Sweet euphoria, maximum confidence, complete misunderstanding of the situation, fear and depression. Investors in the cryptocurrency market who have entered the market since about the new year (2021) received approximately this range of emotions. Seeing a powerful crypto market price growth, after which the same powerful fall, each investor had unprofitable trades. These losing trades pose the main question. What is better – to fix the loss on the position and have free funds for new trading situations, or to sit out the loss without making unnecessary movements? This is a difficult question, and we will try to answer it!
In 2-3 months, when all cryptocurrency market participants forget the terrible sale of 19 May, 2021, a new powerful fall wave may begin. The most powerful and uncorrected phase of Bitcoin growth, which began in September 2020, gave investors a 540% return. The main question is – how many% will investors be able to keep in the process of the cryptocurrency market global correction?
In order to understand how you can protect your deposit in the crypto market during a fall, you need to understand which factors affect the investor.
Factors that influence an investor during a trend change in the cryptocurrency market
Understanding a trend change comes too late.
Any growth trend, strong or weak, has local corrections. After a long period of the same trend, investors get used to what is NECESSARY or:
-Constantly buy (at best on local corrections, at worst on the market anywhere on the chart) and keep;
-Just keep and wait for the cryptocurrency market to grow forever.
In addition, investors are getting used to the fact that after each local fall, a new growth wave comes. So, we can sit out any fall in a drawdown, since the trend is long.
The worst thing about this situation is that just once is enough to plunge into serious problems. Usually, the investor’s understanding that the trend has changed comes here:
The nature of the price movement during a fall has other features
Patterns that worked before – stop working. Here are a few examples of how excellent trading situations that have recently been profitable when the trend changes can start to hit your deposit.
The chart of 20 October, 2020, when there was a powerful BTC price upward trend. On the chart, we see that after a strong growth impulse, buyers were buying Bitcoin so actively that even the consolidation, in which some investors took profits, took place in a diagonal channel (usually consolidation takes place in a clear range without updating local highs and lows).
And now a similar situation, which took place a month later:
The pattern is identical, the volumes in consolidation are not increased, should the price continue to move along the trend?
Note that the growth trend did not change at that time, but only broke for a certain time. As a result, the market began to consolidate, which drained the nerves of investors. However, everything ended positively.
Such situations do not always end with a slight fright. We take the same familiar pattern and analyze it already in February 2021:
3 months of consolidation and waiting for the Bitcoin price growth to $100,000 eventually gave all frivolous investors a fall to $28,000:
The main problem of this situation is that, at best, consolidation in the cryptocurrency market will continue for several more months. In the worst case, investors can get stuck in losing positions for years.
This is one of the patterns that have been relevant lately. Though, there are more such situations on the market. The reason for the change in the development of patterns lies in the change in the behavior of market participants. However, in order to discern it, experience and time are needed.
Lack of risk management heightens investor fear and greed
This factor greatly exacerbates your emotions, but disables healthy thinking and the possibility of stable earnings in the crypto market. At first, you can show incredible profitability that will forever remain in your memory. But, after a while you can lose everything and you will try to forget these memories forever.
It is a well-known fact that trading on the markets, we can only control our risks. The main mistake of a novice investor is calculating potential profit without taking into account potential loss. Seeing the cryptocurrency chart that everyone is talking about, evaluating its growth dynamics per day, the investor exponentially considers how his deposit will increase if all capital is invested in the project right now. Unfortunately, due to the large amount of future profit, there is no room in their head for thinking about an alternative scenario, such as “What will happen if I was mistaken?” This question arises especially when an investor buys with margin leverage. Thus, an irrational risk assessment entails impulse decisions that destroy the trading deposit and break the investor identity.
How to get out of a falling market with a profit?
For such a task, it is necessary to analyze in detail the nature of the falling waves from the point of view of psychology, trading volumes and mechanics. However, this is a separate large and detailed article.
Important factors for choosing behavior when the cryptocurrency market falls are:
-% of free capital that you can trade with;
-The time you can find for trading;
-Your goal in the cryptocurrency market.
The fact is that if you bought a cryptocurrency for the entire deposit, which has now lost 50% of the value, you do not have the time and knowledge to trade and the main task is to increase the amount of USDT – you have few Options.
Do not trade in a falling market.
