Buy low, sell high – this is how investors and traders come out ahead in any market, crypto included. It’s a simple phrase that masks how complicated markets really are and downplays the role that human emotions play in investment decisions. One scenario that’s more complicated than simply buying low and selling high is knowing when to cut losses.
What does cutting losses mean?
‘Cutting losses’, when used in a financial context, is when an investor or trader exits a position to avoid losing more money. It also means removing poorly performing assets from a portfolio to reinvest in more promising ones.
Why is it important to cut losses?
The answer to this question may seem obvious: to prevent further loss. But without a trading or investment strategy in place, emotions can creep into the picture and cloud the judgement of a crypto investor. Hoping and hodling can lead to even larger losses than if a position is exited as part of a plan.
Strategies for cutting losses
There are a few strategies that investors and traders can explore when deciding how to cut losses. Two of the easiest to implement are a ‘full cut loss’ strategy and a ‘partial cut loss’ strategy, both of which can be set up to automatically kick in with stop-loss orders.
Full cut loss strategy
A full cut loss is a strategy that involves completely selling an asset when it falls to a specific price point. This strategy is typically implemented during times of extreme volatility in the market, meaning that emotions are in full effect and just how far a price will fall is difficult to predict.
Partial cut loss strategy
A partial cut loss strategy is similar to a full cut loss strategy, with one key difference. Instead of selling an entire position, with a partial cut loss strategy, a trader sells only a part of their position in an asset at a specific price point. This allows the trader to maintain exposure to the asset in case of an upswing in the price but reduces the risk of further losses.
Limiting Loss
Of course, it’s best to prevent major losses in a portfolio as much as possible. There are a few ways that investors and traders go about doing this.
Stop-Losses
Stop-loss orders are a popular strategy for keeping losses in a portfolio to a minimum. A trader sets the order to sell a crypto at a certain price to limit losses on a particular investment. Stop-loss orders can prevent traders from incurring further losses by holding indefinitely.
Investment Strategies
In addition to setting stop-loss orders, investors and traders often have a strict plan in place when buying or selling crypto. These plans don’t have to be complicated – they can be as simple as selling at a certain price point (which can be done with a stop-loss order), or selling when a token drops a certain percentage. Having any kind of well-reasoned plan helps investors and traders manage both risk and their emotions.
