Author: Route 2 FI

Compiler: Plain Language Blockchain

Trading psychology reveals the psychological games hidden behind successful cryptocurrency trading. As a trader, your mindset can become your most powerful tool—or your greatest weakness.

Your personal biases, such as confirmation bias and overconfidence, can quietly undermine your financial decisions, often without you even realizing it.

The most successful traders are not necessarily the smartest; they are those who understand their psychological patterns, control their emotions, and can make rational choices under pressure.

By recognizing the brain's natural response patterns, you can cultivate discipline, manage risks more effectively, and transform trading from an emotional rollercoaster into a strategic, precise operation.

Let’s dive deeper into this!

Which segment of the IQ curve do you belong to, and which Pepe type are you?

Trading psychology reveals traders' psychological responses when facing market events and various factors that influence trading.

A trader's psychological state not only determines their trading decisions but also significantly impacts their trading career development.

You may already know that the key to success is not high IQ, but psychological factors such as patience, perseverance, self-discipline, and a healthy mental state.

In the face of the same market conditions, different traders may react very differently.

1. Types of Traders

For example, when the price of Bitcoin ($BTC) drops significantly, some people panic sell, while others choose to buy the dip, firmly believing that the price will rebound. Therefore, based on psychological characteristics, traders can roughly be divided into the following categories:

1) Impulsive Traders

These traders lack a well-thought-out plan, make quick decisions, but often overlook the consequences. They are easily influenced by emotions, leading to potentially huge losses.

2) Cautious Traders

These traders conduct a comprehensive analysis of market conditions and their own financial situation before trading, usually maintaining emotional stability and good self-management skills. However, they can sometimes be overly conservative and lack a risk-taking spirit, while appropriate risks often yield higher returns.

3) Pragmatic Traders

Pragmatic traders combine a spirit of adventure with cautious analytical skills. They know how to manage risks and can trade confidently. This type of trader is ideal: they neither overanalyze nor fail to reasonably assess whether each trade has a positive expected value (+EV).

You may have found your reflection among these types and can reflect on how your psychological traits affect trading outcomes.

Undoubtedly, trading psychology is an indispensable part of trading success.

2. Trading Biases

Trading biases are cognitive errors that traders may encounter during the decision-making process, which can significantly affect trading performance and final results.

Here are some common trading biases:

1) Confirmation Bias

Traders tend to seek information that supports their existing views while ignoring evidence that contradicts them. This bias can lead to poor decisions or overtrading.

For example: If you hold a large amount of Ethereum ($ETH), you might typically look for information on platforms like Crypto Twitter that supports the idea that "Ethereum is a good asset," rather than researching reasons why Ethereum might not be the best choice. As a result, you are more likely to engage with content that aligns with your existing views rather than conducting a comprehensive and objective assessment.

Trading psychology not only helps you better understand the market but also clarifies your behavioral patterns, aiding in the improvement of trading performance.

2) Availability Bias

In cryptocurrency trading, availability bias refers to investors making decisions based on information that is easy to recall or recently obtained, rather than through comprehensive analysis. A typical example is when traders rush to buy a cryptocurrency simply because it is frequently mentioned on social media or news platforms, without considering its fundamentals.

For instance, a specific altcoin may surge in popularity due to celebrity endorsements or viral internet memes on Twitter, leading traders to overestimate its potential and invest heavily, even though the coin may lack a solid technical foundation or practical application.

This bias can lead to poor investment decisions, as easily available information may not accurately reflect the true value or long-term prospects of an asset. Another example is when traders overreact to recent market events. If the price of Bitcoin suddenly spikes, availability bias may lead investors to believe that such rapid gains are common and easily achievable, resulting in overly optimistic trading.

This can lead to chasing short-term trends while ignoring more stable long-term investment strategies.

3) Anchoring Bias

A classic example of anchoring bias in cryptocurrency trading is when investors buy Bitcoin at a market peak for $100,000, and even when market conditions change and the price drops significantly, they still cling to the "anchor" price of $100,000. This mindset can lead to the following poor decisions:

Holding onto a position when it is clearly time to sell, hoping the price will return to $100,000.

Ignoring new market information or analysis, only believing in their fixation on the $100,000 price.

Anchoring bias can lead to significant financial losses, as traders fail to adapt to market changes and miss opportunities to stop losses or take profits at lower prices.

