When starting out, every single unit of funding is vital. As such, you should adhere to strict money management rules to protect your capital.
Undisciplined and irresponsible practices are a prevalent cycle that novice traders fall into, causing them to fail.
Trading is a challenging venture for anyone. However, when trading in the crypto markets, futures or margin trading is even more difficult due to the extreme volatility present in these markets.
To navigate the crypto markets safely, traders must know how to manage risk and avoid costly mistakes that will harm their investments. As such, it’s essential to understand all of the common pitfalls that cause traders to fail so that you can avoid them and become a more successful trader.
Over-Leveraging
One of the common reasons that traders fail is because of over-leveraging. Over-leveraging is the consequence of a trader's overconfidence in the outcome of a trade. It’s akin to aiming a home run on every swing. The problem with this approach is that it is incredibly unsustainable.
Using high amounts of leverage can provide traders with two outcomes. The most hopeful outcome is that the trade is successful, leading to substantial profits. However, high-leverage positions can also deal an equal amount of losses if the position goes unfavorably.
With crypto trading being incredibly volatile and unpredictable, the more likely outcome is to incur a loss just as costly as it would be profitable. In addition, the loss could liquidate a trader’s entire funds and potentially even more if the market was highly volatile.
Successful traders never undertake trades that are leveraged beyond their means or even beyond their strategy. As such, novice traders should be most concerned with preserving capital and aim for small and consistent wins, which adds up over time. An incremental growth per aggregate of trades is more critical as a strategy. Small but steady growth allows traders to compound their investments over the long run.
Another cause for traders failing is due to poor risk management. Risk management strategies should be incredibly adverse to any amount of loss. Exchanges, such as Binance, offer trading tools like stop-loss orders that minimize losses on a trade. Stop-loss orders allow traders to exit their position if they don't perform as expected.
When traders don’t use trading tools that assist and protect them, it exposes their investment capital to undue risks. Not only do tools like stop orders help traders protect their funds, but they also remain active when the user isn’t, as the crypto markets are. Consider an example that illustrates the importance of stop-loss orders. Suppose Bitcoin falls over 10% overnight, triggering a margin call that you could not have met as you were away from the market. As a result, your entire investment was fully liquidated. A stop-loss order could prevent this altogether. Therefore, protecting your funds with all available tools and minimizing the risk of loss is pertinent for all traders.
Taking Large and Risky Positions
Novice traders often fall prey to the idea of ‘go big or go home’, plunging much of their finances on a single trade. Not only is this reckless and dangerous, but the logic is also entirely flawed. When starting out, every single unit of funding is vital. As such, you should adhere to strict money management rules to protect your capital. In fact, the most successful traders follow similar rules and restrictions on each trade.
A 10% worth trade would be considered a very high-risk trade to most investors. For example, if you had $1000 to trade, a 10% trade worth $100 would be a high-risk trade simply because if you lost the $100 (excluding fees and funding cost), you would only be able to make 10 more of those trades before you were out of funds. Instead, it’s much wiser to trade at 1% or even less. This way, you can learn how the market works and take on losses without breaking the bank. As more wins accumulate, you’ll eventually have more funds to work with. At that point, you may be trading with higher value amounts, but the percentage of your funding will not waver, making you an experienced trader.
Not Trading Responsibly
Psychology and emotion have a great influence on the way traders trade. For this reason, undisciplined and irresponsible practices are a prevalent cycle that novice traders fall into, causing them to fail. Likewise, compulsive trades and gambling are sure ways to lose in the long term. When traders face a losing streak, it may be challenging to turn the tide and stop the bleeding. In these situations, sometimes, the best trade is no trade at all.
Binance has created a mechanism to assist traders in avoiding this behavior, called the Cooling-off Period function. It disables futures trading activities for a certain amount of time.
Another irresponsible form of trading occurs when novice traders do not have a clear understanding of the products they trade. In other words, they are trading blindly. Taking the time to learn about the products you trade and the fundamentals behind them will give you a sharper competitive edge and help you feel more in control of your actions.
Learn more about responsible trading on Binance!
Conclusions
Traders often fail because they do not take trading seriously enough. Most inexperienced traders seek get-rich-quick methods and do not adequately prepare how they would approach the market. In reality, some inexperienced traders are gambling without even realizing it. Successful traders, on the other hand, aren't gamblers. They accept responsibility for their actions. Trading should be well-planned and thoughtful. If you want to make profits consistently, you must trade responsibly.
When trading responsibly, each trade should have a purpose and be protected as best as possible—using tools to minimize risk. When done successfully, traders will have better results, further encouraging them to execute best practices.
If you’re looking to get started but don’t want to learn the hard way how harsh trading can be, Binance is a great option.
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