How should investors approach a crypto market correction?
The crypto market has witnessed a deep correction for the last couple of weeks with a 30% drop from $2.3 trillion to $1.6 trillion in total market capitalization. Even though it seems like a difficult situation for most investors, true value creation happens during a bear market, and there are ways to make the most of the market correction.
Even though these extreme price fluctuations are alarming for new investors, they are quite normal for experienced crypto investors. Trading analysts and experienced investors recommend leveraging the market correction as an opportunity to buy assets “at a discount”.
Let’s take a look at crypto market corrections and the strategies that help to leverage the current market correction.
What is a crypto market correction?
Although the exact definition of a crypto market correction varies from place to place, in general, it describes a rapid decrease by 10-20% in prices across the market Corrections typically happen following an abnormal surge in price, and after a period of time, the correction typically returns the price to its long-term established trend. If the price decreases more than that, then we call it a market crash.
There can be several reasons for a market correction, such as low trading volumes, technical factors, or market sentiment. Market corrections are quite regular in the crypto industry and they last from a few days or weeks to several months. When a correction happens, the market will often return to its previous trend, or in some cases, it can lead to a larger decline resulting in a bear market.
Significance of automated crypto trading during a correction
During a market correction, it’s common for emotions to run high with fear, uncertainty, and doubt (FUD). It’s also possible that because of these emotions, investors panic sell or execute transactions that are ill-suited for their portfolios. Trading bots come in handy to avoid these kinds of scenarios during a market correction because they don’t run on emotions, but rather logic and data.
Crypto trading bots are designed to follow a set of rules and instructions. Even though they are efficient in making transactions, investors need to create a carefully-crafted trading strategy for a bot, because it can’t predict unforeseen challenges in the market. Investors need to take extra caution while choosing a trading bot strategy.
While a correction helps investors to buy assets at lesser prices, the major concern is determining when a correction will occur. By leveraging the decreased prices of cryptocurrencies during a market correction, crypto trading bots play a major role. Automated trading with the help of bots is crucial to determine the best time to buy or sell cryptocurrencies by considering signals and indicators so you can take advantage of the market.
Strategies to apply during a market correction
Let’s discuss two strategies that help crypto investors approach a market correction without any FUD.
When a market correction happens, the prices are expected to go back to normal trends. Reversion strategy is based on the idea that the rates will return to a mean value after a certain point in time. In practice, this strategy identifies the upper and lower limits so that your trading bot will execute transactions when the price surpasses the usual range.
Reversion strategy is beneficial when the prices hit new highs or new lows as it helps investors to gain profits from the market trends. However, investors need to remember that prices may not go back as quickly as expected while employing this strategy.
Dollar-cost averaging (DCA)
The dollar-cost averaging method is often recommended for long-term trading strategies. By using this strategy, investors don’t have to worry about the perfect time or a decrease in price to buy cryptocurrencies. With the DCA strategy, trading bots can place a single buy order and continue to purchase additional orders if the price decreases to a certain limit.
Assuming that the market will correct itself back to the normal trend, investors can make profits by selling assets once the price rises once more.
Cryptohopper - crypto trading bot
Cryptohopper enables crypto investors to leverage the market and earn profits. Cryptohopper’s strategy designer allows investors to leverage strategies including dollar-cost averaging, trailing stop-loss, and historical backsetting.
The platform also helps new users by providing strategy templates, a comprehensive tutorial section, and a learning academy. The simulated paper-trading feature allows investors to validate a strategy before implementing it in real-time. Traders can choose from more than 30 technical indicators and 90 candlestick patterns to create a well-researched trading strategy.
In the crypto market, corrections of 5-10% are more frequent when compared to traditional markets like stocks because digital currencies are highly volatile. On the flip side, market recoveries are also similarly frequent in the crypto market. Investors cannot be in front of the screens 24/7 to make decisions based on price changes. A smart investor leverages strategies and tools to trade more effectively during a crypto market correction.