It can be unnerving and intimidating to watch a sharp drop in assets in your portfolio. At the same time, it is actually completely normal and part of the underlying dynamics of the market. In fact, corrections are a sign of healthy markets as price reverses from an abnormal bounce to its long-term, established trend.
There is no specific rule that defines what is correction. Most traders consider a fast 10% drop in asset price from its recent peak as a correction, and anything above 20% signals a potential trend reversal (although for bitcoin this value could be more than 30%).
S&P 500 has gone through a slight 5% correction three times a year, a 10% correction every sixteen months, and a serious 20% fall every seven years. Corrections last 43 days on average.
The last major drop occurred in early 2020, when the Covid-19 pandemic forced investors to flee the market, however, within five months, the index fully recovered and set new all-time highs.
Crypto assets are much more volatile than all the currencies of traditional stock markets combined. Corrections in the 5-10% range are more common, and serious corrections of 20% certainly occur much more frequently than once a year. At the same time, frequent corrections are counterbalanced by equally frequent recoveries. For example, in early March 2021, BTC fell 12% in just two days, but recovered and surpassed the previous high just four days after that.
Most traders try to anticipate corrections by selling high and buying downturns.
While it is certainly possible to profit from trading volatility, making short-term profits, trading the ups and downs of the market, it is always more sensible to calculate the market and stick to an effective strategy, as catching the market rarely works in the long run. Most people lack the self-discipline to pursue a winning investment strategy when adjusting the markets. They also tend to take trades at the wrong time, leading to even bigger losses.
But if instead you trade with the trend, move crypto assets and trade long, then market corrections affect your strategy to a lesser extent. Hodl can help you time the dollar value averaging strategy. However, it can be overwhelming to see a major correction that minimizes any gains you have made over an extended period.
When a row of red candles is watching you from the screen, worthy of a royal funeral, it is important to remember that corrections are normal, expected and beneficial for long-term continuous growth. Even in traditional markets, financial planners expect one in every four calendar quarters to generate negative returns.
Broadly speaking, the way to limit the impact of adjustments on your portfolio is to diversify across assets and industries, both geographically and fundamentally. For example, the rotation of technology stocks, which began in February 2021, was quite serious, but stocks in the financial, transportation and retail sectors were not affected.
Narrowly speaking, there isn’t much to do in the cryptocurrency section of your portfolio if you’re investing with a long-term perspective. Many of the major crypto assets have roughly similar price movements, so there is no real way to diversify your path to security to guard against adjustments. You can set your stop loss at specific levels to define the boundaries of how much you are willing to lose in a major retracement.
However, be careful with this game – your sell orders can be intercepted during a sudden crash and you end up selling good positions for no reason. Always stay in the field of risk management!
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