Beginner’s Guide to Cryptocurrency Trading Strategies

Introduction to Cryptocurrency Trading Strategies

There are countless ways to profit from cryptocurrency trading. Trading strategies help you organize these techniques into a coherent scheme that you can follow. You will be able to continuously monitor and optimize your trading strategy in this manner.

The two main schools of thought to consider when establishing a trading strategy are technical analysis (TA) and fundamental analysis (FA). We will distinguish them in relation to the strategy to which they are applied, but before continuing, make sure you understand the differences between both concepts.

We’ll go over some of the most common trading strategies because there are so many. The purpose of this article is on cryptocurrency trading strategies. However, the same can also be applied to other financial assets -for example, forex, stocks, options, or precious metals such as gold.

So, would you like to design your own trading strategy? This article will help you with the basic principles of how to approach speculation in crypto markets. With a solid trading strategy, you are more likely to achieve your trading and investment goals.

What is a trading strategy?

We can define a trading strategy as a comprehensive plan for all your operations related to said activity. It is a framework that you create as a guide for all your trading initiatives.

A trading plan can also help to reduce financial risk by eliminating many unnecessary decisions. Although having a trading strategy is not required to carry out this activity, it can be useful at times. If the unexpected happens in the market (and it will), you should react according to your trading plan rather than your emotions. To put it another way, having a trading strategy in place will assist you in anticipating possible outcomes. Preventing you from making hasty or impulsive decisions that can result in significant financial losses.

For example, a comprehensive trading strategy might include the following elements:

• what asset categories do you trade
• what settings do you choose
• what tools and indicators do you use
• What causes you to enter and exit? (placement of your stop loss )
• what dictates the sizing of your position
• how you document and measure the performance of your portfolio

Additionally, your trading plan may contain other general guidelines as well, and even address minor details. For example, you can determine that you will never trade on Fridays, or when you feel tired or sleepy. Or you can set a trading calendar, whereby you would only trade during specific days of the week. Still checking the Bitcoin price over the weekend? Always close your positions before the weekend arrives. Such a personalized guide can also be included in your trading strategy.

This will cover two types of trading strategies: active and passive.

As you will see shortly, the definitions of trading strategies are not strict – so they can overlap. In fact, it may be interesting to consider a hybrid approach that combines multiple strategies.

Active Trading Strategies

Active strategies necessitate more time and effort. They are called active because they require constant monitoring and portfolio management.

Day Trading

Day trading is possibly the best known active trading strategy. It is a very common misconception that all active traders are, by definition, day traders – as this is not true.

Day trading entails opening and closing positions on the same day. Thus, the goal of “day traders” is to capitalize on intraday price movements – that is, those that occur during the course of a trading day.

The term “day trading” comes from traditional markets, where it is only possible to trade during certain specific hours of the day. Therefore, in such markets, day traders will not be able to hold their positions overnight – when trading activity stops.

The majority of digital currency trading and exchanges are available 24 hours a day, 365 days a year. Therefore, the concept of day trading is used in a slightly different context when it comes to crypto markets. Generally, it refers to a short-term style of trading, in which traders enter and exit positions within 24 hours or less.

Day traders routinely use price action and technical analysis to come up with trade ideas. In addition, they can employ many other techniques to find market inefficiencies.

Cryptocurrency day trading can be very profitable for some people, but it is often quite stressful, demanding and can carry high risk . Therefore, day trading is recommended for more advanced traders.

Day trading can be a profitable endeavor. However, it’s important to remember that it’s also one of the riskiest ways to deal with cryptocurrencies. If you want to see long-term gains, you must understand the details of how to day trade crypto.

The first way to reduce this risk is to gain a thorough understanding of the cryptocurrency market before devising and implementing a sound strategy. If you take these precautions, you, too, can become a successful crypto day trader.

Swing Trading

Swing trading is a longer-term type of trading strategy, which involves holding positions for more than a day – though usually not exceeding a few weeks or a month. In a sense, swing trading falls somewhere between day trading and trend trading.

Swing traders typically try to profit from waves of volatility that develop over several days or weeks. Swing traders may develop trade ideas by combining technical and fundamental factors. Of course, changes at a fundamental level can take longer to occur, and that’s where fundamental analysis comes in. However, chart patterns and technical indicators can also play a prominent role in a swing trading strategy.

Swing trading is possibly the most suitable active trading strategy for beginners. A significant advantage of swing trading over day trading is that swing trades take longer to develop. And yet, they are short enough that they are not too difficult to follow.

This gives traders more time to think about their options. They usually have enough time to react to how the trade is developing. With swing trading, decisions can be made less hastily and more rationally. In contrast, day trading often requires quick decisions and nimble execution, which is not ideal for beginners.

