How to minimize your losses when closing losing trades? Three strategies
This article will discuss three powerful strategies for exiting losing cryptocurrency transactions. Typically, they help minimize losses and keep stress low, while maintaining capital for future trading opportunities .
Exit after closing below important trend line
The incredible Bitcoin rally in October-December 2017 provided several low-risk entry opportunities. The graph shows the last such opportunity just before the peak formed on December 18:
Prerequisites for purchase
- Prolonged sequence rising maxima (HH) and minima (HL) (definition of the rising trend);
- An increase in the slope of the 90-day simple moving average indicates that the trend is gaining momentum;
- After the correction, the price touched the trend line and immediately rebounded, breaking the maximum of the previous consolidation;
- The day after the entry, Bitcoin jumped by almost $ 2,000, but on December 19 the price dropped and the cryptocurrency closed below the trend line.
The trader , who used this signal, had to closely monitor the position in order to exit it with a profit. But even just closing it after breaking through the trend line, he could minimize losses.
Remember that breaking through a long-term trend line is one of the most powerful and common trend reversal signals you will encounter. The market clearly shows that the prerequisites of the position are no longer valid and should be closed as soon as possible.
- Formed trends, especially with an angle of attack of 45 degrees and above, often act as powerful support or resistance;
- When the price reverses and closes below (or above) such a trend line, it is highly likely that the previous trend has ended and the market will continue to move in the opposite direction;
- Relying on the trend when opening a position, close it immediately when there are signs of the end of the trend, otherwise you may suffer big losses.
Exit when the primary stop level is reached
Trade against the trend is popular with those who seek to earn on cryptocurrency, the scope of the movement of which looks excessive. Usually, in this strategy, winnings are approximately equal to losses, therefore the ratio of profitable transactions to losing ones (it should exceed 70%) is important.
In the example below, BTC was reduced for four consecutive sessions, while the magnitude of the falls was impressive. This indicates too high sales pressure.
Some countertrade traders love these moments, especially when the relative strength index RSI (3) is so small (10). In this case, the signal is the 4th bearish candle. Any increase above its maximum is considered a trigger for opening a long position .
Lack of reaction – the reason for the action
The deal did not work out from the very beginning and closed with a small loss. Please note that the stop loss exit (set just below the low of the signal candle) is carried out immediately, without waiting for the candle to close.
When trading against the trend, it is important to exit positions in real time, without waiting for the end of the day (and the close of the daily candle). This method allows you to protect capital if the price continues to move in an unfavorable direction during the day.
You should never hope that a losing trade suddenly turns around and becomes profitable. Instead, fix the losses at the level prescribed by the strategy. Doing so will save your trading capital and mental balance.
- Trading against the trend is an acceptable strategy, but losses must be controlled;
- Always set a primary stop loss just above or below the extremes of a signal candle;
- To fix the loss of the foot should be in real time, without waiting for the candle to close;
- Observe the stop-loss level prescribed by the strategy, otherwise you risk turning a small loss into a large loss.
Exit after a certain time
Sooner or later, the trader finds himself in a situation when his favorite coin stops moving altogether. It literally hangs at the same level, fluctuating in a small range near the entry point without any hints of further movement. What to do in such a situation when neither the profit target nor the stop loss is reached?
The solution to this dilemma may be a temporary stop. Analyzing the past price dynamics, one can get an idea of the average duration of consolidation, followed by a breakthrough. For example, if the duration of low-volatility consolidation is 12 days or less, the position can be closed at the end of the 13th day. This will free up trading capital and invest it in a more profitable tool.
In the example above, BTC / USD formed a triple bottom , the MACD indicator showed a bullish price / moment divergence, the key trend line was broken. Together, all these factors are an excellent reason to open a long position . But then the movement stalled, and Bitcoin could not reach a single target level. Volatility continued to fall, and the exit after 10 days from the moment of opening a position was the right decision.
The time stop saved the trader from further decline to the 4th touch point. Moreover, he freed the tied capital and allowed him to invest in more promising instruments. It should be noted that the lateral movement in Bitcoin lasted more than two months, and only yesterday volatility returned to the market.
- Even an ideal trading signal may not work;
- If for a long time the transaction does not show signs of life, close it.