DeutschHumans are emotional beings. Of course, this applies more to some people than others. For human interaction, this characteristic is naturally an elementary basic requirement. In some areas of everyday life, however, the so-called gut feeling can certainly become a risk factor that should not be underestimated. Namely, whenever rational decisions are required. Trading is one such area. This does not mean that trading positions based on a good or bad feeling cannot be successful. Nevertheless, investment experts warn for good reason against relying exclusively on emotions. It is worth examining the question of why traders act the way they do. Not least because there are many strategies in the world of trading that are explicitly based on rumors and feelings. Not every strategic approach relies on transactions that are solely the result of objective facts.
Anyone who deals with price movements in cryptocurrencies, but also in classic asset classes such as stocks, and related media reports, knows about the susceptibility of financial products to emotionally charged sentiment. And yet, gut feeling plays a role. And not infrequently a big one. This does not always have to be bad. Rather, it is important to find a healthy balance between purely analytical and emotional decisions.
The Market Has Created many Proverbs over the Years
There are various popular idioms in the financial market that sum up well how traders proceed. The approach “Buy the Rumor, Sell the News”. The saying “Sell in May and go away” also has followers and is one of the most well-known stock market rules worldwide. In the latter case, the point is that, especially in the time before digitization, the stock market was rather weak in the period from May to late summer. The phase from October to the beginning of the second quarter of the year, in turn, attracted significantly higher returns. The increasing internationalization of the markets and their now largely digital orientation have led to a noticeable change here. As far as the stock market is concerned: dividend payments for many stocks have in turn had an influence in that the supposed rule is less effective nowadays.
Which Headlines Have Recently Moved Crypto Users Emotionally?
Speculating on the basis of rumors or headlines, on the other hand, is common practice, especially in the market for digital currencies. The connection is obvious in a way. Anyone who invests in cryptocurrencies is, so to speak, “on the road” in the digital sector anyway. Social media such as Facebook and Twitter or reports on TV or video portals receive great attention from many crypto investors. A good example in recent months was the Twitter messages of Tesla founder Elon Musk. He sent Bitcoin on a downward spiral several times with his tweets. Previously, the Bitcoin price had risen rapidly when Tesla’s billion-dollar investment in Bitcoins became known.
Big Names in the Market Have a Big Influence
Musk, on the other hand, has repeatedly caused positive developments in the price of Dogecoin – among other things, by bringing himself into play as the supposed originator of the currency. News from the People’s Republic of China on far-reaching bans on crypto mining also dramatically influenced a number of crypto prices. Reports on the planned (and now completed) IPO of the US-American stock exchange Coinbase also led to significant price jumps in many parts of the market.
It became clear in many phases:
It is not the actual developments that influence the market. In many cases, the rumors alone were enough to send prices on a roller coaster ride. For many investors, it was almost unimportant that the actual fundamental data on currencies had hardly changed at all. In particular, social media messages triggered many massive movements. The result was that even large crypto exchanges had to temporarily suspend trading due to panic selling. This was the only way to prevent worse things from happening.
What is the Truth Content of News about the Crypto Market?
Many analysts have complained in the past about the serious effects of “felt truth” on the market, while market participants disregarded clear fundamental data and instead reacted acutely and often thoughtlessly. Bitcoin alone has gone through several such phases in recent years. Providers such as the aforementioned exchange operator Coinbase decided to develop their own services in order to provide both investors and government regulators with reliable data. The stated goal of many data providers is to declare war on “fake news”. Coinbase is not alone in this. Many other service providers are also increasingly striving to contrast emotions with real facts.
Many Investors are Afraid of not Becoming Active Quickly Enough
The fact that emotional trading is particularly important in the crypto sector can be explained, among other things, by the fact that trading in this environment does not really know any breaks. Cryptocurrencies are traded around the clock and in real time on many platforms. In addition, the area of mobile trading is used here more than in other sectors of the financial market. Short-term activities can decide between success and failure within minutes. Here, the power of psychology plays out its full strength. The rule could be: feeling before rationality. The danger of missing an opportunity seems too great. This is also a reason why many people buy cryptocurrencies when prices rise, instead of waiting for the next decline and a subsequent recovery. A suitable idiom has also been developed for this pattern of behavior.
The established acronym for this is “FoMo”. The abbreviation stands for “Fear of missing out” or translated into German: “Angst, etwas zu verpassen” (Fear of missing something). It is precisely this concern that leads to some rash decisions because crypto investors fear being too late to jump on a trend.
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News Sources Often Pursue Their Own Goals
The dilemma in providing “hot” news by crypto service providers is that their objectivity can be doubted in many cases for good reason. Because, of course, providers like Coinbase and others primarily pursue a plan. The obvious goal is to control their own earnings. Again, the note: Legitimate doubts may be raised about the objectivity and neutrality of many sources. When selecting sources, crypto fans should therefore question where data comes from and how reliable information really is. The search for reputable media is correspondingly important. Are published reports a neutral inventory or are the originators themselves involved and pursuing a specific goal with the publication? It becomes clear that truth in the crypto sector, as in any segment of the financial market, is a flexible term.
Fortunately, media are increasingly reporting on trends in the industry that, at least on the surface, do not directly benefit from a boom or slump. But the boundaries are increasingly blurred. It is therefore not easier for interested parties to keep emotions out of decisions and prevent them from falling victim to false reports.
Rumors and News are Still Important for the Market
Ultimately, however, it is correct that positive reports are beneficial for the market even if they are only rumors upon closer inspection. None other than Karl Marx and Friedrich Engels are attributed with the quote “Das Sein bestimmt das Bewusstsein.” (Being determines consciousness). And this is also the situation on the crypto market. Freely interpreted, it could be said that investors read exactly what they want to read from headlines. Accordingly, many investors react to supposedly real reports in news portals with a purchase. Even if the prices have already recorded an increase anyway. Proven facts, in turn, leave a less clear and lasting impression in many phases.
How Can I, as a Crypto Investor, Prevent Overly Emotional Behavior?
An important keyword to exclude emotions is automated trading. The term robot trading is also frequently used. By using trading software, investors can minimize the influence of their own feelings when trading cryptocurrencies. Instead of the aforementioned gut feeling, pre-installed parameters take its place, which are converted by the software used into transactions on the market. The systems realize positions without acting emotionally. A distinction can be made in this area between free and paid models. Paid systems are no guarantee that users will achieve higher returns with them. For every trader who still does not want to completely forego their own perception, automated trading models are recommended that, in addition to automatic trading, still allow manual decisions. No less decisive is the option of being able to quickly adjust underlying parameters.
In this way, individual perception can ultimately become the basis for trading using robot systems. On the whole, crypto trading with currencies with Bitcoin, Ethereum, Litecoin and other digital currencies is not possible without one’s own feeling. The key is to put rumors to the test and carefully weigh how other traders will react to the latest headlines. As consciously as I try to keep rumors out of my decisions: many other crypto traders will not be able to do this. This should also be kept in mind.
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