The first and easiest option is when you have neither free funds nor time to delve into the market. In this case, you will have to sit out an unpleasant trading situation and wait for a new growth trend. The only drawback of this strategy is the loss of time. Although, as practice shows, investors who bought Bitcoins in 2017 for $20,000 and just waited 4 years would be sitting in profitable positions today.
Catch local bounces from strong liquidity zones.
The best situation is when you have a part of your capital free for trading. In this case, having 50% free capital, you can improve your position by buying, for example, bitcoin near the local bottom (for example, as it was after March 2020). Of course, keeping part of the deposit in stablecoins during the growth of cryptocurrencies reduces your profitability. However, this is what will provide you with agility, a stable trading mood and improve your trading position.
Having free capital for trading, you can forget for a while about your unprofitable positions and focus on catching local price bounces upwards. For such trading, one should be prepared for situations when even strong liquidity levels may not withstand price pressure. As an example, let’s show the chart from 19 May, when the BTC price did not kept the important range of $40,000.
As you can see, having bought bitcoin on the fall from a strong liquidity level to $40,000, in the first days we would have got another unprofitable position in the portfolio. Of course, the market allowed you to exit the position at no loss. Such cases teach us that:
- In any case, you cannot enter the same position with the entire deposit
- If you buy cryptocurrency during a market fall, your trading position should be several times less than if you bought after checking the liquidity range for strength.
It is worth remembering that there are two types of rebounds – instant and smooth. Instant rebounds occur when there is a high concentration of volume and emotion in the market. And high volumes and concentration of emotions occurs after the price moves against the majority. Such rebounds must be recorded immediately, since their vital activity is short-lived:
On the chart, we marked with white ovals the approximate place where it was actually possible to buy BTC and where it was possible to fix profits within an hour. In addition to a small position, an important factor in trading instant rebounds are trading volumes. If the price falls without volumes, it means that at the moment the cryptocurrency is not needed by anyone, including you. The presence of high abnormal volumes indicates a change in local initiative and the possibility of earning money.
Smooth rebounds are much more comfortable and calm to trade. They are much less aggressive. Though, they end up with a new sharp fall wave. This is the main difficulty in trading smooth bounces. If during the uptrend the price did not reach your target, then with a high probability there will be another upward wave. On this local growth wave, the price will either reach your target or approach it. There will be no problem to close the position. In the event of local corrections in a falling market, there may not be a second chance to close your position at a normal price.
Another trap of such bounces is dead volume. When you look at a candle that is growing and see increased volumes under it, you do not know whether these are entries into a position (other market participants buy in order to sell at a higher price) or exits from positions (sellers fix their short positions and buy at the market). What is the difference? In the case when the volumes are alive and buyers enter positions in order to sell at a higher price, it will be difficult for sellers to change the market situation quickly (with one candle).
In addition, rebound trades become less profitable when compared in terms of profit-to-loss ratio. If on a growth trend after entering a position, the main target is above the previous local high, then when trading rebounds, you should be ready to take profits earlier.
As we can see, on an uptrend, the ratio of potential profit to potential loss is 4/1. Catching a rebound, the ratio becomes 2/1. In addition, squeezes often knock out stop orders and sometimes you need to re-enter a position several times. Therefore, before trading rebounds, you need to form elementary rules of behavior. To do this, you need to put yourself in bad situations and analyze what will happen to your position, deposit and whether you are ready for such a scenario.
Margin trading with the trend (no more than 1 leverage)
The purpose of this trading option is to generate new USDT or BTC in order to be able to buy promising alcoins near the bottom of the market. This method is suitable primarily for those whose deposit is in drawdown, but they are not ready to wait and want to change the situation now. In this case, altcoins that are currently in unprofitable positions can be transferred to margin trading as collateral.
By trading with the first leverage trend, you are effectively hedging your gains that you earned during the market rally or preventing your loss from increasing.
In this strategy, it is very important to adhere to a clear risk management, since margin trading is a deadly pleasure. All profits from such a trade should be transferred to spot trading and placing orders for the purchase of cryptocurrencies. These actions will prepare you for the new season of growth in the cryptocurrency market and will improve your long-term portfolio.
There is always a way out. The main thing is not to rush and follow the system. Only the system can help you to be equally collected in any situation in the crypto market.