Corrections are natural and happen in all markets, so having a solid investment strategy is essential. No matter how optimistic one is about the long-term prospects of a specific investment asset, especially cryptocurrency, it is essential to consider both scenarios, a breakout up or down .
Unfortunately, many people who trade crypto do not have a detailed plan to follow during a correction, and as the saying goes, “Failing to plan is planning to fail.”
While not every correction leads to a stock market crash, all cryptocurrency crashes start with a correction. So, a crypto trader must know the strategies to follow during one. This article covers the basics of market corrections and crypto trading strategies to adopt.
What is the market correction?
A market correction is a fall in the price of an asset. There is no limited time range for a corrective stretch; it can last from a few minutes to years.
This happens cyclically in all markets (not just the crypto market) and can be triggered by the slightest bit of negative news. Corrections always signal that the asset has derailed from its predicted trend. Sometimes it may turn up, but some may lead to a bear market.
What are the causes of the corrections
There are many reasons why a correction can occur in a crypto market. Here are some of the causes:
- Irrational Exuberance: This is when the market shows a positive trend and traders are confident in their predictions that the price of crypto will continue to rise. But this is not the case as the cryptocurrency price starts falling for a while and traders start panic selling; this is when a correction has occurred. Then the forces of demand and supply balance out so that prices rise again.
- Other causes include:
- trade wars
- A downturn in a country’s economy
- Political unrest
- Insider trading
- Market makers controlling the market
What crypto trading strategy to adopt during a correction?
You can use various strategies to avoid any losses that may occur in the market during a correction. However, every crypto trader should have a strategy mapped out if a correction occurs. This will avoid unnecessary losses and minimal profit.
These strategies will show you what to do when a correction occurs instead of acting rationally. Crypto trading strategies to use during a correction include:
Removal of exposure
This is the first strategy, where you prepare for the appearance of a correction. This can avoid large losses and poor performance. Once you have noticed the shape of a downtrend, it may be a good idea to lower your exposure. Or, when the oscillator drops, you might want to consider your long position on the trade.
Closing part of your long position instead of all of it in case the correction re-establishes itself and the price rises again has proven to be a winning strategy. It also helps to solve one of the biggest problems for traders, namely cutting short their winning positions. With this method, you get the best of both words.
Buy the dip
The second strategy to follow during a correction is to have enough savings to buy cryptocurrency sold at a discount. This means buying crypto from panicked traders while ignoring fake news and analysis, otherwise known as buying the dip.
This strategy is more about acting after the correction has started. As soon as the crypto market corrects lower, technical support levels such as longer and shorter term support levels begin to break. But the longer term support level lasts better than the short term. So, look for longer-term support levels on your chart and take advantage of the correction by subscribing there.
Recurring purchases by fixed sums
This strategy involves periodically deploying a fixed amount of money and investing it in the market without regard to the current state of the market. Dollar cost averaging helps crypto traders practice excellent investing skills such as patience and discipline. The DCA has proven to be effective and can offer a significant return when the market correction reverts back to a bullish formation.
The cost average also divides your entire investment, initiating a systematic entry. This strategy is a solution to the volatile nature of cryptocurrency, as you can reduce the effect of volatility on your portfolio. For those looking to automate this process, tools such as a DCA trading bot are available. This bot automates the DCA process allowing for a shorter time scale than the traditional DCA method, while allowing the trader to reap all the benefits and more!
Following the best crypto trading strategy during a correction mainly depends on the trader’s risk appetite and preference. Traders who take risks will try to stake their crypto for liquidity. In contrast, conservative traders will save their cryptocurrency in anticipation of the resumption of the market correction.
Regardless of your type of trading psychology, make sure you have an elaborate trading strategy to combat a market correction. This will protect your investment from unwanted losses.
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