Top 10 Crypto Trading Biases and How to Fight Them

Disclaimer: the following info is provided for educational purposes only. Crypto trading is an activity related to high risks so only you’re responsible for the potential consequences. Also, biases are natural so the author also can be biased. 

Let’s begin with bad news: it’s impossible to overcome your biases completely. The catch is that psychological patterns are parts of humans at all. We’re born with them. We live with them. We die with them. But, most importantly, we trade with them. 

But there’s some good news, too. When a trader realizes that biases are eternal, he or she can research them for deeper understanding. As a result, it should be easier to identify the problem and overcome it. Partially, at least. 

Despite the full list includes dozens of lines, we want to talk about crypto trading biases in more detail. 

Understanding Biases

Did you know that 80% of individuals and 30% of institutions trade more inertially than logically? That’s the insight from Harvard Business School revealed in 2007. Today, the situation is similar because, yeah, biases don’t change. 

This led to the emergence of so-called behavioral finance – a science field that focuses on the role of psychology in trading and investing activities. It also researches emotions, sociological aspects, and even biology. 

We aren’t professionals in these fields but we’re traders. And we want to talk about the most popular issues. 

1. Anchoring

Definition: the anchor is the first piece of information that a trader spots. Later, it acts as the most significant and trusted point that limits alternative ideas. 

Example: a powerful bullish sign on a trading chart. Say, when you open a trading terminal and see that BTC/USDT pair forms a large bullish flag, it’s possible that you will trade according to it the entire day regardless of other indicators. 

Lesson: never rely on only one sign or opinion. Analyze the market from several points of view to get the full picture. 

2. Bandwagon

Definition: traders tend to be more social than individual so they rely on news and actions of other market players. We buy when others buy and sell when others sell, especially focusing on crypto influencers. The problem is that attention bias may surpass the importance of more objective stuff like chart patterns. 

Example: after the news about listing at Binance, DOGE jumped from $0.0032 to $0.0044 in four hours. During the next week, the price slowly returned to $0.0032. That’s the power of news and mass trading when a token is pumped without actual reasons. 

Lesson: try isolating yourself from the crowd when trading. Obviously, you should do research and check news but don’t rely on them only. Sometimes, when you’re quick enough to jump in the wagon, you can get huge profits. The catch is to be among the first. 

3. Blind Spot

Definition: it's probably the most natural bias of all examples. Basically, you can always find clear biases in trading stories of others but never spot your own faults. Long story short, people who live in glass houses shouldn’t throw stones. 

Example: for instance, you explored this article and decided to analyze trading patterns of your friends. You realize that he’s a captive of anchoring bias. The problem is you will not say the same about your own trading even if the decisions are identical. 

Lesson: know yourself and cooperate with other investors. It’s always a good idea to look at your trading from another angle. 

4. Confirmation

Definition: a very dangerous bias that leads to self-deception. The key idea here is that we appreciate signs that prove our thoughts. Respectively, we pay more attention to these indicators by ignoring those that contradict our opinion. 

Example: a trader has a bullish confirmation bias related to TRX/USDT pair. He or she decides to open a long position at $0.0315 paying high attention to bullish bars and expecting the uptrend. Thus, a trader ignores the fact that the bar has a small range while the next bearish bar is much wider. He/she even may not spot that the price closes below the support. Boom! We have $0.0278. 

Lesson: double-check your thoughts. When you see that everything's perfect, conduct another research and look for signs that contradict your views. 

5. False Rationalisation

Definition: it’s a special case of cognitive dissonance. We tend to justify our decisions even if they were totally wrong. This bias prevents you from closing unprofitable positions that destroy your capital. 

Example: you do your due diligence. You watch the market for a few hours. You analyze everything. You deny not as perfect trades. Finally, you open a long position just before the correction phase. You invested a lot of time in this deal so you refuse to close the position even after 10%, 20%, 30% dump, and so on. 

Lesson: Terrance Odean from Berkeley found that closed profitable positions still outperform open losing deals that remain in portfolios. Thus, you should follow the idea of cutting losses short. Just forget about previous decisions when you’re in. The money is spent already so try not to spend even more.

6. Framing

Definition: it’s all about too high focus on each separate deal instead of looking globally. Framing forces you to forget about the portfolio and other deals.

Example: a trader entered an unprofitable position when BTC went down to $10,000. Still, he or she forgets about pumping EOS that reached $6 and BCH at $420. 

