by CryptoJelleNL
Ho Ho Hodl, or not? With 2024 right here, it's time to make some New Year resolutions – discussing things we want to do this year. Some people decide to sign up for a new gym membership, while others decide to pursue a new hobby or attempt to stop smoking cigarettes. No matter the resolutions, it takes meticulous planning and strong motivation to pull off these New Year’s resolutions; as a whopping 80% of people give up on their resolutions mere weeks into the new year.
Most people by now agree that the bull market we long expected is here; a new opportunity to win big, and rectify the mistakes you made in the previous bull cycle.
Bull markets cause too many people to make a boatload of money – only to give those profits back to the market. Time to erase that abhorred memory; let's dive into one of my favorite New Year resolutions: taking profits. Read on to learn more about the approaches successful investors use to scale out of the market, locking in their profits before the inevitable downturn arrives.
What is an exit strategy?
Exit strategies - like the name suggests - involve planning for the moment you will sell your investment for a profit (or loss!). With an exit strategy, you outline where and how you want to take profits, and where you sell your investment for a loss, in detail. For example, it can discuss what portion of your investment you sell when Bitcoin hits $100,000 (just a number, not financial advice!).
The goal of an exit strategy is to help you deal with the emotions that'll inevitably cloud your judgment during the thrill stages of a bull cycle. By laying out your exit strategy from the beginning, you reduce the likelihood of costly mistakes and help you lock in those profits from your earlier investments.
Our Top 3 Exit Strategies
Having a well-defined exit strategy can make the difference between handing all your profits back to the market and getting out of the crypto circus with more money than you have now. There are many different ways of going at it, but the most popular exit strategies boil down to one (or a combination) of the three profit-taking strategies below. Let's dive in!
Setting targets, and sticking to them
This is - by far – the most popular approach in crypto, while also being the most difficult to pull off. With this profit-taking strategy, traders define a price target at which they sell their investment. You could compare it to a short-term trade, it has an entry, a target, and a stop-loss.
Once this kind of investor enters his position, he simply waits until the target hits and sells. This provides a very structural approach, but the reality shows that it is very hard to execute.
Firstly, it is nearly impossible to define the optimal level to sell. Either you place your target too high, and the price never reaches it, or you place it too low, and have to deal with intense FOMO after selling your investment.
Both of these scenarios introduce emotional decision-making, as any pullback will have you wonder if you missed the top, whereas every pump beyond your exit will have you wondering if you should buy back in.
Tricky business.
Trailing Stop-Loss Orders
Another common approach is to use a trailing stop-loss. With this profit-taking strategy, traders continuously monitor the market, and move their stop-loss orders higher when the market moves higher as well. Whether this is done automatically or manually, this approach makes sure that they lock in their profits as soon as the market's momentum fades.
However, this approach can be tricky business – as the market likes to trigger stop-losses on the way up – if only due to the volatility of the bull market. As a result, a trailing stop-loss might get triggered early on in the bull run, only to serve as liquidity for the next leg higher, leaving the investor sidelined and worrying about where they'll buy back in. As such, the trailing stop-loss can work wonders, but can also work against you.
Reverse-DCA
Now for my personal favorite, the reverse DCA. As the name gives away, the reverse-DCA is an exit strategy that involves incrementally scaling out of your position as the market moves higher. It's how I was able to lock in 90% of my profits in the previous bull market, and it's how I aim to do the same again.
Instead of holding entire positions until they hit their target or the trailing stop-loss is hit, the reverse-DCA investor enjoys the thrills of the bull market and continues to sell small portions of their investments systematically. Some investors have a long list of price targets where they sell, while other investors simply sell a chunk each week.
This method allows you to reduce your risk as the market becomes riskier. As such, while this approach results in a less-than-maximum return, it does help lock in a positive return early on in the cycle – without the risk of getting stop-hunted or missing your profit target altogether.
Choosing the right strategy
All of these profit strategies may have merit, but choosing the right strategy can be a tough nut to crack. The effectiveness of a profit-taking strategy is closely intertwined with your personal circumstances and risk preference. For example, most crypto colleagues would consider me a risk-averse investor, which plays a big role in why the third strategy is my personal favorite – without even going into the reasons for my lower risk appetite.
Someone in a tricky situation, who has very little to lose, is automatically more inclined to take risks – and thus may opt for strategy number one, in an attempt to maximize his return.
Now in addition to the three strategies we discussed, there are also people who set what I call situational targets, such as selling when their boomer neighbor comes asking about crypto - or something similar. While these are good signs of a frothy market, I personally would not build my entire investment thesis on them.
You may find that a combination of the discussed strategies works best for you as well. For example, I was happily scaling out of the market in 2021, until the market breached the 50-day moving average to the downside. This was my "stop-loss" level, below which I wanted to sell out of my positions, and I did.
This helped me lock in the remainder of my profits, while Bitcoin was still at $55,000.
Closing Thoughts
In conclusion, having a well-defined exit strategy is crucial to locking in your bull market success. Without it, you leave yourself exposed to the forces of the market, and the emotional decisions that follow.
Prepare your exit strategy, and make sure you don't end the next cycle empty-handed again.
Author's Disclaimer: This article is based on my limited knowledge and experience. It has been written for informational purposes only. It should not be construed as trading or investment advice in any shape or form.
Editor's note: CryptoJelleNL provides insights into the cryptocurrency industry. He has been actively participating in financial markets for over 5 years, primarily focusing on long-term investments in the stock market and crypto. While he watches the returns of those investments roll in, he writes articles for multiple platforms. From now on, he will be contributing his insights for WOO as well.
Check out his twitter: twitter.com/cryptojellenl
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The content above is neither a recommendation for investment and trading strategies nor does it constitute an investment offer, solicitation, or recommendation of any product or service. The content is for informational sharing purposes only. Anyone who makes or changes the investment decision based on the content shall undertake the result or loss by himself/herself.
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