Cutting your losses is as important as making profits. How can you expect to make money if you don’t know how to back out of losing trades? Here’s how you can implement the cut loss strategy to save your money from being wiped out:
The Cut Loss Strategy
The whole idea of the cut loss strategy is to make sure you still have money left in case the market doesn’t go your way. You can set up an automatic cut loss, which is different from a stop loss (discussed later on in the article), or you may do it manually at your own discretion.
Why should you cut your losses? Cutting your losses is better than letting your whole deposit go down with the price, and then you’ll have to wait a long time until the market recovers or be forced to sell at that tanked price and take a very big loss.
If you can cut your loss, you may have lost a bit, but you will still have most of your money with you, and you can still use that to trade at a later date and potentially make more than you lost. Sticking to a cut-loss strategy will prevent pride and emotions from influencing your trades.
Cut Loss VS. Stop Loss
A cut loss is different from a stop loss in that a stop loss is a sort of last resort, auto-sell panic price level. In many ways, they coincide, but with the cut loss strategy, you can cut your losses through your own judgment before it reaches the stop loss if you deem that the market has entered a different trend.
Benefits of Cut Loss in Crypto
Basically, the idea of the cut loss strategy is similar to the Sunk Cost Fallacy where a person hesitates to abandon their previous choices only because they have invested so much into it, even when it is obvious that abandoning the ship will be more beneficial in the long run.
Here are some of the benefits of the cut loss strategy in crypto trading:
- It is an effective risk management system to minimize your loss.
- It prioritizes the safe keeping of your initial investments.
- It is a safety mechanism when the crypto market is highly volatile and unpredictable.
Types of Cut Loss in Crypto
There are generally three main types of cut loss strategies used by traders in the crypto industry. Each of these types is important and distinct since they cater to different types of positions that you are at a loss. These three types are:
Full Cut Loss
Implementing the full-cut loss means that your whole position will definitely be closed at a certain level. This is used by many people who are experiencing a very volatile and unpredictable market and analyzing the data rationally becomes too difficult. Traders will then implement the full-cut loss to prevent any more losses that are almost guaranteed to happen at any point.
Partial Cut Loss
The partial cut loss strategy is implemented when only a portion of your position is closed. This is the most common strategy for long-time crypto traders and is usually done only when the market is slightly volatile. By doing this, you can expect that half of your position will be closed, but it will be beneficial and safer in the long run.
The other half that you haven’t cut will be left as your assets that still have the potential to incur profits if the prices go back up again. This can also be good for those who are holding on to some of their assets since you can benefit once the market is less volatile.
Drifting Cut Loss
The drifting cut loss strategy is used by traders when the price of their assets are constantly fluctuating. This means that the price at which the position will close has been decided before. The drifting distance is the difference between the cut loss level and the current price of your digital assets.
For example, if the price of your crypto assets goes up, the price at which the cut loss was initially planned will also go up with it, and vice versa.
FAQs
Should I sell my crypto assets at a loss?
If the price of your crypto stocks has dropped, it might be better to hold on to them since there is a chance that the value will go back up again. If you sell at a low price, you might be facing some losses. However, if you think that the prices will only drop in the future, you can choose to sell your assets to minimize your loss.
When should I cut losses on a crypto trade?
Experts usually advise traders to look at the data to know when the market is at its lowest. This means that the pullback is about to end and starting to reverse in your favor. For most traders and investors, it is a matter of critical thinking and wise decision making knowing when to stop risking and just cut their losses.
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