Why do 95% of day traders fail in the cryptocurrency market?

Almost all traders are aware of the high risks associated with day trading. Despite this, many continue to be active, despite the regular setbacks and loss of money. We looked at the reasons for this behavior and how to improve efficiency..

Astounding facts about the activities of traders

Many people start speculative trades in the hope of getting rich quickly. In addition, it is difficult to resist the alluring attractiveness of working for oneself in conditions of comfort with a false idea of «easy money», earned on huge fluctuations of cryptocurrencies.

The truth is that day trading is extremely difficult and emotionally burdensome. She would rather ruin a trader’s life than enrich it..

According to statistics, 95% of day traders fail. 80% leave the market within the first two years, only 13% survive for three years, and only 7% pass the five-year mark. At the same time, the average annual profitability of active traders is 6.5% lower than the market average.

Why do 95% of day traders fail in the cryptocurrency market?

According to statistics only 1.6% of day traders make a profit by the end of the year, although they account for 12% of the total trading activity. Some continue to trade even after 10 years with negative results and a clear lack of ability.

This is due not only to poor preparation, but also to the neglect of the psychological component, when emotions induce to leave the system and perform impulsive actions, and some the participants treat the process just like a game of chance.

Market specifics

Despite the fact that financial markets have some similarities with each other, each has its own characteristics. Some traders who have successfully operated in another market, switching to cryptocurrency fail, because there are slightly different rules of the game..

Why do 95% of day traders fail in the cryptocurrency market?

According to the expert «International Financial Center» Gaidar Hasanov, if we are talking about classical exchanges where shares of world companies are traded, then you can find comprehensive information on them and apply both fundamental and technical analysis to make a decision regarding investments or speculation. But the crypto market is still young and does not have the proper statistics to conduct a qualitative analysis, and decentralization only aggravates the situation, since it makes it almost impossible to track the total traded volume..

Moreover, this market is very risky due to high volatility. It should also be borne in mind that recently the bitcoin rate has become dependent on geopolitical factors and is gradually gaining the status of a reserve asset..

Impact of random reinforcement

A less visible cause of failure is the principle of random reinforcement, which explains persistence even after multiple failures. This concept assumes that a person uses random events to confirm (or refute) his hypothesis or idea, attributing the influence of his skills or lack of them on the result, which is in fact non-systemic..

Thus, the luck factor can have a profound effect. on the behavior of an active market participant, rewarding him for strategically wrong actions or punishing him for the right.

For example, a trader bought a cryptocurrency, read the forecast on the expert’s social network and followed his advice and made a profitable deal. After that, he listens to third-party recommendations several times, earning money on them, and begins to believe in himself, considering himself a talented speculator. The problem is that, in fact, acting without a system, he will continue to take impulsive steps, which ultimately will lead to a loss of capital..

Another option is also possible, when a trader has been preparing for a long time, has developed the right strategy with the correct portfolio composition and risk management plan, but irrational market behavior leads to a series of failures. As a result, he begins to doubt his system, to make risky transactions that contradict the rules, but bring profit. By allowing the market to continue to manipulate his actions, he will face the negative consequences of neglect. risks. 

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In 2017, everyone was a genius trader

The concept of random reinforcement was clearly expressed during the crypto boom, when the continuous growth of the market was confused with personal ability. At that time, everyone was successful, simply investing in a digital asset and then selling it at times more expensive..

But the protracted recession that followed brought amateur traders back to reality, pointing out the irrationality of their actions. Many simply could not sell their assets or acted blindly, losing everything.

Consistency is the key to success

The key to success in the crypto market lies in understanding market dynamics and focusing on long-term success, so traders need to adhere to the basic rules:

  • No more than 1% of the portfolio must be at risk on any single trade.
  • Check and adjust the plan regularly over a long period of time by analyzing hundreds of transactions.
  • Select optimal trading style for yourself.
  • Don’t forget about money management.

Wherein need to take into account that a good deal is one in which the trader planned his actions, followed the developed algorithm and managed risks. In this case, quality is not determined by the absolute result..

text: Ivan Malichenko, photo: Shutterstock, Unsplash

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