Lesson: Harry Markowitz invented the modern portfolio theory according to which you should evaluate each position in terms of its effect on the entire portfolio, not this deal only. Accept short-term failures because you always can diversify and compensate them. 

7. Loss Aversion

Definition: the general theory assumes that people always opt for the highest return. However, Dan Kahneman and Amos Taversky report that traders are more likely to avoid losses than get the same profit. Thus, we’d rather win less than lose at all. 

Example: crypto traders often tend to move Stop Loss orders to perform a break-even strategy and liquidate risks. In this case, you risk even more to be kicked out of the next profitable move. It may be a good decision to use Trailing Stops, also. 

Lesson: study risk management and stick to it. Accept losses as they’re inevitable. Traders that aren’t ready to looses at all are bad traders with poor chances to succeed. Be sure to close deals at the right moment and stick to risk management strategy. 

8. Overconfidence

Definition: we think that we control everything, including large market patterns and decisions of crypto whales. Actually, we don’t have this level of control. The worst moment is when overconfidence meets the Dunning-Kruger effect and traders fail to evaluate their abilities correctly. 

Example: there are dozens of overconfidence issues Particularly, pro traders who have enough experience think that they're the kings of the market. When you’re sure that the next trade will be profitable, you’re overconfident. 

Lesson: accept that there are things out of your sight and power. Try to develop a strategy which makes you feel comfortable in this uncertainty. Focus on things that you do control like emotions and your own actions instead of thinking about larger stuff. 

9. Recency

Definition: humans love history and pay too much attention to it. We evaluate investments and make predictions based on past experience only. The problem is that we trade with incomplete information. 

Example: two or three consecutive losses with a given coin pair or at similar patterns may prevent you from trading these assets or figures at all. Say, most likely, you will not trade actively at the BTC/USDT uptrend after two strong corrections and bear traps. Similarly, you may make false predictions that the coin will rise only because it increased in price for a few past days. 

Lesson: don’t rely on historical data only. Consider all sources of information and try to find the balance. Also, analyze trades in long-term time frames to get clearer insights on upcoming changes. 

10. Self-Attribution

Definition: long story short, traders think that their successes happen because of their experience while failures relate to external factors. All the good stuff is because of you while bad things are because of others. 

Example: here, everything depends on your emotions. Say, you closed an open ETH/USDT position with 1.5x profit and feel that it’s all because of your skills. Surely, no bullish trends… Later, your open long order at the same market ended with a 2x loss. In this case, you blame whales, exchanges, Vitalik Buterin, and your dog. But not yourself...

Lesson: remember our disclaimer? Be brave to take responsibility for all your actions without exclusions. Reward yourself for long-term profitable strategies and successful plans but not for single good trades. Also, it’s suggested to track deals and learn finance management. 

Ways to Overcome Biases

Congrats! You took the first towards accepting and fighting your biases. You learned about them. But there are more options to make the crypto trading safer and more consistent. Let’s look at these approaches:

Design a plan and stick to it. Set rules, limits, and goals; define strategies; and never trade under emotions. The trickiest part is to find the balance between positive intuitive decisions and harmful impulses. Automated trading may help here. 

Do research constantly. The more info about markets you have the better. When you aren’t limited with a single source of information, you can make more elaborate trades. Especially, look for insights that contradict your attitude.

Find reputable signals. Mass media generate noise all the time. You simply can’t trust all those experts and analytics so define the most trusted ones and focus on their ideas to avoid being overloaded with data. Ideally, push your own ideas, too. 

Keep a trading log. Journals are useful for backward analysis. Nearly all modern exchanges and terminals keep these logs automatically so you should check them regularly and draw conclusions. 

Learn new tricks. Always develop your trading style and expand knowledge base. Fresh insights and new vision angles are essential for the crypto industry. For example, you can invert charts to get another point of view.

Take responsibility. It’s your money and your trading history. Only you can place entry and closing points, targets, Stop Loss levels, etc. Feel free to use any auxiliary info but accept the consequences, both good and bad. 

Understand and handle emotions. We’re humans. And we’re all different. Understand and accept your nature, find the best strategies, and use them. When you feel in harmony everything seems simpler. 

Main Takeaways

Crypto trading isn’t a cakewalk. There are angry whales who consumes hundreds of hamsters each day. There’s exorbitant volatility and a lot of FUD. Finally, there are traders with their biases – integral elements of human nature. Despite the fact that we can get rid of these psycho things, we can accept them. 

It all begins with research and understanding. Hope, this article helped to realize how harmful biases can be and how they can be mitigated. Return here sometimes. Don’t forget. Good luck!