Navigating the Volatility of Crypto Trading: Volatility refers to the extent and frequency of the fluctuation of the price of an asset. Each asset and investment vehicle in a trading or financial market experiences fluctuations, so it is something that traders have to learn to either avoid or take advantage of.
While volatility provides opportunities for potential profits, it can also result in substantial losses for traders who lack an understanding of it. In this article, we explore strategies that can either help you evade volatile situations that could hurt your returns or take advantage of volatility to your benefit.
Diversify
Diversification is one of the best ways to protect yourself and your investment from unpredictable and significant price swings. While you will usually see diversification mentioned alongside other investments like stocks, bonds, and real estate investing, it also applies to crypto trading.
Here, traders can buy different cryptocurrencies with different characteristics. For example, they can invest in stable options like Bitcoin and Ethereum for their stability and in other newer, less stable coins to take advantage of their volatility.
Diversification exposes you to numerous cryptocurrencies but, most importantly, blunts the effects of a single cryptocurrency taking a significant dip.
Switch to Stable Coins Momentarily
A stablecoin is a cryptocurrency that maintains a stable price by being pegged to another stable asset. Many stable coins are pegged to the value of the US dollar, while others are pegged to the value of commodities like gold and silver.
Their ability to maintain their values in periods of high volatility makes them the perfect haven for investors who want to wait out this period without exiting cryptocurrency trading and investing. They also work well for this strategy because of their fast transaction times.
You can switch from cryptocurrencies like Bitcoin to stablecoins like USDC relatively quickly, bypassing volatility on the latter that causes its price to fall below your comfort levels.
Embrace Volatility Trading
While many people turn away from volatility, volatility trading encourages traders to embrace it. It involves entering into a position based on a given cryptocurrency’s anticipated or already-realized volatility. Traders who use this tragedy aim to benefit from significant price fluctuations by buying options or trading the asset itself.
Traders can buy or sell potions to benefit from both in different ways. When buying options, traders can buy call or put options when they expect high volatility. If the asset’s price moves either up or down, their call and put options put them in a position to take advantage of this.
Trades can also sell options when they expect an asset’s price to remain stable or experience low volatility. With this strategy, the trader aims to collect the option premium, generating a profit if the final price at the contract’s expiry is low.
Traders can also directly trade the underlying asset. The two strategies they can use here are range trading and breakout trading. Range trading is where the trader sells and buys the underlying asset as long as its price remains between the support and resistance levels. Traders buy closer to the support level and sell when the price nears the resistance level.
Breakout trading happens when traders take positions when the asset breaks out of its support and resistance levels. They do this when they anticipate higher-than-normal volatility, with traders seeking to take advantage of significant price movements following a prolonged period of low resistance.
Avoid Leverage
Leverage is common in forex trading, and it entails getting a bigger market position using a small amount. For example, a 50:1 leverage allows you to hold a $50,000 position by investing $1000.
Leverage is also becoming more common in crypto trading where exchanges allow traders and investors to trade large positions using a margin and sizable ratio. The main reason people do this is that controlling larger positions means higher significant returns when the market moves in the direction they anticipated. However, there is also the issue of amplified losses when the market goes against their analysis.
Things worsen in volatile markets where price swings can wipe out your advantage and position in a few minutes. It is best to use your capital because losing it will mean you will not owe the broker anything. If you must use leverage, ask your exchange or broker to provide you with the lowest leverage possible.
Implement Risk Management Strategies
As mentioned, periods of high volatility present unprecedented risks to cryptocurrencies and trading positions. With cryptocurrencies already being challenging enough in this realm, all traders and investors should have robust risk management strategies in place. If you do not implement anything else, at least implement stop-loss orders. These stop trades when the value of a cryptocurrency falls below a specific threshold.
The cryptocurrency market is volatile, with prices swinging wildly over different periods. Traders and investors should know how to protect themselves and their investments from these swings. Fortunately, there are several strategies and simple changes to their approaches that can help with this if implemented correctly.
