Ep. 53 — 14 Stages of Emotions When Trading

Investor-Cycle
Source: http://bit.ly/2CwuS2r

Human beings are emotional creatures. Despite sincere efforts to present ourselves as reasoned, rational and impartial observers of the world around us we cannot help but respond to our circumstances emotionally. This is not always a bad thing. Reacting to a hurtful loss with grief, or to a promising opportunity with excitement is healthy. We do have to remember, however, that these emotions have the potential to cloud our better judgement.

Like most things in life, trading in cryptocurrency cannot be separated from our emotional nature. It is futile to attempt to deny this or to try to convince ourselves that we have the ability to interact with the crypto market completely emotion-free. The healthiest thing we can do is be aware of the inevitability that we will experience many different emotions along the journey, and take practical steps to best prepare ourselves for them before they hit.

Before we dig into the 14 emotions outlined above, it is worth covering some fundamentals.

First: Never trade from necessity. 

This is a guaranteed way to be absolutely controlled by your emotions when trading. If you are investing in a currency because you need a positive return you will not be able to make clear, reasoned decisions. As a result, the market will chew you up. Only investing what you are happy to lose is a good rule to start with.

Most failures in life are due to self-sabotage. We fail in our professional, personal and business affairs not because of stupidity or incompetence, but to fulfill an unconscious wish to fail.

Alexander Elder — ‘Trading for a Living’

There are two assessments we can make to help guard against this subconscious tendency to self-sabotage.

Assessment 1: Your Motivations

Why are you interested in investing in cryptocurrency? There is no right or wrong answer here (unless it is because you need to pay your rent!). Are you interested in the financial opportunity? The technology? The social implications of blockchain technology? The more honest you can be with yourself about your motivations, the more you will understand the emotions you may attach to the endeavour.

Assessment 2: Your Personality

What type of person are you? This requires a degree of self-reflection that may require you to carve out some time. Take some time to learn about yourself. Perhaps take a personality test like the Myers Briggs or the Enneagram. Both of these are rigorous personality tests that have been developed through peer-reviewed psychological research. Each has its benefits. Both can provide wonderful insights into how you engage in the world. Are you an extrovert or an introvert? Are you more intuitive than you are perceptive? Do you tend to rely primarily on your feelings or your thoughts?

This sort of self-reflection is a different type of investment, and unlike financial markets, this one is a guaranteed positive return. To have a healthy understanding of yourself is one of the best ways you can prepare yourself for investing.

Along with these reflective assessments, there are some practical preparations to consider.

Prepare for FOMO + FUD

Both ‘fear of missing out’ and ‘fear, uncertainty, doubt’ are powerful emotional forces. They each have one common factor: fear. For the crypto trader, they are as certain as death and taxes. If you havent run into them already, you havent been here long. Being aware of them, being prepared for them is essential. You won’t necessarily be able to stop yourself from feeling them, but you can stop yourself from acting on them. Once again, patience and reflection are key. Intentionally removing yourself from the arena from time to time, reflecting, gathering your thoughts and re-entering once your emotions are in check is one of the best practices to master.

Prepare for the Herd Mentality

Both FOMO and FUD become amplified by herd mentality. The herd mentality is something of a collective consciousness that sweeps up large groups of decision makers. When fear is in the mix, this consciousness takes hold all the more quickly. We are desperate for confirmation from our peers that we are making the right calls. This is a new space for many of us and we cannot help but look to others for guidance or confirmation of our thought processes and decisions. This can be fine, but we run the risk of being overwhelmed by our perceptions of group consensus. Herd mentality is an incredibly powerful and persuasive phenomenon. It is hard not to think our educated decision might actually have been a poor one if we seem to be alone in making it. Similarly, we can feel great about a decision if there is a large group of people doing likewise, even if that decision on the balance of things was a poor one.

If you do decide to jump in, it is worth understanding some of the emotions you will encounter.

The 14 Stages

So begins the adventure. No matter your temperament, you will likely experience the rollercoaster of emotions laid out below. By comparison, one may affect you more or less deeply than the next person, but the ebb and flow is generally believed to be universal and quite valid. After all, experienced traders and investors stake their own financial health on this very pattern.

  1. Optimism Sensing opportunity, we make the decision to act – we’re going to “take the plunge.” The allure of green candlesticks (some of which are improbably tall) draws our eyes upward and toward our own imagined financial apex. We’re making a good decision, one which holds great promise for our future.
  2. Excitement

    Things start moving our way and we become giddy inside. The price is rising. This was so easy – how we were fools not to board the express route to financial freedom sooner. We anticipate that our success story is already in the making, and begin plans to buy more or diversify our fledgling portfolio.

  3. Thrill 

    The market continues to be favorable and we just can’t help but start to feel a little bit smart. At this point we have complete confidence in our trading system, having only lost small sums which are quickly forgotten compared to the gains we snatch up. We could take some profit, but decide to let it ride. Why miss out?

  4. Euphoria 

    We’ve reached point of both maximum financial risk and financial gain. Our investments turn into quick and easy profits – we begin to ignore the basic concept of risk. We now start trading indiscriminately, laughing madly as bullets whiz about and nearly graze us.