Another common anchoring bias relates to net asset figures. As traders, we are exposed to fluctuations in profit and loss (PnL) daily. Suppose your crypto asset net worth is $100,000. If you lose $20,000, you can easily become trapped by the fact that "the account has shrunk," feeling it is difficult to return to the original level. This mindset may lead you to adopt an overly defensive strategy in the market, causing you to reduce risk even for seemingly promising trading opportunities out of fear of further losses.

4) Loss Aversion Bias

Traders often feel the pain of losses more acutely than the pleasure of gains, which can lead them to hold onto losing positions for too long or to close profitable positions too early.

Loss aversion bias is particularly evident in crypto trading. Suppose a trader buys Bitcoin for $100,000, expecting the price to rise, but it drops to $80,000. Even when market indicators suggest the price may continue to fall, the trader is reluctant to cut losses, hoping the price will return to their entry point.

This unwillingness to stop losses stems from the psychological pain of realizing a loss, even when the trend is clearly unfavorable.

Another manifestation is when a coin rises by 10%, traders quickly sell to lock in profits, fearing a pullback; whereas when a coin drops by 20%, they hesitate to sell, clinging to the hope of a price rebound.

This behavior reflects that traders feel the pain of losses far more than the pleasure of equivalent gains. In the highly volatile crypto market, loss aversion can lead to:

Long-term holding of underperforming assets.

Missing out on other potential profit opportunities.

Increased emotional stress and irrational decision-making.

To be honest, this is one of the classic traps I fall into every day. For example, I am currently shorting some weak altcoins. If I am currently up $10,000, but a slight price pullback reduces my profit to $5,000, I often fall into the mindset of "I won't close the position unless I get back above $10,000." Because it makes me feel like I've lost $5,000, even though the trade overall is still profitable. I believe many people can relate to this.

5) Overconfidence Bias

6) Overconfidence bias leads traders to overestimate their knowledge and abilities, which can result in excessive risk-taking and frequent trading.

A typical example occurred during the Bitcoin bull market in 2021. Many traders were overly confident, believing they could predict market trends, and thus significantly leveraged their positions, convinced that Bitcoin's price would continue to rise.

When Bitcoin's price broke through $60,000 at the beginning of 2021, many investors became overly optimistic due to the recent upward trend, certain that the price would keep climbing. They ignored potential risks and the possibility of market volatility.

However, when the market eventually corrected and Bitcoin's price fell below $30,000 a few months later, these overconfident traders suffered significant losses.

7) Fear and Greed

Fear and greed can lead traders to exit trades too early out of fear of losses or to hold positions too long in an attempt to maximize profits.

This point is self-evident and needs no further explanation.

8) Recency Bias

Traders tend to give more weight to recent events or information, thereby ignoring long-term trends or historical data.

For example, you might overreact to short-term price fluctuations, leading to irrational decisions. Suppose Ethereum ($ETH) experiences a significant drop; traders might think the downward trend will continue and hastily sell their positions, missing the opportunity for the market to rebound. Think about how crypto Twitter (CT) often declares that the market is over after a few days of decline, urging you to sell, but the market often reverses.

9) Herding Bias

Traders follow the crowd's behavior, making decisions not based on their own analysis, which is very common in the crypto market and is a classic behavior pattern in CT.

A typical example is Ethereum's price performance from 2020 to 2021. From about $130 at the beginning of 2020 to a historic high of $4,859 in November 2021, Ethereum's price surged an astonishing 3,756%.

This price explosion reflects various herd behaviors:

FOMO (Fear of Missing Out): As Ethereum's price continued to rise in 2020 and 2021, more and more investors flocked in, not wanting to miss potential gains.

Market Sentiment: Bitcoin's performance and institutional adoption fueled positive sentiment across the entire crypto market, which also spread to Ethereum.

Technological Advancements: Ethereum's transition to Ethereum 2.0 and the implementation of EIP-1559 in August 2021 (which introduced a fee-burning mechanism) further sparked market interest.

DeFi Boom: As a major platform for decentralized finance (DeFi) applications, Ethereum's demand and usage significantly increased.

Institutional Interest: With the growth of institutional adoption and the Chicago Mercantile Exchange (CME) launching Ethereum futures in February 2021, this asset gained more credibility.

It is important to note that after reaching its peak in November 2021, Ethereum experienced a significant correction in 2022, with prices dropping to around $900 in June, catching many investors off guard.

10) Framing Effect

11) Framing Effect

The way information is presented can influence trading decisions, and traders may make different choices based on whether data is expressed positively or negatively.

For example, in the case of Solana, here is a typical example of the framing effect in crypto trading:

"Solana has risen 10% in the past 24 hours, showcasing its strong ecosystem growth."

