The crypto futures market is one big tricky playing field. Traders who do not know how to endure its mood swings often find themselves lost and their investments burning down to cinders. Why are many still drawn to it? The answer is simple. Trading crypto futures typically involves leverage, meaning traders can control a larger position with less capital. This can amplify potential profits.
While a comprehensive study of technical and fundamental analysis is essential, trading crypto futures successfully largely depends on effectively managing one’s emotions and thinking objectively consistently. It basically involves the careful orchestration of risk management, understanding market psychology and patience, and keeping tight control of the emotions of greed and fear.
This guide will explore how to control emotions in crypto futures trading to avoid fear of missing out (FOMO).
What Is Crypto Futures Trading?
Crypto futures trading refers to the practice of buying and selling a specified crypto asset with standardized quality at an expiration period and at a market-determined futures price. The main objective is to profit from the difference between the contract price and the actual price of the cryptocurrency at the time of settlement.
Typically, futures traders can profit from the difference between the contract price and the actual price of the cryptocurrency at the time of settlement, regardless of whether the price increases or decreases.
However, one of the most difficult aspects of crypto future trading is controlling emotions and sticking to the trading plan or system that all futures market participants should have in place to control risks. When the market reaches an area where a significant event occurs, such as a breakout or breakdown, traders who lack discipline will often disregard their system and follow the momentum generated by these events. Let’s explore the psychology of a market cycle.
The Psychology of a Market Cycle
Unlike traditional markets, the crypto market is generally more volatile. The market is subject to a range of factors that can contribute to higher levels of price volatility, such as lack of regulation, a high degree of speculation, and the influence of social media. This often affects traders’ emotional and behavioral patterns — leading to sentiment and erratic market movements.
As a result, understanding the psychology of a market cycle and the stages of different market cycles can help you stay aware of the emotions that may be controlling your trades. The psychology of a market cycle can be broadly divided into four stages.
Stages of Market Cycle
In this stage, smart money or experienced investors start buying undervalued assets, which are perceived to have good long-term prospects. The general sentiment among the broader market participants is usually negative, and there may be a lack of interest in the asset.
As demand for the undervalued assets increases, the price rises, attracting more attention from investors. This is where early adopters enter the market and take advantage of the upward momentum.
At this stage, the general sentiment starts to become more positive, and investors may begin to feel confident that the market is headed higher. Additionally, this is where the “herd mentality’’ sett in. Traders buy because others are buying, and fear of missing out becomes dominant.
This is when the market reaches its peak and begins to show signs of weakness. The smart trader, who bought early in the accumulation phase, starts to sell, realizing profits, while the inexperienced investors continue to buy in, driven by FOMO.
The market becomes overbought, and the trading volume begins to decrease. At this stage, the market is in denial. Traders believe that the market will keep going up and that the sell-off is just a minor correction.
During the markdown phase, the asset price declines as the overbought market corrects itself. Panic sets in as investors rush to sell their holdings, and the media coverage becomes negative. Fear sets in, and investors/traders who bought in the previous phases see their investments decline sharply, and some may experience significant losses.
Understanding the Psychology of FOMO in Trading
FOMO — fear of missing out is a powerful emotion that drives people to take action in order to avoid the feeling of regret that comes from missing out on an opportunity. In trading, FOMO can lead to impulsive and irrational decision-making, which can result in losses.
FOMO has been a common problem among traders because the market is inherently unpredictable, and traders are often dealing with high levels of uncertainty. In fact, it often causes traders to deviate from their trading plan, take on excessive risk, and make emotional decisions. This can lead to poor performance and ultimately undermine the trader’s confidence and ability to succeed in the long term.
How do you deal with these in futures trading?
How to Control Emotions and Avoid FOMO in Futures Trading
Effective Trading Plan
The first step in trading crypto futures is creating a trading plan and sticking to it. Having a plan in place can ease your mind, give you direction and help focus your efforts for profitability. Always set realistic goals and expectations to avoid pressure to make quick decisions based on FOMO. It allows you to control how you will use your trading time.
Diversify your portfolio
Diversifying your portfolio across different asset classes and sectors can help reduce your exposure to market volatility and minimize the impact of any single asset’s price movements.
Do your research
This is literally the fundamental strategy to employ before considering any trading instrument. Research the assets you are interested in trading and understand their fundamentals, market trends, and potential risks. This will help you make informed decisions and avoid trading based on rumors or hype.
Develop a trading strategy.
Develop a trading strategy that aligns with your investment goals and risk tolerance. This can help you stay focused and avoid impulsive trades based on emotions.
Use stop-loss orders
Not using stop-loss is like driving a car without brakes. Stop-loss orders can essentially limit your losses by automatically selling an asset if its price falls below a certain level. This can help you avoid panic selling during a market downturn.
Understanding the psychology of a market cycle is important for traders to be able to make informed decisions and manage their risk while trading crypto futures contracts.
By recognizing the different emotional and behavioral patterns associated with each market stage, you can adjust your trading strategies accordingly and avoid the pitfalls resulting from FOMO, overconfidence, or panic.
Disclaimer: The opinions expressed in this blog are solely those of the writer and not of this platform.