Over-leveraging is one of the most common reasons for traders to fail. Over-leveraging occurs when a trader is overconfident in the outcome of a trade. It’s like trying to hit a home run with every swing. The issue with this strategy is that it is completely unsustainable.
Using a lot of leverage can lead to one of two outcomes. The most likely outcome is that the trade is a success, resulting in substantial profits. High-leverage positions, on the other hand, can result in an equal amount of losses if the position goes unfavorably.
Because cryptocurrency trading is extremely volatile and unpredictable, the more likely outcome is to incur a loss that is just as costly as it is profitable. Furthermore, a loss could wipe out a trader’s entire account, or even more if the market was extremely volatile.
Successful traders will never engage in trades that are leveraged beyond their means or even their strategy. As a result, novice traders should prioritize capital preservation and strive for small, consistent wins that add up over time. As a strategy, incremental growth per aggregate of trades is more important. Small but consistent growth allows traders to compound their investments over time.
•Inadequate Risk Management
Poor risk management is another reason why traders fail. Any amount of loss should be extremely detrimental to risk management strategies. Exchanges, such as Binance, provide trading tools such as stop-loss orders, which help to limit losses on a trade. Stop-loss orders enable traders to exit a position if it does not perform as expected.
Traders expose their investment capital to unnecessary risks when they do not use trading tools that assist and protect them. Stop orders not only help traders protect their funds, but they also remain active even when the user is not present, as the crypto markets do. Consider the following scenario to demonstrate the significance of stop-loss orders. Assume Bitcoin falls by more than 10% overnight, triggering a margin call that you could not meet because you were out of the market. As a result, your entire investment was wiped out. A stop-loss order could completely prevent this. As a result, all traders must protect their funds with all available tools and minimize the risk of loss.
•Taking on large, risky positions
Novice traders are frequently swayed by the notion of “go big or go home,” risking a large portion of their capital on a single trade. This is not only reckless and dangerous, but the logic is also completely flawed. Every single unit of funding is critical when starting out. As a result, in order to protect your capital, you should follow strict money management rules. In fact, the most successful traders adhere to the same set of rules and restrictions on each trade.
Most investors would consider a 10% worth trade to be extremely risky. For example, if you had $1000 to trade, a 10% trade worth $100 would be a high-risk trade because if you lost the $100 (excluding fees and funding costs), you could only make 10 more trades before you ran out of funds. Instead, it is far better to trade at 1% or less. You can learn how the market works and take risks without breaking the bank this way. As more victories pile up, you’ll eventually have more money to work with. At that point, you may be trading with larger amounts, but the percentage of your funding will not fluctuate, indicating that you are an experienced trader.
•Failure to Trade Responsibly
Psychology and emotion have a significant impact on how traders trade. As a result, undisciplined and irresponsible behavior is a common cycle that novice traders fall into, causing them to fail. Similarly, compulsive trading and gambling are sure ways to lose money in the long run. When a trader is on a losing streak, it can be difficult to turn the tide and stop the bleeding. In these situations, the best trade is sometimes no trade at all.
Another form of irresponsible trading occurs when novice traders lack a thorough understanding of the products they trade. In other words, they are trading in the dark. Investing time in learning about the products you trade and the fundamentals underlying them will give you a competitive advantage and make you feel more in control of your actions.
Traders frequently fail due to a lack of seriousness in their approach to trading. Most inexperienced traders seek get-rich-quick schemes and do not adequately plan their approach to the market. In reality, some inexperienced traders are gambling unknowingly. Profitable traders, on the other hand, are not gamblers. They take ownership of their actions. Trading should be well-thought-out and deliberate. If you want to make consistent profits, you must trade responsibly.
When trading responsibly, each trade should have a purpose and be as safe as possible—using risk-mitigation tools. Traders will have better results if this is done successfully, which will encourage them to continue using best practices.