"Despite rising 10%, Solana has still not returned to its all-time high."

These two statements describe the same 10% increase but are presented in very different ways. The first statement emphasizes positive information, which may encourage traders to buy or hold Solana, while the second statement highlights potential shortcomings, which may cause investors to hesitate or even choose to sell.

This different framing can significantly impact traders' decisions. For example, after reading the first news article, a trader might believe that Solana's network growth momentum is strong and lean towards investing. However, after reading the second news article, the trader might feel hesitant about investing and even choose to exit despite the price increase.

12) Illusion of Control

Traders overestimate their influence on market outcomes, leading to excessive risk-taking.

For instance, a trader might spend hours analyzing the price trends of a token called "Fartcoin" and believe they have discovered a perfect market timing strategy. Based on this "insight," they might bet a large portion of their portfolio, mistakenly thinking they can control the trading outcome.

This illusion of control is particularly evident during bull markets. When the overall crypto market is on the rise, most tokens will also increase. Traders may attribute their success to their abilities rather than the overall market trend. For example, they might confidently say, "I knew this altcoin would rise 30% today because of my technical analysis," when in reality, this increase may simply be a result of the overall market trend.

Personally, I completely distrust technical analysis because time and again it has been proven that the real drivers of the market are news, not the "invisible lines" you draw.

13) Clustering Illusion

Traders see nonexistent patterns in random market data, leading to erroneous strategies.

A typical example is when a crypto trader notices that the price of a coin has risen for five consecutive days. Based on this short-term pattern, they believe a bullish trend has formed and decide to invest heavily in that asset. However, this five-day increase may be entirely random and does not represent any real trend.

This example reveals the core of the clustering illusion:

Traders see a pattern in a small sample of data (five days of price movements).

They assign meaning to this pattern while ignoring the broader market context or long-term data.

Investment decisions are based on the assumption that this pattern will continue, without considering that market fluctuations may be random.

In the highly volatile environment of crypto trading, prices fluctuate dramatically due to various factors. Mistaking short-term random price movements for meaningful trends can lead to poor investment decisions.

To be honest, we have all experienced this situation. But after all, our analysis must be based on some evidence, right?

14) Negativity Bias

Traders often focus more on the negative aspects of trades or strategies, potentially missing out on good opportunities.

For example: Suppose a trader has performed well in their trades over the past few months, with most trades yielding positive returns. However, one day, due to negative regulatory news, they experience a significant loss.

Despite their overall success, this trader begins to overly focus on this negative experience, leading to:

Becoming overly cautious, missing potential profit opportunities even when market conditions improve.

Constantly anticipating similar negative events, resulting in premature selling of positions or excessive use of stop-loss orders.

Ignoring positive market indicators or favorable news, focusing only on potential threats or adverse factors.

This bias is also reflected in some traders selling their previously bullish assets. They may start spreading panic talk (FUD) to justify their decision and hope that the asset does not continue to rise (after all, they have already sold).

15) Self-Attribution Bias

Traders attribute successful trades to their abilities while blaming external factors for failed trades, hindering learning and improvement.

A classic example is when a trader buys Bitcoin for $80,000 and sells it for $105,000, making a substantial profit. They attribute this success to their excellent market analysis and trading skills. However, when the same trader buys Ethereum at $3,500 and the price drops to $3,000, they blame the loss on market manipulation, unexpected regulatory news, or "whale" sell-offs.

We see this phenomenon almost every day on Crypto Twitter (CT) (hint: this is the norm!).

16) Hindsight Bias

Traders believe past events are more predictable than they actually are, which can lead to overconfidence in future predictions.

For example, a trader buys Solana (SOL) for $200 at the beginning of January 2025. By mid-January, the price rises to $250. In hindsight, the trader thinks, "I knew Solana would rise 25%. The market sentiment and technical indicators were so obvious."

This reflects several characteristics of hindsight bias:

Traders overestimate their ability to predict Solana's price movements.

They ignore the inherent volatility of the crypto market, especially for altcoins like Solana.

They overlook external factors that influence price increases, such as overall market conditions or specific news events.

This bias can lead to the following consequences:

Overconfidence in future trades.

Ignoring potential risks or contrary indicators.

Failing to effectively diversify their crypto portfolio.

3. Issues I Experience in Trading

These biases often appear in my trading process. By being aware of their existence, we can better reflect on our trading behavior and improve our strategies.

