In December 2017, the demand for cryptocurrencies hit an all-time high. Trading boomed as investors geared up and purchased cryptocurrencies in large amounts. Over December 2017 and January 2018, most cryptocurrencies had attained their all-time high. However, all that followed since was a period of terror in the markets. A market bloodbath resulted in currencies falling by 80-85% of what they were during their all-time high. This leaves one to wonder – when would have been the best time to exit the markets?
A winning trade requires a winning strategy. In order to exit at the most profit, one needs to invest smartly. Smart investment is the need of the hour. With a smart investment strategy, one can make good trading decisions even at a time when the markets are going through a major downtrend.
Best Exit Strategies for Cryptocurrency Trading
When you begin trading, always remember to begin with the end in mind. The end goal of every trading operation is profit. An exit strategy helps you ensure that you make profit. Sometimes, investors tend to go astray in search of bigger profits – but may even end up losing big amounts if the moods of the market change.
An exit strategy helps a cryptocurrency investor ensure that their risk vs reward ratio is optimum. Least risks and maximum rewards. Broadly speaking, there are two major kinds of exit strategies:
Target-Based Exit Strategy
A target based exit strategy is a simple exit strategy, which involves setting up a predetermined target. For instance, if you are investing $1,000 in the markets, you decide it in advance that you would exit the markets when your profits become $1,500. Most cryptocurrency exchanges provide a system of setting targets – and your trade would automatically be made once your cryptocurrency hits the desired target price. The target-based exit strategy ensures that there is a hard target set for the trader and as soon as the currency reaches that high point, the currency is sold.
Stop Loss Exit Strategy
However, cryptocurrency markets are unpredictable – and it is not guaranteed that the currency you invest in would reach the desired level of profit. Sometimes, currencies even begin to make a loss. Investors tend to hold on to their currencies either because of an optimistic approach about the movement of the markets – or because of sentimental/emotional reasons. However, if the currency does not bounce back, investors can make a loss as the returns may go into the negative.
The stop-loss strategy is used in two ways: investors who want to play it safe would set a very thin stop-loss margin, i.e. that between 0-10% loss. Some even set it at the break-even point. More daring investors tend to set it up between 15-30% depending upon their capacity to bare the loss and their faith in the markets.
Mix and Match: Using Stop-Loss and Targets Effectively to Make Profits
While setting the high and low points that you want to exit the markets at is one side of the story, the crucial part comes in implementing them. Good traders make use of these strategies – however, this is where the difference between a good trader and a smart trader comes in. A smart trader uses both these strategies at the same time.
Multiple stop-losses and targets are set up at various price points. For instance, if a trader invests $1,000 – he or she would set two targets – $1,500 and $2,000. Selling a portion of the total cryptocurrency holding at each point in time, ensuring that first bit of profit, while also ensuring he or she does not exit the markets completely during a bullish trend.
Similarly, with stop-losses, some traders set up multiple stop-losses hoping that the markets would bounce back. For instance, if a trader purchases a currency worth $1,000 – he or she would sell half his holdings if the price drops to $850, and all of it if the price drops to $750. This ensures the trader minimizes his or her losses while still waiting for a market recovery and not losing out on that opportunity.
Staying Cautious in the Crypto Markets
Cryptocurrency markets are prone to fluctuations. This is one of the most basic facts about the cryptocurrency markets which every trader knows. The best way to understand how much the markets can fluctuate is by comparing how the top 10 cryptocurrencies looked last year versus how they look this year. One needs to stay cautious while investing in cryptocurrencies. Here are some of the best ways to trade safely:
– Never invest more than what you can afford to lose
The most basic trading tip in cryptocurrency markets is that one must never invest more than what they can afford to lose. Cryptocurrency investments are very risky- and sometimes users, in search of big profits tend to overinvest. However, always make sure this investment does not impact your day-to-day life.
– Stick to a strategy
This is very important: the aforementioned strategies need to be planned out in advance and need to be followed in a very strict manner. Set your targets and stop-losses, and follow them. Don’t make an emotional call – or change your targets or stop-losses midway. Sticking to one single strategy ensures that you remain safe, even in the most turbulent of markets.
– Research your currency before you invest
One must ensure that they do a full-fledged analysis of the currency that they want to invest in before they invest in it. This analysis ensures that the investor knows who the currency is owned by, who promotes it, etc. The more the credibility of the team that developed it, the better is it expected to be. Moreover, one also needs to analyze the past performance of the currency before they invest in it.