Key Takeaways
- Waiting until the Bull Run gets into full swing before taking your profits is a good thing, but it is inherently risky, and you need to plan to exit before things get crazy.
- Having an exit plan refers to determining your investment strategy and goals well in advance, as this can make the difference between making profits or losses during a Bull Run.
- Some exit strategies you can use to take profits include trigger orders and stop losses, which reduce the time you could spend watching the market. You should also ensure you avoid greed and stick to a pre-defined exit strategy.
When dealing with the lucrative yet volatile cryptocurrency trading market, timing is everything for investors. Since you can’t control market events, you must design steps towards an exit strategy to increase your chances of taking the highest possible return on investment. This article describes several crypto market exit strategies you can adopt to know when you should cash out.
What is an Exit Strategy in Crypto?
A crypto exit strategy is a plan to liquidate or sell your digital asset investments at a pre-determined time or price for the best possible financial outcome. While it is exciting to watch your portfolio grow during a bull run, some traders realize too late in the day they didn’t plan what to do when things go too well or too severely. Unfortunately, this can lead to situations where a trader’s portfolio goes all the way up and then comes crashing down before they can take any actual profits.
Any trader working without an exit strategy will likely make impulsive decisions driven by the fear of missing out (FOMO) or other market emotions like panic selling. An effective exit strategy should help you achieve two significant results:
Take Profits When Things Are Good
Once your crypto asset’s price rises to a certain point or percentage increase, it’s natural to start thinking about taking some small chunks of profit to realize some gains. Since the crypto market is highly volatile, you can be easily carried away and believe the price will pump and continue rising forever. However, since profits are only accurate when you can cash them out, it’s a good idea to have an exit strategy that ensures you can return your initial investment and never lose the money and the opportunity to reap where you sowed.
Reduce Losses When Things Go Badly
If you’ve been in the crypto world long enough, you already know that volatility is next to normal. Having an exit strategy means you can see when things are about to go bad, and the value of your portfolio could soon fluctuate. You need to have a certain emotional detachment to know when to hold on to an investment or let it go by selling just before you endure more significant losses. The timing of your exit strategy will determine how your returns will be impacted or if you can mitigate losses and reduce emotional decision-making in the volatile crypto market.
The Importance of Understanding Market Movements
Since cryptocurrencies are highly volatile, traders need to learn and understand market movements to identify the right time to implement an exit strategy quickly. Among the things traders need to understand include:
Market Trends: Recognize when the general market trend is bullish or bearish. A bullish trend suggests taking more time to let the investment ride, while a bearish trend indicates it could be time to lock in the gains you already made.
Technical Analysis: Learn to use technical analysis tools like RSI and moving averages to analyze historical data and predict future movements. This will help you anticipate potential continuous price trends or reversals.
Fundamental Analysis: Stay updated on news and developments surrounding your selected crypto investments. Any news regarding technological advancements, adoption rates, or regulatory changes can have a positive or negative impact on crypto prices.
The Importance of Setting Goals
Before entering any trade or investment, you need to establish clear financial goals to address the following concerns:
Profit Targets: Determine beforehand the profit level at which you’ll be satisfied to avoid letting your emotions sway you.
Risk Tolerance: Assess the level of downturn you can comfortably accommodate before selling to avoid getting into panic selling when the market temporarily corrects.
Time Frame: Decide whether you are a short-term, long-term, or swing trader. Your choice will determine what exit strategy you take at the right time.
Exit Strategies for Taking Profits
Lump-Sum Sale
This exit strategy involves selling all your crypto holdings in one simple and decisive move. This would work well when you need immediate access to your funds or have attained your financial goals.
Benefits: The process is straightforward and doesn’t stretch in time.
Risks: You will miss out on future profits when the market conditions improve after your exit.
Dollar-Cost Averaging Out (DCA)
The strategy involves gradually selling assets in smaller increments, regardless of the prevailing market conditions.
Benefits: It helps you average a selling price and reduces your overall risk when things go down.
Risks: You could initially end up selling your crypto at a low price and miss out on better profits if the market value surges. Moreover, you risk spending much more on transaction fees when you sell many times.
Partial Exit: You sell some crypto assets and secure profits while the balance remains invested.
Benefits: Your remaining crypto assets are secured for potential growth in the future.
Risks: Your exited portion will miss out on any potential price gain, and your remaining portion’s value could drop significantly if the market value drops.
HODL for the Long-Term
It may sound ironic, but sometimes, the best crypto exit strategy is to decide not to sell at all. This is especially true for anyone who understands that the crypto market can undergo different phases, such as growth, correction, and recovery.
Benefits: HODLing can help you benefit from a project’s compound growth as its adoption grows. Moreover, there are countries where users who HODL enjoy lower taxes on crypto gains or are sometimes completely exempt from returning any taxes.
Risks: The market could take longer than you projected to recover, and this could cause you to miss out on other potential investment opportunities that could have brought a higher return on investment.
When to Take Profits
Percentage Profit Target: A popular method for taking profits as an exit strategy involves setting a percentage increment from the price you bought your crypto. While this strategy requires discipline, it guarantees you don’t miss out on profits because of greed.
Trailing Stop-Loss: By trailing a stop loss, you can protect your profits and prevent further losses. You can lock in your earnings when the asset’s price rises, and should the price start declining, you sell your positions automatically as soon as the price hits the trailing stop.
Sell in Increments: Another way of reducing risk involves selling incrementally instead of exiting your entire position. You could, for example, decide to sell 20% of your holdings when there’s a 10% increase, etc. This method allows you to make returns from continued growth and minimizes your regrets should prices go down drastically.
Stick to your Plan: Deep psychological factors can influence your ability to take profits as a partial exit strategy. As a result, you must be able to deal with fear and greed so they don’t lead you to make irrational decisions. It’s, therefore, essential to train your mind to stick to your plan as much as possible, regardless of the market conditions.
Conclusion
Surviving the challenges associated with the crypto market requires crafting and sticking to a dynamic exit strategy. To achieve this, you need to incorporate knowledge of the market by leading to set financial goals and using a mixture of fundamental and technical analysis. Moreover, remember to deal with psychological factors like greed and fear that could easily cloud your mental faculties. Learn the art and science of periodically determining when to take profits as you assess market fluctuations. Your success in crypto trading depends on your ability to understand the market and capitalize on an informed exit strategy.
