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Should You Have A Bitcoin Exit Strategy?

Published 03/25/2021, 03:25 AM
Updated 03/25/2021, 03:30 AM
Should You Have A Bitcoin Exit Strategy?
BTC/USD
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Bitcoin has broken many milestones recently, reaching record highs this year and seemingly staying there. It has attracted thousands of investors looking to profit from this growth, but that also means inexperienced crypto traders are risking their money.

Having a Bitcoin exit strategy might sound counterproductive. Why would you want to jump off the wagon and miss out on profits? It’s easy to find traders purposefully neglecting exit strategies, but that could be one of their worst mistakes.

Why should you consider an exit strategy?

Exit strategies protect you and your budget from market crashes. The crypto market is quite unstable, and this volatility is what attracts so many experienced investors. For newcomers, it’s a considerable risk.

It’s easy to forget about having a solid exit strategy when everything seems to be going right. But exit methods are usually among experienced traders’ first considerations when assessing an investment option.

Ideally, you never want to require turning to your exit strategy, yet it can save you from significant losses when things go south.

Exit strategies have always been important

Exit strategies aren’t exclusively for crypto trading, and they’re not a new concept. Exit strategies are common investment approaches.

A good exit strategy is vital when trading in real estate and other investment markets. Most expert traders will tell you that you should always consider exit strategies.

Weathering a bearish storm isn’t always possible

Some traders tackle bearish trends—risking millions—only to ride the rebound and make twice as much as they would have if they had exited earlier.

Such cases are rare exceptions, not the norm. It's easy to end your trading career prematurely if you do this.

Cryptocurrencies can crash

As mentioned, cryptocurrencies are popular for investors because of their volatility. That means short-term traders, such as day traders, can reap robust profits without committing for months or years.

Regardless, these price fluctuations—while thrilling—make Bitcoin an unstable investment. Today, it sits just below the $60,000 mark, but it also crashed recently, breaking the $30,000 support.

Cryptocurrencies are also more prevalent for trading than for investing. That means people can profit from selling and buying, and that drives both bearish and bullish trends.

Bitcoin exit strategies vary depending on your goal

All exit strategies have the same goal: protecting your capital. However, there are lots of different ways to use exit strategies to achieve this.

Some traders prefer to use exit strategies as a way to ensure their investments’ profits. That’s usually the safer approach. Others prefer to use them as damage control, a last-ditch effort to exit a trade without too many losses.

Those are the two ways people can implement exit strategies. Let's see how you can use these two categories.

Securing profits

Exit strategies act as insurance, and some use them to ensure they can exit a trade with robust profits. Traders doing this usually never break their exit strategy’s target. Likewise, traders often use exit strategies by setting new support. Let's go through a couple of examples:

  • You might invest in Bitcoin when it’s at $50,000 and exit as soon as it hits $60,000. That way, you leave with a 20% profit.
  • You can also wait until it breaks $60,000 and see how far it goes. If it dips below the mark, you exit with your profits secured or adjust your support to $61,000 and leave with a little more.

Damage control

This type of exit strategy is simple. You set how much you’re willing to lose. It allows you to hold for longer in case BTC rebounds stronger than before.

What should you keep in mind?

Exit strategies aren’t foolproof, and they’re not as simple as saying, “once I reach this point, I exit”. You have to think about what’s an acceptable exit approach and when you want to use it.

Also, many traders actively avoid using these strategies because of FOMO (fear of missing out). The main problem with exit strategies is that they’re only disadvantageous “in hindsight.” There’s no definitive way to tell whether an exit strategy will work against a trader.

On the flipside

  • There’s no in-between. You can only exit a trade with gains or with losses.
  • A poor mentality and following false signs can turn exit strategies into unnecessary losses.
  • Widening your stop-loss order can be a huge mistake.

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