1) Random Reinforcement

Sometimes, amateur traders (like myself) may make significant profits in a row, while experienced traders face consecutive losses. Although this situation is essentially a game of luck, traders may mistakenly believe it is due to their abilities or, conversely, develop serious doubts about their skills, falling into the psychological trap of random reinforcement.

Random reinforcement is a destructive psychological phenomenon that is very common among traders. This phenomenon can lead traders to misunderstand their abilities, blur their judgment, and result in overconfidence or extreme lack of confidence. The problem is that novices may mistakenly believe they have found an easy way to profit, while veterans may begin to doubt their skills, trading plans, and even the entire trading knowledge system.

An example of a mistake I often make:

Suppose I start my day trading with a huge profit on $TIA. This can happen with any asset, but generally speaking, if I have a big profit at the beginning, I become overly confident and more likely to trade frequently without clear trading logic.

My thought process is like this: "I've already made a lot of money, so I can take bigger risks now. Even if I lose, it doesn't matter because I'm betting with 'free money.'"

Can you see the flaw in this thinking?

Random reinforcement causes traders to ignore the randomness of the market, mistakenly believing that short-term success is entirely due to their abilities, leading to more high-risk decisions made without rigorous strategies. This mindset can result in:

Ignoring market risks and trading frequently.

Overestimating their skills and overlooking potential warning signs.

Suffering significant losses when the market shifts.

2) Fear of Missing Out (FOMO)

Everyone is familiar with FOMO. Social media, news, and herd mentality make us obsessed with the idea that "acting immediately can lead to big profits," which is the beginning of panic trading. Trading due to FOMO excludes rationality and reason.

To be honest, I feel this emotion almost every day on Crypto Twitter (CT). There is always some token that might "fly to the moon."

A reader once wrote to me saying:

"I haven't taken a vacation since 2019 because I feel that if I leave for a week, the market will surge while I'm away. I believe many people feel similarly, unable to fully enjoy life due to FOMO."

This sounds sad, but I can understand. Especially when I am not fully invested in the market or during bear market liquidation periods, this feeling is particularly strong.

If you feel FOMO on green days… then on red days, you might already be out of ammo. If you must FOMO, choose a red day.

3) Revenge Trading

This trading style is very detrimental to traders' financial situations and often exacerbates losses.

Suppose you have been trading well this week, earning stable profits. However, over the weekend, you suddenly lose all your profits, or even more.

The next reaction is a sense of "revenge."

The target of the revenge is the market itself. So you try to quickly make up for the losses by trading junk coins frantically, often making some unforgivable mistakes.

I define revenge trading as: after losing in one trade, trying to recover losses through multiple low-quality trades.

Suggestions:

Prioritize quality, don't rush for results. Finding good trading opportunities takes time; don't act hastily due to emotional drives.

Pause trading and reassess your strategy. After suffering losses, take a moment to reflect on what went wrong. Analyze your trades and identify mistakes; this can help you avoid making the same errors in the future. Tools like CoinMarketMan and TradeStream can help you record and analyze trading data.

Seek help. If you find it difficult to break free from the cycle of losses and revenge trading, consider finding a mentor or coach. They can provide valuable guidance and help you develop more effective trading strategies.

4) Gambling Psychology

First, let's admit that we all have a bit of a gambler's mentality.

The essence of trading is planning, strict discipline, and continuous learning, but some traders view it as gambling. Traders with a gambling mindset typically do not consider establishing a suitable trading strategy but instead trade whimsically based on luck. They are driven by the adrenaline rush of winning the "bet," completely ignoring systematic operations.

This gambling psychology is common among novice traders and some professional traders who desire easy gains.

Gambling psychology can lead traders to make impulsive decisions without careful consideration, ultimately resulting in inevitable losses and emotional breakdowns.

5) Herd Instinct

Herd instinct is an important issue in psychology. In trading, herd instinct often stems from a fear of failure. Therefore, traders often rely on group decisions rather than conducting comprehensive market analysis. This reliance can lead to panic trading, irrational operations, and ultimately losses.

To become a successful trader, it is essential to always pay attention to your psychological state. This simple formula should serve as a guiding light on your trading journey: Rational Analysis > Herd Behavior.

An example of herd instinct:

Suppose Ansem posts a message about a new coin on Twitter. Immediately, the price of that token starts to soar. Soon, other opinion leaders in the crypto space begin discussing this token. Because the entire group is rushing in, you feel a sense of security and follow the trend. However, if you are not vigilant, you may suffer losses when the market eventually "crashes." This is always the case.

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