In the beginning of a trader’s activity, inexperience can lead to many mistakes that may cost the trading capital. The most effective way to protect yourself from potential problems is to follow simple and practical advice below.
Causes of mistakes
Anyone can start trading in the markets, even without specialized training. This is both a significant drawback and a notable advantage. The disadvantage is that at the start of their career, a trader may find it difficult to assess their capabilities, especially if there is no mentor or professional market participant who can point out errors and prevent account drawdowns. Therefore, it is important to understand your level of experience and trade accordingly. Below are the most common reasons for failure at the beginning, which can also lead to complete disillusionment with trading. To avoid this, carefully study and follow the advice provided.
1. Incorrect choice of instrument
The first rule, written by many with the loss of millions of dollars by beginner crypto traders, is that the traded asset must match the applied strategy. If there is no strategy (or, more correctly for inexperienced traders, “since there is no strategy”), it is necessary to choose an instrument with volatility (price change) that at its peak corresponds roughly to half of the risks the trader is willing to accept. If a position can bring a 5% loss of the account, then choose an instrument with 2-3% price volatility. This restriction will help significantly reduce losses in unfavorable situations. Remember, cryptocurrencies are the most volatile assets. Price movements often occur in short periods and in large volumes. A protective order (we will mention it later) can help limit losses.
2. Risk diversification errors
Many books on stock trading recommend using 10% of the total account balance for a single position, but beginners are advised to lower this threshold even further — to 5-7%. Diversification should not involve trading only one instrument. As the well-known market saying goes, “don’t put all your eggs in one basket.” There are many options for risk diversification, including strategies that imply near-risk-free trading.
Developing a specific trading style is a matter of experience. But initially, it is critically important to trade small volumes across 2-3 different cryptocurrencies. Monitoring more assets can be inconvenient for a beginner, while fewer can slow down the accumulation of experience and style development. You can gradually increase the number of assets. When daily profit starts to appear (even if it’s not impressive, for inexperienced traders, trading without losses is already an achievement), you can gradually increase both trading volume and the number of assets used.
3. Trading without a strategy
Trading without a trading system is a common mistake among beginners. In general terms, you should have a maximum acceptable risk level and translate it into protective orders. The less risk a trader takes, the easier it is to gain experience. It might seem that trading on a demo account is ideal for beginners. However, in this case, it’s impossible to feel, accept, and learn to manage your emotions and risks. Emotions are one of the main reasons for overconfidence or excessive paralysis when a position turns against the trader. More on this below.
4. Emotional trading
If the account shows profit, the trader’s joy is limitless — especially for the first time. The position closes “in profit,” and trading continues. A new position is opened — and suddenly, the first loss appears. “It’s just a small amount, nothing scary,” the trader thinks. The loss continues to grow, and the trader reacts more emotionally as the amount of lost funds increases. Even if a strategy is written, a stop-loss percentage is set, and a protective order is in place, the hand may still be tempted to change the previously set loss levels. Any reason can trigger this.
Beginners often hope that the chart will return to previous levels. The main thing to remember — the price is determined by the market. If the chart moves in a certain direction, there are reasons for it. Therefore, it’s crucial to follow trading rules strictly, without deviation. It’s better to adjust the trading system later for future trades than to increase losses. Emotions should be put aside; if rules are set, they must be followed precisely. Hope for profit in the account does not help; it only makes things worse.
5. Incorrect use of protective orders
The most dangerous mistake is the refusal by beginners to use “stop-loss” orders to limit losses. Inexperienced traders are generally unable to adequately assess their strength. Take profit can be moved along the chart (if the situation develops in favor of the position), but stop-loss must not be edited. That’s final. Set it and stick to it. When it triggers — analyze the market for other earning opportunities, which are plentiful in the crypto market.
6. Wrong investment horizon
This is a quite important nuance. Simply put, the investment horizon is the duration of a position. For beginners, short-term trading is enough. First, it helps develop technical skills with the trading terminal. Second, it provides invaluable experience of trading on the exchange over a short period. “Trading medium- and long-term” (opening positions for more than a day) is not recommended for beginners. Often, they lack the necessary knowledge base and cannot withstand unfavorable corrections in the trading volume.
7. Wrong choice of trading platform
Simply put, trading on an exchange that does not suit the chosen strategy. The number of cryptocurrencies is increasing, as is the number of trading platforms. It’s important to choose a platform based on conditions:
- The ability to trade the selected cryptocurrencies. In the early stages of experience, traders should not choose the most popular assets due to their high cost. It’s better to start with lower-priced cryptocurrencies. Litecoin is preferable over Bitcoin and Ethereum with similar earning opportunities.
- Availability of deposit and withdrawal options. This will help avoid technical issues, especially at the start.
- Convenient trading terminals. For an inexperienced trader, starting with a user-friendly platform is as important as choosing a reliable exchange.
Practice on a demo account on BitMex
Is it impossible to avoid mistakes?
Traders should understand that mistakes are unavoidable; no one who trades in the market is mistake-free. There’s no need to fear difficulties — the main thing is to have a clear plan for solving arising issues. And if initially, the solution might not be clear, later, when faced with a similar problem, the trader should already know exactly how to act.
The initial knowledge base about the most common mistakes of beginner crypto traders is laid out in this material. Traders should honestly assess their abilities, develop an initial trading strategy, and start trading. It is impossible to learn to avoid mistakes in trading without doing so.