  5. Anxiety 

    A sudden and unexpected shift in one of our coins has occurred overnight. Then another begins to dip, and overall the markets show their ability to take your “hard earned” gains back. We chalk it up to an anomaly, remain greedy and convince ourselves the long-term trend is stronger overall.

  6. Denial 

    After a brief period of sideways movement, the markets don’t turn back upward as we had hoped. “There must be something wrong.” We can wait this out long-term, we’re self-assured (but we’d certainly be happier to see a near-term rally).

  7. Fear 

    Red candles rudely awaken us to the reality that we may not be as smart as we once thought. Instead of being confident in our trading we become confused, but instead of taking a small profit and move on, we clench our teeth and wait.

  8. Desperation 

    All gains have been lost at this point. We had our chance to profit and missed it. Without any plan, we attempt various trades which might bring our positions out of the red. The more we trade, the greater our losses become.

  9. Panic 

    We’ve now reached most emotional period by far, now feeling both clueless and helpless. Our hard-earned investment, profusely bleeding, seems beyond the reach of any help. We believe are at the mercy of the market and have absolutely no control to resist selling our holdings at a loss.

  10. Capitulation 

    We have reached our breaking point and sell out all remaining positions at any price. As we get out of the market entirely to avoid bigger losses, we are provided a weary content. Scraped up, bloodied, bruised… but at least we made it out alive. We marvel at the total annihilation of our confidence.

  11. Despondency 

    After exiting the markets we do not want to buy, or even hear about a cryptocurrency ever again. The markets are not for us and should be avoided like the plague. However, this rare point marks the point of maximum financial opportunity. Being gun shy, we don’t even think of “buying the dip.”

  12. Depression 

    In an attempt to soothe ourselves, we drink, cry and/or pray. “How could we have been so dumb?” we think to ourselves. Those that begin to see with clarity and truthfully analyze what went wrong take a hard lesson. Real traders are born here, learning from past mistakes, acknowledging that a lack of knowledge about ourselves, nor the true extent of the risks, failing to use and adhere to a plan.

  13. Hope 

    Eventually we return come to the realization the market actually does have cycles, and remember the old adage: what goes up, most surely will come down. We begin to analyze new opportunities and approaches to our goals.

  14. Relief 

    The markets move upward one again and we see how our prior investment would have come back around. We regain our faith (although small) in our ability to invest our money. The cycle start all over again! This time is different, we’ve gained the ability to learn from our mistakes. 

Moving Forward 

Having become intimately acquainted with the rollercoaster, it’s time to re-evaluate our strategy. Putting rules in place to protect our investments from our emotional reactions is an investment in the process itself. We do not plan to fail, but rather fail to plan. Let us move forward and explore some techniques that can mitigate our own personal risk in future trades.

When Risk Becomes Dangerous

Before we dive into our new approaches, there is one scenario that we should all consider when facing that crypto enthusiast in the mirror – do you have a predisposition for addictive behavior? Some of us are risk takers by nature, and this can be a very healthy component of a well-balanced life.

On the physical side, some of us like to sky-dive, climb  mountains or even swim with sharks. In the financial realm, there’s a little treasure hunter in all of us. Have you eve taken a trip with friends to Las Vegas, Marina Bay or Macau? Count us in! How about that annual contribution to the office fantasy football league? All of these can be a lot of fun. It allows you to scratch your financial risk-taking itch and may even land you some unexpected spending money. Lest we forget, Game Theory lies at the heart of blockchain theory.

No harm, no foul.

But unless you possess a wealth of resources or are one of the curious few who have  managed to make a career on the professional poker circuit, the combination of an addictive personality and gambling will be a dangerous cocktail in the cryptocurrency market space. Gamblers that struggle with addiction are no longer truly fueled by a desire to win the game at hand anyways. They are prisoners to the emotional and even physiological response they get from engaging in certain behaviors – regardless of wins or losses, and this includes investing.

As we discussed above, emotional filtration is what we are trying to achieve. Despite the best of intentions, a true addiction cannot be broken without the support and help of others. If you or someone you know and care about struggles with a gambling addiction (or any form of addiction), please consider taking steps to connect with others in that individual’s circle and to explore the options for help. If you’re aware of any particular options for support in your community, we challenge you to leave a comment below or to share the information with our Crypto101 Facebook Community. Helping each other is one of our core values and, if you think about it, a crypto fundamental. We thank you in advance for making a difference!

Now, Clear Your Head

Separating yourself and your actions from your emotions is incredibly challenging. One way to create an environment for this to occur is by clearing your mental clutter. These days, we are constantly inundated with information and data at a rate and severity that is nothing short of sensory overload. Unless you’ve purposely escaped into a park or natural area (and turned your mobile off), there is some outside information screaming for your attention.

confusion

If you’re reading this, you’re now on your own crypto journey – complete with even more sources of information that keep in-step with a fast paced, 24/7 global market. Reality check: the Crypto101 network is a part of this incredible flow of content. It’s a beautiful thing and we’re glad you’re on this adventure with us! Knowledge is power, but you have to turn the proverbial faucet OFF if you ever want to enjoy that cold glass of water. But how do you turn it all off?

