Cryptocurrencies are on the rise, and some people make a fortune by investing in them. However, many investors seem focused on figuring out when to buy, and selling becomes just an afterthought. They assume that if you enter at the right time, the profit will just happen automatically.
This is usually not the case. As with any investment, there is always the risk of losing money. You might enter the crypto market at the perfect time, but if you never take profits, it becomes very easy to get caught in the euphoria of a bull market and assume prices will go up forever. This is why many investors end up sitting in their positions, watching their value go up and then all the way down when the crypto market performance cycle – inevitably – turns.
In this blog post, we will discuss the factors that you should consider when deciding whether or not to sell your cryptos. We will also provide practical examples to craft your exit strategy.
What is an exit strategy?
An exit strategy is a plan for the sale of your crypto investment. It includes determining when to take profits and when to cut losses, and what portion of your investments to sell when you hit your price targets. The goal is to maximize returns while minimizing risk.
It determines your reactions when the prices of your investment change, and it may also include planning for other relevant issues, such as news related to your crypto holdings, new regulations or changes in the macroeconomic environment.
You want to have an exit strategy right from the start of your initial investment. As humans, we are prone to emotional decision-making, and having an exit strategy in place from the beginning can help to prevent us from making costly mistakes and raking in that sweet profit your well-timed crypto asset purchase deserves.
Your investment goals and personal risk tolerance
When devising your exit strategy, your investment goals are the first thing to consider. Are you looking for short-term gain, or are you looking for long-term growth? Do you have any specific price targets that need to be met before exiting? These questions should be answered before deciding on an exit strategy.
You also need to consider the level of risk you are willing to take. Are you a conservative investor? Do you prefer low-risk investments with smaller but steady returns? Or do you prefer higher-risk investments with the potential for higher rewards? Answers to these questions as well.
Why do you need a crypto exit strategy?
Within the overall goal of maximizing your returns on your crypto investments, you need a crypto exit strategy for a variety of reasons, including economic cycles and other external factors, minimizing losses if the market turns against you and maximizing profits when prices are moving up. Let’s look at these in detail.
Market timing
The cryptocurrency market is extremely volatile, and prices can move quickly. You need to understand when the market is peaking so that you can take profits before the prices start to come down.
Market timing can mean keeping an eye on crypto market cycles and anticipating the turn of the market. Then attempt to cash out before the turning point. This is, of course, extremely hard to do, but even if you can get close, you can get significant gains. One way to try and achieve this is by studying charts from similar situations in the past. The more time you spend looking at various indicators, the better sense you can get of when to exit successfully.
You also need to be aware of the news that might affect the value of your cryptos and handle your investment portfolio accordingly. This is another way market timing can play a role. Everyone heard of the “Buy the rumour, sell the news” phenomenon, and this is one way to take advantage of it. By keeping a watchful eye on crypto market news, you can notice potential price movers before others and take advantage of it by buying or selling your positions before the masses do.
Minimizing losses
Exit strategies are not just about maximizing profits. You also need to plan your exit strategy to minimize losses when the market suddenly turns sour. When prices fall due to unexpected news, you might not have the time to react before your losses become significant.
In order to prevent this, setting a stop loss is essential. A stop loss is an order you give to your broker, which will automatically exit your position when the price reaches a certain level, thus minimizing potential losses – even if the bad news comes while you sleep.
Start by determining your maximum loss limit. This could be the amount of money you are willing to lose in a trade or a specific percentage of your total portfolio. Set your stop-loss, and when prices reach this level, you will exit and close your trading positions.
You also need to consider how much liquidity is available when constructing an exit strategy. This is especially important if you’re looking to exit large position sizes quickly. Make sure the market has enough liquidity to accommodate your exit without causing drastic price changes.
Maximizing profits
You need to consider the best way to maximize profits when devising your exit strategy. When prices rise, you want to ensure you don’t miss out on potential gains by exiting too early.
A good approach is to set a target price that is slightly more than what you expect the market price to reach. This will ensure that you have a margin of safety and won’t exit too soon.
Setting trailing stops or partial exits can also be beneficial, which will move your stop loss up with the market price as it rises. This way, if the market turns earlier than expected, you will still enjoy some gains without taking on additional risk by holding out for too long.
Four crypto exit strategy examples
Exit by return %
This strategy involves exiting a position once you have reached your desired return on investment. At the time of purchasing a token, you might have desired target return you would be satisfied with. You can opt for a full portfolio exit and celebrate when your tokens hit this specific price point.
For example, you might decide that buying Ethereum at $1000 is a good investment opportunity, and you would be very happy to realize a 50% gain on this trade. When the price hits $1500, you sell.
Taking profits is always a good thing, but a better version of this strategy involves considering the state of the crypto market as a whole, with the possibility of only selling a portion of your portfolio if market conditions or technical analysis suggest that there might still be a significant upside move. You can then let the remaining portion continue to move up while you set up a trailing stop loss to preserve the bulk of the extra gains.
Exit by return amount
Similar to the return percentage strategy, this one involves setting a target amount of profits and exiting when you reach it. This could be a valid strategy if you have a specific opportunity outside of the crypto market.
For example, let’s say you can start a new business or buy a house when you have $50k cash. You calculate that entering the crypto market with $20k and earning a 250% return will get you there quickly. When your portfolio hits that $50k mark, you follow your exit plan and start making your next move in life.
As discussed in the previous section, you can also follow an improved version of this exit plan. If favourable market conditions suggest that the current market value of your crypto assets is still significantly less than they potentially can reach, you can modify your selling plan by only cashing out a portion of your positions at the price target and setting up a trailing stop loss to protect your extra gains on the rest.
DCA out (Dollar-cost average out)
This exit strategy looks to “average out” the position by selling a portion of it incrementally. It involves exiting with small chunks over a period of time instead of all at once. This allows you to manage market volatility and reduce the risk of being overly exposed to the downside while still locking in some profits along the way.
It is essentially the opposite of the popular DCA in strategy used by many crypto investors. Instead of buying at regular intervals, you are selling at regular intervals. You can also combine the two methods for a complete entry and exit strategy.
Exit by market cycle
Many crypto investors look to buy at the bottom of a market cycle and exit at the top. This is easier said than done, as timing the exact point when a bull run starts or ends can be difficult.
To make this strategy work, you need to keep track of important indicators such as volume, price action, and news events. You also need to keep track of the market sentiment. When you start seeing signs that a bull run is ending, it’s best to exit and wait for the next cycle.
The good thing is that you don’t have to be perfect when it comes to hitting great returns. The crypto market cycle typically consists of extreme lows and extreme highs, so if you can come close to guessing the bottom and the top, your gains can be amazing.
Controlling your emotions and sticking with the plan
When it comes to crypto exit strategies, there is no one-size-fits-all solution. Each investor must decide which strategy works best for them, given their risk tolerance, time horizon, and overall goals. No matter which strategy you choose, make sure to stick with it and control your emotions in order to maximize profits.
Keeping emotions out of the decision-making is a key part of any good crypto exit strategy. You are almost guaranteed to never buy at the exact bottom and sell at the absolute top. This often leads to investors beating themselves up for missing out on a lower buying or a higher selling opportunity.
“If only I have…” has no place in a solid crypto trading plan. When you set a target return on investment or decide to DCA out over time, then follow that plan and don’t waver. It’s easy to get caught up in the excitement of a bull run and start thinking about all the money you can make, but if you don’t stick to the plan, then it’s easy to miss out on profits.
We hope you found value in this article and better understand crypto exit strategies and how to use them to maximize profits. Good luck in the crypto world!
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