How and when to enter or exit a cryptocurrency trade

Designing a good exit strategy is highly recommended for anyone entering any asset and stock trade at any time. Without a good exit strategy, it is likely that a trader will take premature profits or, worse, run losses. An exit strategy for any trade helps you to minimize loses and lock in profits when needed. It also ensures that you do not have a mere hodling strategy without a limit.

The two options available when planning to or when exiting a trade are: taking a loss or making a gain; and hence the two kinds of exit strategies: take-profit and stop-loss orders (abbreviated as "T/P" and "S/L"), depending on the exit strategy being taken.

Setting stop-loss and take profits as entry and exit points

Stop-loss orders are those set to sell the asset at a given price or point. The orders convert to market orders immediately that target is reached, in order to sell. Stop-loss orders are orders that are usually utilized to minimize loses if the market happens moves against you.

These orders are set at above the current asking price on a buy or below the current bid price on a sell. There might be some variations here: you are able to set those stop loss orders that expires until they are canceled by you; day orders that expire after a day; or trailing stop that follows the market price at a distance but will never move downward.

The take-profit orders are converted to market orders to sell when the set price or price level is achieved. In this case, the exit point must be set above the current market price instead of below it and hence there is no "trailing" point.

However, developing an entry or exit strategy for any kind of trade is, at the end of the day, a skill to be experienced rather than read. You might manage only after several experimentation.

Technical analysis does help in the setting of stop-loss and take-profits as entry and exit points

In developing an exit strategy for a trade, most people in cryptocurrency trading would rely on technical analyses, although this is a true challenge for small coins that do not have large volumes. Otherwise, if you are looking at a technical chart, you might rely on a “hammer” candlestick that signifies a good bullish signal and long downwards shadows of candlesticks in order to determine entry points. However, if there is a strong resistance as would be signified by long upwards shadow, you might call that an exit. Those are just a few examples.

You can use tools such as Tradingview.com that allow you to plot the moving averages, Fibonacci retracements and other kind of trading indicator charts, as well as allowing you to execute indicators such as William’s Alligator indicator, MACD indicator and others; and it (tradingview.com) also allows you to formulate oscillators such as Heikin-Ashi oscillator, Adaptive Ergodic oscillator and others. With adequate knowledge on how to use these indicators and oscillators, you should successfully be able to set a good entry and exit point.

If using Fibonacci retracements to identify entry and exit points, for instance, you can use the “Fib Retracement” option on Tradingview.com. Plot the 1-day chart along a period of 3-4 months and then find the resulting retracement levels to find the desired entry and exit points of the trade. Just trace the high and low of your Fibonacci retracement, which are now your resistance and support levels. Usually, a bullish rally is stopped when it faces a FIb retracement while a further price drop is prevented when a strong support level is encountered.

Finally, candlestick chart signals such as hammers, shooting stars, bullish engulfing pattern, piercing pattern, bullish haramis, long upwards or downwards candlestick shadows and morning star are good indicators to look for when deciding your entry or exit a trade by setting a stop-loss or take-profit.

Many traders are finally able to successfully deal with high rates of price drops. This is by setting accounts with different cryptocurrency exchanges and when price is sharply falling on one, they can quickly turn over to a different exchange to sell and avert huge losses. This is because, usually, there will be price differences in different exchanges during these unpredictable times, no matter how meager those differences they are. They might turn so helpful for your portfolio.

There are some things you need to consider in developing an exit strategy as listed below:

1. How long you want to be in a trade

An exit strategy will vary depending on whether you are there to hold for long or for a short while. If you are in a given stock trade for more than one month, then you should be able set your profit targets in several years and this will definitely limit the number of trades you make. It is a good alternative to a flat buy-and-hold strategy because you will have an idea of  when to exit the trade. It is also advisable to limit your downside potential by locking in profits (using trailing stop-loss points).

Preserving capital is the primary goal for you long haulers or long-term investors. You should also set to take profits in increments over a period of time to reduce volatility while liquidating. You should also seek to allow for volatility in order to keep trades to a minimum, if you are in it for a long haul. A trader who's in for a long term should also create an exit strategy that is based on fundamental factors (and indicators) that are geared towards the long term.

For those aiming at a short term profit or with short term investment goals, it is necessary to set near-term profit targets to execute at opportune times in order to maximize profits. The common execution points are pivot point levels, Fibonacci/Gann levels, trend line breaks, and any other technical points.

Those geared for short term profits and having short term investment goals need to also come up with solid stop-loss points to get rid of holdings that do not perform. As a trader with short term goals, you should use technical or fundamental factors affecting the short-term.

Again, a very good tested strategy is to mix the long and short haul strategies -- and smiling that you will have the possible two types of results right in your hand when the game is over.

2. How much risk do you want to get exposed to?

The risk level is based on how much you can afford to lose when a trade goes all wrong. Unfortunately, in some cases, risk-cautious investors do not rake in as much profits when the rule holds that the higher the risk the higher the returns. But the rule won't hold always in volatile markets.

A risk assessment will help you determine how long you want to be in the trade and the type of stop loss you would want to use. In that case, you might delay selling and allow some more legroom downward the price curve if you assume more risk or just set tight stops if you want less risk.

You should also ensure to set your stop loss points such that they won't be set off by normal market volatility.

A stop loss point of 10% to 20% lower than what you bought is a good and safe bet if the beta indicator (an indicator that shows how volatile the stock is relative to the market) is between zero and two. Alternatively, you can set a lower stop loss if the stock has a beta indicator of more than three or find an important level to rely on such as a 52-week low, moving average or other significant point.

3. Where do you want to get out at?

A common tendency is to become attached to your holdings and refuse to take-profit when an asset is performing well and yet the fundamentals have already changed. DON'T. Also, many traders are likely to worry to the point of sell an under-performing asset (called panic selling) when there is no change in the underlying fundamentals. Both of these cases earn you a loss. The challenge is to know if the fundamentals have changed, or what is happening is just based on fake news or fads or false signals -- you can bet the signs will only be short-lived.

Long term investors in stock would want to set an exit point at a critical price level -- usually the company's yearly target -- while short-term investors set them at technical points such as certain Fibonacci levels, pivot points or other such points. That may be the case for many cryptocurrency traders because these factors change rapidly as events develop.

David Kariuki

David Kariuki likes to regard himself as a freelance tech journalist who has written and writes widely about a variety of tech issues that affect our society daily, including cryptocurrencies (see cryptomorrow.com and coinpedia.org); climate change (cleanleap.com), OpenSim and virtual reality (see hypergridbusiness.com). He is currently pursuing a MSc in Environmental Management at Open University. He does write here not to offer any investment advise but with the intention of informing audience, and articles in here are of his own opinion. Anyone willing to use any opinion here as advise to invest in crypto should obviously take own responsibility and accountability of their losses (or benefits) thereof. You can reach me at eqariu@gmail.com or david@cryptomorrow.com