Abstract

Behavioral biases are irrational beliefs that can unknowingly affect cryptocurrency trading decisions. Common behavioral biases that can affect decision-making include overconfidence, buying or selling at the wrong time, limited attention span, and following trends. Traders and investors should be aware of and avoid such behavioral biases to reduce the risk of making illogical decisions. Here are four behavioral biases and strategies for dealing with them.

Introduction

If left unchecked, behavioral biases can lead to errors Cryptocurrency trading decisions and investment decisions. There is a research field called behavioral finance, which combines psychological theory with traditional financial economics. Bias is often unconscious, so traders must pay close attention to their own behavior and try to avoid biased decisions.

Israeli-American psychologist and economist Daniel Kahneman and the late Israeli cognitive and Mathematical psychologist Amos Tversky conducted extensive research on human behavior and psychology. Interested readers can check out Judgment Under Uncertainty: Heuristics and Biases to better understand behavioral biases.

Overconfidence

“We think we know the past; This illusion fuels our overconfidence in our ability to predict the future." - Daniel Kahneman

Overconfidence bias occurs in traders who are overconfident in their trading abilities, causing them to make risky market decisions or trade too frequently. Investors may be overconfident in assets in which they are already heavily invested, resulting in a lack of diversification in the portfolio.

While there may be exceptions, a study led by Columbia University professor Kai Ruggeri, Ph.D. Conclusion, the more active retail investors are, the less money they make. Because investing often requires more fundamental research into the intrinsic value of a project or cryptocurrency, investors may consider trading less and investing more.

After doing proper research, investors can consider diversifying their trades. Trading diversification can reduce overall risk compared to holding a single coin.

Avoid regrets

Qin Jie, professor of economics at Ritsumeikan University, in " A study published in the journal Economic Theory shows that traders are twice as likely as average users to sell winning positions too early and sell losing positions too late to avoid the regret of losing profits or capital. We are hardwired to avoid regret, even if it leads us to act illogically.

To curb this impulse, traders can stick to specific trading strategies and investment strategies and refuse to make decisions amid market fluctuations . A simple approach is to automate transactions with predetermined conditions such as price and quantity.

One such strategy is dollar-cost averaging, a practice used by traders to invest a fixed amount at regular intervals, regardless of assets current price.

Traders can also use trailing stop orders to place preset orders at a specific percentage away from the market price. In addition to automatically tracking prices, trailing stop orders can help lock in profits while limiting losses, ultimately helping traders avoid entering the market by mistake.

Attention span is limited

Because there are many generations on the market coins, so there are many cryptocurrency opportunities for traders. However, our attention span is limited and we cannot accurately understand every opportunity before trading.

And there tends to be a lot of market noise surrounding different cryptocurrency opportunities. This may allow traders to make trading decisions with incorrect or insufficient information.

Don’t rush into trading without careful understanding. Rather than letting your attention get too distracted, it is better to do your own research (DYOR) and conduct proper fundamental and technical analysis before trading.

Also, it is best not to rely on third-party information surrounding potential crypto trading opportunities.

Chasing the trend

Tulane University Professor Prem Jain Another study by Prem C. Jain and University of Rochester professor Joanna Shuang Wu found that 39% of all new capital put into mutual funds went into the top 10% of funds that performed the previous year, suggesting that traders have The tendency to follow trends. This can lead to hasty trading actions rather than logical decisions backed by sound research.

Due to the volatility of the cryptocurrency market, traders may be misled by a coin’s exponential price increases and ignore it. Study the fundamentals of this surge. Rather than following the trend, consider assets that are trading less than their intrinsic value, and don’t just focus on tokens that are performing amazingly.

Warren Buffet once said: “Be fearful when others are greedy and fearful when others are fearful. Be greedy."

Traders can also try to perfect and stick to a trading strategy rather than entering when a coin is pumped higher trade. Beginners can find dozens of articles on trading strategies on Binance Academy, including the Beginner’s Guide to Cryptocurrency Trading Strategies, Day Trading Strategies, and Backtested Trading Strategies.

Conclusion

Humans often rely on intuition when making decisions. Traders can avoid making wrong trading decisions by monitoring their own behavior and working to control behavioral deviations.

Extended reading

• "Five Risks Management Strategy》

• How to manage risks and transactions responsibly | Binance Customer Service

• Detailed Explanation of Dollar Cost Averaging (DCA)

• "Why and How to Do Research (DYOR) When Investing in Cryptocurrencies"