Corrections are natural and occur in every market, so it’s essential to have a strong investment strategy. Regardless of how bullish one is on the long-term outlook for a specific investment asset, especially cryptocurrency, it is vital to take both scenarios, a break to the upside or downside, into account.
Unfortunately, many people who are trading crypto do not have a detailed plan to follow during a correction, and as the saying goes, “failing to plan is planning to fail.”
Though not all corrections lead to a market crash, all cryptocurrency crashes start from a correction. So, a crypto trader needs to know strategies to follow during one. This article covers the basics of market corrections and the crypto trading strategies to take.
What is Market Correction?
A market correction is a fall in the price of an asset. There’s no limited time range to a correction stretch; it can last from minutes to years.
It occurs cyclically in all markets (not just the crypto market) and can be sparked by the slightest bit of negative news. Corrections always signal that the asset has derailed from its predicted trend. Sometimes, it can recover, but some might lead to a bearish market.
What are the Causes of Corrections
There are many reasons 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 keep rising. But this is not the case as the cryptocurrency price begins to drop for some time, and traders start panic selling; this is when a correction has occurred. Then, the forces of demand and supply enact a balance so that the 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 Take During a Correction?
You can use various strategies to avert any loss that may occur in the market during a correction. However, every crypto trader must have a mapped-out strategy if a correction occurs. This will prevent some unnecessary loss and minimal profit.
These strategies will show you what to do when a correction happens instead of acting rationally. Crypto trading strategies to use during a correction include:
This is the first strategy, where you prepare for the occurrence of a correction. This can prevent significant losses and poor performance. Once you notice the form of a bearish trend, it may be wise to decrease your exposure. Or, when the oscillator turns down, you may want to consider your long position on the trade.
Closing out a part of your long position instead of all in case the correction recovers and the price increases back has proven to be a winning strategy. This also helps to solve one of the largest problems traders have, which is cutting their winning positions short. With this method, you get the best of both words.
Purchase the Dip
The second strategy to follow during a correction is to have enough savings to purchase cryptocurrency sold at a reduced price. This means buying crypto from panic traders while ignoring fake news and analysis, otherwise known as buying the dip.
This strategy is more about taking action after the correction has started. As soon as the crypto market corrects lower, technical support levels like the longer-term and shorter-term support levels begin to break. But the longer-term support level lasts better than the shorter-term. So then, look for longer-term support levels on your chart and take advantage of the correction by buying into it.
This strategy involves deploying a fixed amount of money periodically 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. DCA has proven effective and can offer a significant return when the market correction returns to a bullish formation.
Dollar-cost averaging also splits up your entire investment, initiating a systematic entry. This strategy is a solution to the volatile nature of cryptocurrency, as you can reduce the volatility effect 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 across a shorter time scale than the traditional DCA method, yet still allowing the trader to reap all the benefits and more!
Following the best crypto trading strategy during a correction mostly depends on the trader’s risk appetite and preference. Traders who are risk-takers will try to stake their crypto for liquidity. In contrast, conservative traders will save up their cryptocurrency in anticipation that the market correction will recover.
Regardless of your type of trading psychology, ensure you have a mapped-out trading strategy to combat a market correction. It will shield your investment from unwanted loss.