Make a Habit of Making Time for Yourself 

Routines. Some of us love them and others…not so much. They can be tough to develop in balance with jobs, families or other outside forces that can change so quickly and pull us in different directions. But there is no better way to guarantee yourself an opportunity to relax, and focus or meditate with a clear mind than by making it a part of your daily, weekly or even monthly routine.

Start out slowly and with small steps to keep it reasonable. If your initial thought is that every waking hour is already overbooked for you, steal a few moments from unexpected places or change your perspective. Here are a few examples:

  • You have to eat lunch,  but how often do you eat lunch at your desk? Is there a walking trail or comfortable city street within your reach? If so, bring a pair of sneakers and try one lunch “on the go” next week. Find a bench and take a seat. Get comfortable and watch the rest of the world walk by for a few moments. Then close your eyes and listen…

Draper Meditation

  • Sleep is essential and few of us get enough. But if we are not taking the time to find balance while we’re awake, your sleep might lack the quality it deserves. Similar to keeping that dusty copy of the Iliad on your nightstand, make a bold effort to accomplish something before you close your eyes. Take five or ten minutes to clear your head before you tuck in; phone away, television off.
  • Despite our modern efficiency, we all wait. A lot. We wait for Ubers and boarding calls when we travel. We wait for our waiter to bring us food and for HBO to bring us the next season of Game of Thrones. We wait for our gas tanks to fill up and we wait for the work clock to wind down. What if you turned that waiting into something more reflective than a scroll through social media? Think of those “time-takers” as opportunities to catch you breath and clear your mind.

These are just a few ways that you can incorporate some clarity into your daily routine. A little bit of time can go a long way towards finding some peace in a hectic world, and it is this peace that we seek to enable greater focus for weighing choices, making decisions, and taking action with minimal emotional attachment.

Where to Focus

Now that you’re making some time to meditate or simply clear your mind, you have an opportunity to approach your crypto activities with a fresh start. Here are a few thoughts to consider when determining where to direct your new-found focus:

  • Risk: Do you understand it? Are there many facets to this risk and can you weigh the good ones versus the bad to reach a conclusion? It’s often not that easy, but if you’ve avoided an emotional decision to buy or sell a crypto asset, you now have a chance to explore the risk inherent to that asset before you take action. You can read a white paper or reach out to the coin’s project team with questions (yes, really!). Identify as much of the risk that you can and then take steps to mitigate, if possible.

    BTC White Paper Snip
    The White Paper that started it all…
  • Plan: This seems pretty basic, but you’d be surprised how many of us fail to adequately plan for our crypto journey. Simply writing out your thoughts, concerns, goals, and interests will place you above the thoughtless herd. And while the rest of the pack is zigging based purely on a mob-mentality, you can zag with confidence and sleep well at night with a legitimate plan in place. Give yourself thresholds and triggers upon which you can take pre-determined actions that fit your appetite regarding the aforementioned risk. This volatile market will demand that you be realistically flexible, but stay true to your original intent.
  • Track: As mentioned in the podcast, we would encourage any Crypto101 listener and investor to keep track of their investment transactions. The mobile app by Blockfolio makes it relatively easy to track on the go and there are many others to choose from.
Blockfolio App Screen
Ah, the good old days!

A good old fashioned spreadsheet could be your thing, or you could choose to make it a little more personal. Pick up a nice journal and make your ledger entries by hand! There’s something poetic about an ink pen and leather-bound parchment tracking your travels throughout crypto’s universe of distributed, digital ledgers, don’t you think? 

  • Reflect: Perhaps the most important part of your plan will be to take the time to reflect on where you’ve been along the way. There’s nothing worse than making a mistake twice, so take note of your own personal “hard lessons learned,” whenever possible. Where did you go wrong? What would you do differently now that you’re on the other side of a bull or bear market? You might even surprise yourself with some unexpected market insights! The crypto world is new and unpredictable for everyone, not just newcomers or casual investors. As the markets establish themselves over the years to come, everyone will be watching and learning for the first time, together.

A Final Thought

Trading in cryptocurrency is not a ‘get rich quick’ scheme. Some people have had tremendous success in this area, but they are the exceptions, not the rule. If you are considering trading and you don’t want to be taken for a ride, chewed-up and spat-out after a few short months, you need to approach it with a healthy amount of intrigue and passion. There is an inherent joy to be found in the journey; learning about the tech, growing with the projects and getting involved in new communities. Taking the steps outlined above is a great way to get yourself prepared. Ask questions, never stop learning and keep making those small but consecutive steps forward toward your goals.


This post was a collaborative effort between Ryan LaMonica, Scott Wehman and Glen Veitch. These views are their own and do not reflect the views of their employer(s).

Crypto 101 Episode 53

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Author: Glen Veitch

— Philosopher and explorer of the cryptosphere — Glen is a crypto enthusiast and graduate student living in Australia. He is currently completing his PhD in metaphysics at the University of Newcastle.

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