The Art of Catching Knives - Limit Orders & Market Volatility
There is a common phrase often used across different investing markets, "Don't try to catch a falling knife" which is most often meant as a warning for those buying assets as they are still going down in value. Investors say this because no one likes the feeling they get after trying to buy the dip before it continues dipping even further and further. It is not easy to time the bottom when buying the dip and sometimes you aren't even able to connect to the platforms to trade during those critical moments where timing is everything, there's only so much that you can do in these situations.
When trying to buy the dip one thing that can be done is using limit orders to buy instead of doing it at the current market price, if you are able to do this ahead of time before the dips happen then the buy orders will fill and amount to some decent returns once the price recovers.
Limit orders vs market orders
Limit orders will place a buy/sell order at the "limit" price, executing the trade once it reaches the price you've set to buy or sell at.
Market orders will place a buy/sell order at the "market" price, executing the trade as quickly as possible by purchasing from existing sell orders.
My strategy with creating buy orders is to start out by making multiple orders across a range of prices that I believe are around key support levels, then I create additional buy orders between those orders spacing them out across a range of prices until I am satisfied with the spread I've created. I like to think of it as a net or a web to catch the price as it falls into my target range, if the price drops into the buy zone then it will buy more as the price falls deeper into it. If the price recovers and you still have some buy orders leftover then that means you successfully bought the dip and managed to buy some near the bottom too.
When creating sell orders I like to take profits in small increments as the price grows to what I believe are prices just below key resistance levels, this helps ensure that my orders fill before price corrections prevent an investment from reaching price points that are psychologically significant.
Platforms with limit orders
Voyager limit orders have no fees, instead taking a cut of the difference between your set price and the price they pay
(you get $25 in BTC once you trade $100 in crypto)Coinbase Pro limit orders have 0.5% maker/taker fees
(you get $10 in BTC once you trade $100 in crypto)Crypto.com limit orders have 0.1% maker and 0.16% taker fees but the exchange is not available in the USA yet
(you get $25 in CRO once you stake CRO for a debit card)Binance.US limit orders have 0.1% maker/taker fees
(you get $30 once you trade $100 in crypto)KuCoin limit orders have 0.1% maker/taker fees
Cash App limit orders have a service fee + an additional fee
(you get $5 if you send someone $5 within 14 days)
Out of the above mentioned platforms Voyager is my currently favorite option for using limit orders because I can earn interest on my holdings while the limit orders are set up. Once Crypto.com launches their exchange in the USA I will start using that for limit orders as well, KuCoin's limit orders will be useful for selling AMPL tips from here.
After creating enough limit orders all you have left to do is wait for the market to move, instead of watching the charts you can go on living your life knowing that a notification will let you know when any orders are filled. It can create a win/win situation for yourself where if the price goes down you get a notification telling you that you've successfully bought the dip and when the price goes up enough you get a notification letting you know you've successfully taken profits.
I am not too worried about the short term price action for the cryptocurrency market, things might look ugly on the charts right now but thanks to this volatility in the market lately I've been able to stack a lot more crypto than what I thought I was going to do in the short term. Every paycheck I am creating new buy orders, if we really are going into a bear market then I am prepared to ride this out by catching knives all the way down to the bottom because I believe that it will amount to long term gains in the future.
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This article is intended for informational purposes only and should not be considered financial advice. Please do your own research before making any financial decisions.