much higher return. Similarly, cryptocurrency investment is also long-term. You put your money in projects, you hold it for a longer period, and then you sell it at much higher prices. Holding is the key to the investment approach in crypto.  

           Please do remember, both investment and trading need a different mindset, different strategy, different levels of patience, investment. And obviously, the types of returns in both will be different. Therefore, it is strongly recommended to a new entrant to be clear that what they want between trading and investment before they start jumping into the crypto market.  

2.   Following fake crypto experts (Wrong numbers)

It is very easy in today’s words to get some basics from different YouTube channels, Facebook pages/groups, blogs and become a self-proclaimed expert in the crypto industry. It is pretty obvious when the market is bullish, you will make money, even if you buy a “shit coin”.

Since, the market was in Bull Run for a quite long time during the last several months, so there was a mushroom growth of self-learned, zero-experience, zero-depth knowledge experts that are advising everyone and also their mentors for investing in various new projects. Some even start running paid groups too for giving signals by having some fancy screens in the background or even trading on beaches, to attract new entrants.

 

Figure 2: Photo source: https://skepticalscience.com/print.php?g=335

 These experts are “wrong numbers” and you are strongly advised to stay away from such experts. Trading is not a theoretical thing or something that one will learn in a month. If it would have been that easy, there will be not an 80% failure rate. Nor that many would be liquidated in every market dip or crush. It is a continuous learning process, and there is no substitute for “practical trading experience”, no matter how big claims these fake experts made.  New traders need to stay away from such experts that may give you wrong advice or may expose you to things, that they have never faced. Keep yourself open for learning, but stay away from financial advice from such experts.

3.   Unrealistic expectations

It has been reported by some studies that around 80 per cent of retail traders lose money in financial markets. Out of the remaining 20 per cent, about 10 per cent exist at the breakeven point. We and mostly all new entrants are retail traders. Why does such a huge percentage of retail traders lose money in financial markets?

The major reason is the unrealistic expectations. There is a wrong and unrealistic perception about trading and its return. There is a wrong projection about trading returns by the influencers. These influencers create an illusion of a beautiful world, with luxury cars, beautiful girls, beach days, the latest gadgets, and a lavish lifestyle to attract the new entrant. While showing and attracting these “hundreds of Rajjus”, these fake experts do not tell how the trading works? How much investment can provide such a lifestyle? What is the risk involved? What is risk management? trading strategy? What if someone loses all his/her invested money? And so many other questions, that they never (and can never) answer. But instead, that provides “a heavenly life” on earth by just doing “trading” from a “beautiful beach”.

                   Figure 3: Photo by Oliver Sjöström and Drew Williams from Pexels

 The problem is that a retail trader (mostly in a country like Pakistan), don’t have tons of dollars. Instead, they have limited money, and after watching this “lifestyle” start borrowing from family and friends, and put all this money into trading with all the wrong and unrealistic expectations. While borrowing money, they also show that “rosy picture” to lenders. Humans (who have surplus money in particular) is greedy by default, so the unrealistic expectation shifts to lenders also, and they provide funds for investment. Some retailers even get loans from banks too. Then without having any in-depth knowledge or being able to do any technical analysis, these retailers put all the money in the market.

Now, if a loss happens in a single trade, these retailers aim to get their money back through a second trade. The strong human emotions at this time, i.e., greed and fear, would occupy the trader at this stage. The process of irreversible revenge trade starts, which leads to a loss, followed by a new trade to recover from the previous loss, leading to another loss, and the process continues until the trader loses all his/her money or reaches a stage, where there is no sufficient fund left to trade profitably. The result is bankruptcy, a shameful exit from the market, with a lot of bad words about the fake expert aka wrong numbers, but then it’s too late for all these things.

To conclude on this point, keep your expectations realistic. Always remember “Rome was not built in a day”. It takes time to learn, it takes a lot of patience, and much more struggle to reach the expert level in this field. Also, to earn large profits, you need huge funds and obviously, there are risks involved in investing huge capital. You must be an expert before diving so deep into the crypto market.

4.   Trading through borrowed money

Entering trading through borrowing money also has a lot of issues. For instance, while borrowing money, the trader may be making a lot of promises for returns (based on his illusionary and unrealistic expectations) to the lender. These promises may lead to giving a fixed monthly return, sharing profits, or even sometimes making a full partnership. But, since, the trader is new, so mostly, these are all verbal agreements, at the same time, the lender has no idea (neither does the trader), where this money is going to be invested, rather the money is channelled through the advice of some wrong numbers/fake experts.

Figure 4: Photo by  InspiredImages from Pexels

  Once, a trader is trapped in a loop of revenge trading fueled by emotions and greed, synergized through wrong expectations and making quick money, the chances are bright that this person will bankrupt. The lender will be following such traders shortly to get their original money, rather than the profit that was promised at the time of borrowing money.

           Therefore, it is advised, not to do trading through borrowed money. Use your funds. If your funds are small, your return will be small, but calculate your return in percentages, rather than in USD, and then you will be fine, with whatever return you get in USD. Secondly, place only that much amount in trading, which if you lost, would not bankrupt you. Remember, don’t be greedy, yes, if you put a lot of money into trading, you will be getting a very high return, but at the same time, you are taking a very high risk too. So, it is strongly advised to risk only that much amount, that you can bear.