Cut loss strategy is better than running out all of your funds. In cryptocurrency trading, there are 3 types of cut loss strategies that you need to know.

A cut loss strategy is where your cryptocurrency position is closed to prevent further losses. A cut loss strategy is designed to minimize the potential loss that could occur in a position. If you feel like after crossing a specific price the market is going to continue in loss, you can choose to close the position to stop the loss from getting worse, hence the name "cut loss".

Cut Loss Strategy

 

Types of Cut Loss Strategies

There are three main cut loss strategies in cryptocurrency trading. They’re each important in their own ways in order to determine the best course of action for a position in loss.

 

Full Cut Loss

With a full cut loss strategy, the whole position will be closed at a certain level. This is extremely useful when the market is very volatile and unpredictable, making it extremely hard to be analyzed rationally. In order to prevent any further loss which is almost guaranteed to occur, this type of cut loss strategy is very effective.

 

Partial Cut Loss

With a partial cut loss strategy, only a portion of a position will be closed. This is a common strategy when the market is slightly volatile and you only want to close half the position just to be on the safe side. The other half will still have a chance to incur a loss or profit since it remains open, enabling you to gain from the market once the volatility decrease.

 

Drifting Cut Loss

With a drifting cut loss strategy, the price at which the position would be closed is previously decided. It's constantly fluctuating with the price. The drifting distance is the difference between the cut loss level and the current price of the cryptocurrency. If the price of the cryptocurrency rises, the price at which the cut loss was planned will rise with it, and vice versa.

 

Example of a Cut Loss Strategy

  1. You buy into Bitcoin (BTC) at a market price of $60,000.
  2. You realize the market price is significantly dropping and is now at $58,000, therefore making your position currently in the loss.
  3. You decide to cut loss using a full cut loss strategy at $55,000.

The chart below illustrates how the cut loss strategy is applied:

Cut Loss Strategy in Bitcoin

When the market decides to touch $55,000, the position will be automatically closed. On the chart, you can see that the price is not going up after falling from $58,000 and $55,000 so applying a cut loss strategy can really save you from big loss.

 

Benefits of a Cut Loss Strategy

Here are some top benefits a cut loss strategy can bring to your crypto trading experience:

  • Is an effective risk management strategy to cap losses.
  • Prioritizes safekeeping of your capital by preventing a margin call.
  • Acts as a safety net when the market becomes extremely volatile.

 

Risks of a Cut Loss Strategy

Here are some top risks associated with using a cut loss strategy while trading cryptocurrency:

  • Can be disadvantageous if the market starts to reverse and move in your favor after the cut loss.
  • Cut loss could be triggered earlier or later due to slippages.
  • During extreme volatilities, the broker may not execute the cut loss order due to high demand.
Tell us what you want to find

Considering the risk, is cut loss still recommended if you want to be profitable? To answer such question, you need to weigh in the amount of manageable losses versus unexpected losses due to market uncertainties. Isn't it better to lose what you can accept than risk losing all money because of unpredicted volatility?

 

Cut loss can be planned beforehand or executed as a last-ditch effort to save some of your funds. When it is carefully planned, the order used is typically called a stop loss order. Learn about it further in Why Do You Need Stop Loss in Crypto Trading?