Trend Trading

Sometimes also known as position trading, trend trading is a strategy that involves holding positions for a longer period of time, usually few months. As the name suggests, trend traders try to take advantage of directional trends. Trend traders can enter a long position in an uptrend and a short position in a downtrend.

Trend traders will generally use fundamental analysis, but this may not always be the case. Fundamental analysis, on the other hand, looks at events that can take a long time to occur, and these are the moves that trend traders try to profit from.

The assumption behind a trend trading strategy is that the underlying asset will continue to move in the trend’s direction. However, trend traders should also be aware of the possibility of a trend reversal. As such, they can also incorporate moving averages, trend lines, and other technical indicators into their strategy to try to increase their success rate and mitigate financial risks.

Trend trading can be ideal for beginner traders if they do their due diligence and manage risk properly.

Scalping

Scalping is one of the fastest trading strategies out there. Scalpers do not try to take advantage of big moves or long trends. It is a strategy that focuses on exploiting small moves over and over again. For example, taking advantage of bid-ask spreads, gaps in liquidity, or other inefficiencies in the market.

Scalping is a trading strategy that allows making a small profit on a large number of trades, resulting in a larger profit. Scalping is a strategy that involves using a large amount of liquidity (currency) to profit from small price changes over a short period of time. The time horizon is usually a few minutes, but it can be as short as a few seconds or as long as several hours.

Scalpers do not plan to hold their positions for an extended period of time. Scalpers have frequently seen opening and closing positions in a matter of seconds. Scalping is often associated with high-frequency trading (HFT) because of this.

If a trader discovers a market inefficiency that occurs frequently and can be exploited, scalping can be a very profitable strategy. They can make small profits each time it happens, which add up over time. Scalping works best in more liquid markets were entering and exiting positions is relatively easy and predictable.

Scalping is a more advanced trading strategy that, due to its complexity, is not recommended for novice traders. It also necessitates an in-depth knowledge of market mechanics. Scalping, on the other hand, is generally more suitable for large traders ( whales ). Because profit percentage targets are typically lower, trading larger positions makes more sense.

Passive Investment Strategies

Passive investment strategies allow for a more direct approach, where portfolio management requires less time and attention. While there are differences between trading and investing strategies, trading ultimately means buying and selling assets in the hope of making a profit.

Buy and Hold

“Buy and hold” involves traders buying an asset with the intention of holding it for a long time, regardless of market fluctuations.

This strategy is generally used in long-term investment portfolios, where the idea is simply to enter the market without regard to time. The idea behind this strategy is that over a long enough period of time, the time or the entry price will not matter much.

Technical indicators are rarely used in the buy and hold strategy, which is almost always based on fundamental analysis. The strategy also probably doesn’t involve monitoring the portfolio’s performance frequently, just once in a while.

The HODL phenomenon can be compared to the buy and hold strategy, despite the fact that Bitcoin and other cryptocurrencies have only been around for a little over a decade. Cryptocurrencies, on the other hand, are a risky and volatile asset class. While the buy and hold strategy for Bitcoin is well-known in the cryptocurrency world, it may not be appropriate for other cryptocurrencies.

Investment In Indices

Buying ETFs and indices in traditional markets is typically what index investing entails. This type of product is, however, also available on cryptocurrency exchanges. Both within the Decentralized Finance (DeFi) movement and on centralized cryptocurrency exchanges.

A crypto index is a token that tracks the performance of a basket of cryptocurrency assets. Coins from the same industry, such as privacy coins or utility tokens, can be placed in this basket. It could also be something entirely different, as long as the price remains consistent. As you might expect, the majority of these tokens rely heavily on blockchain oracles.

What are the benefits of crypto indices for investors? They could, for example, invest in a privacy coin index rather than a single privacy coin. In this way, they can bet on privacy coins as a sector while eliminating the risk of betting on a single coin.

Investing in tokenized indices is likely to become more popular in the coming years. It makes it possible to take a more direct approach to invest in the blockchain and cryptocurrency markets.

Conclusion

Designing a crypto trading strategy that suits your financial goals and personality style is no easy task. We reviewed some of the most common cryptocurrency trading strategies, so hopefully, you can figure out which one suits you best.

In order to know what really works and what doesn’t, you must follow and follow each trading strategy, without breaking the rules that you establish. It is also helpful to create a journal or trading sheet so that you can analyze the performance of each strategy.

It’s worth noting, however, that you don’t have to stick to the same strategies indefinitely. If you have enough data and trading records, you should be able to adjust and adapt your methods. To put it another way, as you gain trading experience, your trading strategies should evolve as well.

It can also be beneficial to allocate different parts of your portfolio to different strategies. In this way, you can track the individual performance of each strategy while exercising proper risk management.