6 profit-taking strategies for crypto investors

Posted: 23 June 2022 1:15 pm

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Choosing the right time to take profit might feel like sorcery, but with some research, traders can develop their own personal strategy.

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As obvious as it sounds, nobody ever lost money by taking their profits.

This is especially true for volatile assets like cryptocurrencies, with investors needing to come up with both buying and selling strategies in order to give themselves the best chance of success.

These strategies will allow investors to not only overcome their emotions through proper planning, but give them confidence to sell their losers and double down on high quality assets, to build towards the next market cycle.

Such is the importance of a clear market strategy, Axi's market analyst Milan Cutkovic told Finder a clean plan can help offset emotions when investing.

"Emotions are often a trader's worst enemy," he said.

"Having an exit strategy helps with keeping emotions at bay and can prevent second-guessing that could lead to irrational decisions such as closing a position out of fear. It is, therefore, a crucial part of every trading plan."

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade.

What is profit taking?

Profit taking is selling down a portion of assets when the price has risen to protect against potential falls in the future. It's a contingency plan to counterbalance losses and swing the overall numbers in a trader's favour.

Using a profit-taking strategy can help overcome human psychology which tends to play against investors.

After all, nobody wants to miss out on gains or be stuck holding the knife when the market falls.

But keep in mind that each strategy is highly personal, and as such should come with a degree of flexibility and market responsiveness.

Note: Finder doesn't endorse any specific strategy or individual trader's perspective mentioned below. As general advice only, this is purely food for thought for investors considering their own personal approach.

1. Risk and trading style

The first thing any investor needs to understand is their personal risk tolerance and their investing style.

Considering both appetite for risk and portfolio timeline is a good place for any investor to start their strategy.

For instance, a short-term trader looking for fast returns usually has a higher risk tolerance. While the longer term investor might have a higher degree of conviction, but less tolerance for losing their capital.

Technical analysis can also play an important role for some investors in managing risk and choosing exit points.

Axi's Milan Cutkovic says technical analysis can help a trader judge whether to set a tight or wide stop loss and adjust their take-profit target.

"Technical levels are widely watched by a variety of traders and investors, which is why they make good entry/exit points."

"For example, if you anticipate strong resistance in the form of the 200 daily moving average, you may set your exit point just ahead of the level where the 200 DMA is resting," Cutkovic said.

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2. Take out the initial investment

Despite cries from the crypto crowd to hodl at all costs, it may be prudent for some investors to take profit by removing at least their initial stake if an asset dramatically increases. That's generally a positive step, though be aware it might unlock the "house money" effect.

This can occur when an investor decides to take on greater risk when reinvesting profit that they earned through investments rather than through savings or wages.

To offset the possibility of over-risking capital earned, investors might cash out half the value of a trade once it hits an initial price target. This helps mitigate risk and "lets the winner ride", as opposed to playing with the "house's money".

To keep greed under control, investors should consider managing risk by setting price targets even after an initial investment is taken out.

Disclaimer: Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

3. Take profits on the way up and on the way down

Chances are investors won't time the exact top nor buy the exact bottom, so laddering in and out can help secure gains. Sure, traders might leave some money on the table, but nobody loses money by taking a profit.

Prepare to sell on the way up, and on the way down.

And always remember the adage coined by one of the richest men in the US for half a century, Bernard Baruch: "I made my money selling too soon."

Sometimes it's better to sell some assets than get caught holding bags when the market starts its inevitable downslide.

4. Dollar-cost averaging

The time-tested strategy of dollar-cost averaging (DCA) is widely supported by successful investors in all types of markets.

Investors can average both into and out of trades (taking profit), and whether markets are rising or falling.

For proponents, dollar cost averaging can help remove the emotion of trying to time the market and by buying or selling an asset periodically.

A simple example: Taking out a set percentage every time an asset increases by a set amount (such as if it doubles). And on the way down? Some investors might also consider taking profits every time an asset drops by a set amount or percentage.

And others might dollar-cost average on a time-based schedule, for instance buying a set amount every time they get paid.

5. More example take-profit triggers

Ultimately, what triggers taking profits is a personal decision based on an investor's own risk profile, personal strategy and goals. Let's recap some examples:

Price targets: As mentioned, this can be done in specific amounts; selling a percentage when traders double the initial investment and then another percentage when you triple, and so on. These objectives don't need to be set in stone, but rather give or take a zone and follow through. These might also be tailored for each asset a trader is invested in.

Technical indicators: Many investors enhance their profit-taking strategy by incorporating technical analysis.

Axi market analyst Milan Cutkovic shares some further examples.

"Classic support and resistance levels are very popular – this includes major highs/lows, psychological levels and Fibonacci levels. These tools can give traders additional insights and help them pick their levels more efficiently."

"The Average True Range (ATR) indicator is another useful tool, as it helps to gauge the volatility of the instrument that is being traded."

Portfolio rebalancing: A good crypto portfolio strategy will factor in diversification. Many investors might have a mix of higher-risk cryptos with blue chips like ETH and BTC. When one starts outperforming, they rebalance by taking profits to make sure they're not overly exposed to riskier assets. Some might even leave a little "moonbag" investment behind in case the asset continues to increase.

Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades. Read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the product on the provider's website.

6. What can traders do with their profit?

This is perhaps the most personal question to ask yourself and ultimately comes down to the needs, desires and social context. However, there are a few options to weigh up when thinking about what to do with gains.

Keep some cash aside: Cash is king, and keeping dry powder on the side for price dips can be a strategic move. Take profits and keep a percentage to pull the trigger when there is a sale on the market.

Accumulate long-term assets: Rotating profit into larger market cap cryptocurrencies like Bitcoin is a strategy many investors take. They take some of their gains from smaller cap coins, and stack Sats for the long run.

Paying off debts: It may be obvious but it's worth repeating – prioritise paying down any debt that traders have first.

Invest in yourself: At the end of the day, money is just a tool to help us progress along life. Traders might want to pay for a trading course, buy a new guitar, or take a pottery class. Take profit on investments, and then cycle them into life in other ways.

Traders need to define their own strategy

Only traders can define an exit strategy for the investments. Though it can be hard to fight the fear or greed of wanting to click the sell button, building a considered plan for the crypto investments can go a long way – both for the bank account as well as mental health.

None of these strategies are rigid or one-size-fits-all, so test then invest to design a trading plan that works best for each traders personal circumstances.

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