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Stop Losing Money in Crypto: Master FOMO and Your Trading Psychology

Your brain isn’t broken—it’s human. Prospect Theory (Kahneman & Tversky) explains why FOMO makes you buy high and loss aversion makes you hold losers. Use the “Dojo Drills” after each section to trade your plan, not your feelings.

What Is Prospect Theory? (2-Minute Version)

Prospect Theory explains why people make predictably irrational choices under risk. Instead of valuing final wealth, we judge outcomes relative to a reference point (usually our entry price) and we hate losses about twice as much as we like equal gains.


  • Reference dependence — you compare everything to your entry/ATH, not absolute value.

  • Loss aversion — losses feel ~2× stronger than equal gains.

  • Diminishing sensitivity — farther from your reference, each extra dollar moves you less.

  • Probability weighting — tiny odds feel too big; near-certainties feel too small.

Quick coin-flip: Win $110 on heads, lose $100 on tails. Most people still say “no,” because loss pain dominates—even though the math is positive. This is why even positive-expectancy trades feel risky. Same bias shows up when you refuse to cut a loser or chase a pump.


Prospect Theory (explained in a minute)

1) Reference Dependence: You Judge From Where You Started

We don’t feel gains/losses in absolute terms—we compare against a reference point (usually our entry or an ATH—All-Time High—seen on social).

  • Everyday feel: Buy BTC at $50k → $60k feels good; buy at $40k → $60k feels incredible. Same price, different feeling.

  • Crypto trap: Watching SOL run $100 → $200, your mind reframes “not buying” as a loss, so you chase late.

  • Sensei move: Use an objective reference (your thesis price, 200D MA, or fair-value range)—not Twitter’s last pump.

Dojo Drill: Before entering, write: “My neutral reference is ___ because ___.” If it shifts to “what I could have had,” step away. Log it in your journal (e.g., Notion or Google Docs).

2) Loss Aversion: Losses Hurt ~2× More Than Gains Feel Good

We hate realizing losses, so we hold and hope.

  • Everyday feel: Losing $100 feels worse than winning $100 feels good.

  • Crypto trap: You buy high on FOMO, then refuse to sell because “locking the loss” hurts—that’s the origin of HODL memes, holding through pain.

  • Sensei move: Pre-commit exits (profit and stop-loss) at entry. Small, planned losses keep you in the game.

Dojo Drill: Set both stop-loss and take-profit at entry (e.g., −8% / +20%). Use a bracket order if your exchange supports it. No edits mid-trade.


3) Diminishing Sensitivity: Big Swings Feel “Normal” Over Time

The thrill (and pain) fades, so we size up recklessly.

  • Everyday feel: After a $1,000 win, chasing another $100 feels meh—so you bet bigger.

  • Crypto trap: A few wins make 10× feel “standard,” so you over-leverage; after big drawdowns, another −5% feels “whatever,” so you ignore risk.

  • Sensei move: Fix position sizes with a rule, not a mood.

Dojo Drill: Cap risk per trade (0.5–1.0% of account).Formula: Position size = (Account equity × Risk %) ÷ Stop-loss distance (as a decimal)Example: Equity $10,000, risk 1%, stop 8% below entry ⇒ position = $100 ÷ 0.08 = $1,250.

4) Probability Weighting: We Overrate Long Shots, Underrate Boring Wins

We treat tiny odds like they’re likely and steady odds like they’re dull.

  • Everyday feel: A 1% moonshot feels like 10–20%. A 90% base hit feels “meh.”

  • Crypto trap: Meme coins feel inevitable; DCA (Dollar-Cost Averaging) into BTC/ETH feels slow.

  • Sensei move: Put most capital in high-probability strategies; keep moonshots in a strict sandbox.

Dojo Drill: Two-bucket plan:Core (90–95%) = DCA into BTC/ETH.Explore (5–10%) = high-risk bets with hard stops. Start conservative and earn the right to size up after 3–6 months of consistent journaling.

Bias → Behavior → Fix (Cheat Sheet)

Bias

What it makes you do

Sensei fix

Reference dependence

Chase pumps from FOMO

Use objective reference (200D MA / thesis range)

Loss aversion

Refuse to cut losers

Pre-commit stop at entry; bracket orders

Diminishing sensitivity

Oversize after wins

Fixed risk per trade (≤1% account)

Probability weighting

All-in on long shots

90–95% Core DCA; 5–10% Explore

“FOMO Interrupt” (30-Second Checklist)

  1. What’s my objective reference?

  2. What’s my max risk (≤1% of equity)?

  3. Stop and target pre-set? (bracket order)

  4. Is this Core or Explore bucket?

  5. If I skip this, what objective data (not FOMO) would change my mind later?

Starter Playbook for New Crypto Users

  • Get clear on goals (wealth building vs. action seeking).

  • DCA your Core; don’t live on the hourly chart.

  • Write your investment thesis before buying.

  • Only invest what you can emotionally stomach dropping 50%+.

  • Journal every trade: entry, thesis, stop, size, exit, lesson.

  • Automate where possible (recurring buys, bracket orders).

  • Review weekly for patterns (e.g., “I chase—double down on reference drills”).

  • Track progress: After 30 days, revisit this post and rate your bias control (1–10).



You can’t delete emotions—you can only pre-wire better defaults.
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At SignalSensei.com, we teach simple, repeatable routines:

  • FOMO Interrupt checklist (printable card).

  • Position sizing calculator (risk per trade).

  • Pre-trade template (thesis, reference, stop, size, exit).

Your turn: Which bias bites you most—FOMO or loss aversion? Drop an example in the comments and I’ll match the Dojo Drill. We’ll feature top examples in future posts!

Educational content, not financial advice. Crypto is volatile—manage risk first.


 
 
 

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