Crypto Investing and Loss Aversion Bias
Nobody likes to lose , especially when it results in losing money. Loss aversion can cause a crypto investor to hold on to a position long after it should have been sold or to sell winning picks too soon. We are socially conditioned to fear losing , in everything from monetary losses to competitive sports to being rejected by a date.
The pain of losing is about twice as powerful as the joy experienced when winning. For this reason humans are subconsciously wired for loss aversion bias. Overwhelming fear can cause investors to behave irrationally and make poor investment decisions.
Most of us are bad at timing the market. It’s hard to see a market bottom and the best moment to get back in until it has already passed. The same is true of a market top thus many investors buy high and sell low. Many people who flee from risk at the wrong moments are more likely to double down on risk irrationally.
Minimizing Loss Aversion
Have a well defined exit strategy. A well defined exit strategy can help us overcome our loss aversion bias and make better trading decisions. By having a clear plan for when to sell you can take the emotion out of the decision and make it based on objective criteria.
Use stop loss and limit orders. Having a stop loss automatically limits your losses on a trade which adds discipline for those concerned about uncontrollable trading losses. Be aware that a stop loss order can be triggered by normal price fluctuations when set too close.
Automate your trading. Investors are turning to automation with trading bots . With a trading bot you can set clear parameters for what your willing to lose on a trade. This can take the emotion out of the decision making process and help you stick to your plan.
Dollar Cost Averaging. When employing this strategy a set amount of cash is invested at regular intervals increasing your chances of buying assets at a lower price. Dollar cost averaging can help you improve your discipline in sticking to an investment plan regardless of current market conditions.
Trying to time the market is a loser’s game. One of my favorite quotes is ” It’s not about timing the market , it’s about time IN the market “.