A cut loss strategy is where your crypto asset position is closed to prevent further losses. The cut loss strategy is designed to minimize the potential loss that can occur in a position. If you feel that after passing a certain price the market will continue to lose, you can choose to close the position to stop the loss from getting worse, that’s why it is called “cut loss”.
Types of Cut Loss Strategies
There are three main cut loss strategies in crypto asset trading. They are each important in their own way for determining the best course of action for a losing position.
- Full cut loss
With a full cut loss strategy, all positions will be closed at a certain level. This is especially useful when the market is highly volatile and unpredictable, making it very difficult to analyze rationally. To prevent further losses that are almost guaranteed to occur, this type is very effective.
- Partial cut loss
With a partial cut loss strategy, only a portion of the position will be closed. This is a common strategy when the market is a little volatile and you only want to close half a position just to be on the safe side. The other half will still have the opportunity to incur a loss or gain as it remains open, allowing you to profit from the market once volatility has decreased.
- Drifting Cut Loss
With a drifting cut loss strategy, the price at which the position will be closed is predetermined. It keeps fluctuating with price. The drifting distance is the difference between the cut loss level and the current price of the crypto asset. If the price of a crypto asset goes up, the price at which the planned loss cuts will go up with it, and vice versa.