Corrections are natural and occur in all markets, so it is important to have a solid investment strategy. Regardless of how bullish the long-term outlook is for a particular investment asset, especially a cryptocurrency, it is important to consider both scenarios, whether it is an upside or a downside.
Unfortunately, many crypto traders do not have a detailed plan to follow during a correction, and as the saying goes, “no plan is failure.”
Although not all corrections lead to market crashes, all cryptocurrency crashes begin with corrections. Therefore, a crypto trader should know the strategies to follow at some point. This article covers market corrections and the basics of crypto trading strategies to adopt.
What is a market correction?
A A market correction is a fall in property prices. There is no fixed time limit to the correction; It can last from minutes to years.
It happens cyclically in all markets (not just the crypto market) and can be ignited by the slightest bit of negative news. Corrections always indicate that the asset is moving away from the predicted trend. Sometimes, it may recover, but some may lead to a depressed market.
What are the causes of correction?
There are many reasons why a correction may occur in the crypto market. Here are some reasons:
- Irrational excitement: This is when the market shows a positive trend, and traders are confident in their predictions that the price of crypto will increase. But this is not the case when the price of a cryptocurrency starts falling for a while and traders start selling in panic; This is when the correction occurs. Then the forces of demand and supply will balance the price to rise again.
- Other reasons include:
- Trade wars
- A country’s economic collapse
- Political instability
- Internal marketing
- Market makers who control the market
What Crypto Trading Strategy Should We Take During A Correction?
During a correction, you can use different strategies to avoid potential losses in the market. However, every crypto trader should have a strategy mapped out in case of a correction. This prevents some unnecessary losses and small profits.
Rather than being logical, these strategies show you what to do when a correction occurs. Crypto trading strategies to use during a correction include:
Avoiding vulnerability
This is the first strategy, where to prepare the occurrence of a correction. This prevents high losses and poor performance. Once you notice a downward trend, it may be wise to reduce your exposure. Or, when the oscillator falls, you may want to consider your long position on the trade.
If the correction recovers and the price rises, closing a portion of your long position has proven to be a winning strategy rather than all of it. This also helps to solve one of the biggest problems that traders have, which is Short cut their winning position. With this method, you get the best of both words.
Buy the dip
The second strategy you should follow during a correction is to save enough to buy cryptocurrency that is selling at a discount. This means buying crypto from panic traders while ignoring fake news and analysis, otherwise known as dip buying.
This strategy is more about taking action once the correction has started. As the crypto market settles down, technical support levels such as long-term and short-term support begin to break down. But the long-term support level remains better than the short-term. So, look for long-term support levels on your chart and take advantage of the correction by buying it.
Dollar-cost averaging
This strategy involves regularly deploying a certain amount of money and investing in the market without considering the current market conditions. Dollar cost averaging helps crypto traders practice better investment skills such as patience and discipline. DCA has proven its effectiveness and can generate huge profits when the market correction returns to a bullish formation.
Dollar-cost averaging also divides your entire investment by initiating a strategic entry. This strategy is a solution to the volatile nature of cryptocurrency as you can minimize the impact of volatility on your portfolio. For those who want to automate this process, such as a DCA trading bot They are available. This bot automates the DCA process allowing for a shorter time than the traditional DCA method, but still allows the trader to reap all the benefits and more.
Conclusion
Following the best crypto trading strategy during a correction largely depends on the trader’s risk appetite and preferences. Risk-averse traders try to diversify their crypto for liquidity. On the other hand, conservative traders save their cryptos in the hope that the market correction will come back.
Regardless of your trading psychology, make sure you have a mapped out trading strategy to combat market corrections. It protects your investment from losses.
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