These last six months in the crypto market have reflected the utility of patience in trading. Because we view trading through a financial lens, we always assume that risk management is preventing financial loses. And as such, we integrate strategies to mitigate against such losses.
These include stop losses, invalidations, and hedging strategies.
And while these are imperative in preventing losses from spiraling out of control, there is another aspect that gets commonly overlooked.
And that is psychological risk management.
Just like our portfolio value, we need to maintain a healthy balance within our inner emotional and psychological wellbeing. When we have a prolonged stretch of losing money in the markets, it negatively weighs on our mind. As such, this can create a negative feedback loop whereby we make decisions without awareness of the emotions in behind them.
A common misconception in investing psychology is that we should block off emotions entirely. By running a trading system, it is said that this eliminates bias and emotion from the picture, allowing us to make objective decisions informed by data. However, what this approach fails to recognize is that the emotions involved with having money on the line are still ever present.
As a result, we need to find a way to work with these emotions rather than ignoring their existence entirely.
This enables us to develop a healthier relationship with our mind, and the end result is that we're making trading decisions with mindful awareness.
I often find that investors recognize the utility of understanding psychology, but they're left with few practical exercises they can do to utilize its power. So let's walk through some simple exercises and habits we can integrate to make more mindful trading decisions.
Of course, each point can be expanded on an infinite ways, this is just a high level overview.
Maintain healthy habits. Move your body daily, don't put rubbish into your body, rest, and nurture social and intimate relationships. A healthy body is imperative to a healthy mind, which allows you to make more level-headed decisions.
Pause in the morning. Even if for a minute. Feel the breath, watch the thoughts that arise in the mind. Practice bringing yourself into the present moment. This leads on to the third point.
Pause before executing a trade. Feel your breath. Feel the sensations in your body. Take this moment to watch the sensations that arise without looking to change it. There is a tremendous amount of wisdom in the body so just even 30 seconds to feel what comes up. Tightness, numbness, pulsation, looseness. Feel it.
Limit social media. The algorithm is designed to tap into anger and anxiety to drive engagement. It is not healthy for your decision making.
Remember, the goal here isn't to clear the mind.
The goal is certainly not to stop feeling emotions because they're going to arise regardless of whether or not we want them to.
By cultivating awareness, we can make more grounded and informed trading decisions, which helps us both in our trading as well as maintaining a healthy mind away from the screens.
Ultimately, this not only protects our portfolio but also strengthens our mental resilience in the dynamic (and often tumultuous) world of crypto.
