Like all investments, purchase price matters. The lower the purchase price, the more assets you can buy, and the more profit potential you’ll have. The ladder strategy can help you lower your average purchase price when entering into an investment.
Laddering is an easy-to-use strategy that helps you both take advantage of the high volatility of crypto and minimize your price risk, or the risk of being stuck with assets whose price goes down after purchase. Because, let’s face it, it’s impossible to time the market and know where a price will be at any given time.
The key here is putting in a number of “laddered” buy orders instead of buying your entire position at once. If you’re unfamiliar with creating buy or sell orders, read the basics of How to Trade on Exchanges.
For example, let’s say you’ve done some research and want to buy $2,000 worth of Ark. If Ark is currently trading at $4, your $2000 investment would give you 500 Ark if you bought it all at once. Unfortunately, it seems all too often that when you choose to buy your entire position at once, the price goes down soon after. This downward price movement can naturally lead to an emotional response that you should sell before realizing any further losses. Laddering can help you avoid this emotional response and make you feel more confident when entering into an investment.
So, instead of purchasing $2,000 of Ark at one time, we could instead create a schedule or “ladder” of limit orders like so:
Buy $500 Ark at $4.00 giving 125 Ark
Buy $500 Ark at $3.60 giving 138.88 Ark
Buy $500 Ark at $3.20 giving 156.25 Ark
Buy $500 Ark at $2.90 giving 172.41 Ark
If Ark happens to dip all the way to $2.90, you would end up with 592.54 Ark at an average price of $3.38, instead of 500 Ark at $4 each.
This allows for more flexibility when you enter into a new investment, and will hopefully allow you to have a lower overall cost basis (price per asset) for each of your investments.
However, there is no guarantee that Ark will drop in price after your initial entry point, or that it would stop dropping after $2.90. But consistently using a strategy such as this can help an investor accumulate more assets per dollar invested, as some assets will inevitably drop below the price of your initial entry point.
There is no one correct way to create a ladder. You may wish to implement a larger schedule of orders, buying fewer assets at each price level. Or if you’d like to create a more advanced ladder based on the price history of the asset you plan to purchase, your schedule of buy orders can match up with previous resistance levels.
You can also use the ladder strategy to set sell orders at prices you wish to take profits. But remember, while every investor should consider capturing profits on investments, it also creates a taxable event. When to take profit and how much profit to take could vary greatly depending on each investor’s financial situation and investment goals.