Brought to you by the Liquid team to help you make sense of crypto.
Knowing when to take profit is one of the key factors that distinguishes profitable cryptocurrency traders from unprofitable ones.
In order to know when to take profit, it’s important to have a plan before entering a position.
- Why are you entering the trade?
- Where do you expect this trade to take you?
- What's your plan if the market turns against you?
In this post, we’ll look at some suggestions for how to determine when to take profit.
The volatility of cryptocurrency is a double-edged sword. Multiple 4-5% moves within the span of an hour with occasional 40-50% spikes are commonplace – something unheard of in traditional markets.
Crypto markets are also much more accessible because most exchanges don’t require a minimum balance to start trading.
Combining these two key factors, we end up with a situation where inexperienced traders can be presented with a life-changing financial opportunity in the form of volatility – but sometimes newcomers fall into the trap of letting their emotions dictate their trades.
Controlling our emotions
Take-profit strategies won't work if can't keep your emotions in check.
Try not to let yourself fall into a routine of waiting for more gains after your profit targets have been hit.
We saw the results of this kind of mindset during the 2017 bull run. There are many stories of traders who sat through massive gains without taking profit.
when prices turned, some traders saw their portfolios dwindle.
Keep your emotions in check, make a plan and stick to it.
A take profit strategy
Some people like to exit their entire position at once, while others prefer to ladder exit orders across a range of prices.
If you’re in the latter group, it’s important to always set a stop loss order to prevent losing all your gains.
Here’s an example of how to set a stop loss order:
If you enter a 1 BTC long position at 3,300 USD and exit 50% of the position at 4,000 USD for 350 USD of profit, you could set a stop loss order at break-even (3,300 USD) to prevent losing money.
Later on, if you see BTC starting to weaken, you have the option to close the original order completely. By setting a stop loss order at break-even, you can ensure you won’t lose money on an already profitable trade.
When to take profit?
The question of when to take profit can be answered by technical analysis in most cases.
Here are a few strategies that will help you determine when to close a position and call it a day.
Be on the lookout for divergence
Divergence between price action and relative strength index (RSI) is a great tool for finding profitable entry and exit prices. The 4-hour ETH/USD chart below shows an example of divergence between the price action and RSI.
In this theoretical situation, let’s say you enter a long position after A.
At the next price peak, B, RSI also makes a higher high. This means there is strong buy-side momentum that is driving price upward – a good sign.
C could be a good place to sell part of your position and set a stop loss order at break-even. At C, price retests the resistance level formed by the previous high with a steep drop on the RSI. After a period of consolidation, Ethereum (ETH) makes one final wave upward to 164 USD.
In this case, D could be the place to close out the majority of your position. Even with the nearly 20 USD move to the upside, ETH registered a lower high on the RSI indicator – a bearish signal.
Pay attention to Fibonacci levels and pivot points
As a trader, you can take advantage by paying close attention to Fibonacci levels, especially during retracements.
In most cases, there will be some sort of reaction off different Fibonacci levels, which can provide a temporary liquidity pool for you to close a position and take profit.
In the BTC/USD 4-hour chart below, we can see an upward move from 3,150 USD to 4,250 USD. Following the local top, A, BTC retraces down to 3,700 USD (B), consolidates for a little while, and then makes another move down to 3,550 USD (C) before another uptrend occurs.
Overlaying a Fibonacci retracement chart on top of price action reveals that the retracement down to B corresponds exactly with the 0.5 Fibonacci level, while the subsequent move down to C hit the 0.618 Fibonacci level.
So, if you open a short position on BTC somewhere around A, the 0.5 and 0.618 Fibonacci levels could be logical places to either reduce your exposure or close your position.
In addition to Fibonacci levels, it’s also common to see price reactions at pivot points.
If you never take profit, you’re never going to make money. Keep emotions at bay and stick to your plan when trading. Next time you find yourself in a profitable trade, think about whether it's time to lock in some of those gains – profit is profit.
This content is not financial advice and should not form the basis of any financial investment decisions nor be seen as a recommendation to buy or sell any good or product. Trading cryptocurrency is complex and comes with a high risk of losing money, particularly if you trade on leverage. You should carefully consider whether trading cryptocurrencies is right for you and take the time to learn how trading works and decide how much money you are prepared to lose.
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