There are numerous methods to make a profit by trading cryptocurrency. Trading strategies help the traders to arrange all the techniques in a well-organised framework which they can follow. Using this way, traders can constantly optimise and monitor their cryptocurrency trading strategies.
Two particular ways of thinking that a trader needs to consider while making a trading strategy are fundamental analysis (FA) and technical analysis (TA). We will explain the difference between these two and which applies where. Before going ahead, you need to make sure and understand the difference between these two.
As there are various trading strategies, here we will discuss some of the most important and common crypto trading strategies. This article focuses on effective, crypto trading strategies. Though, these trading strategies are also used and applied to other financial instruments such as shares, forex, metals, options, futures etc.
We will help you to understand the basics of the speculating approach in the crypto market. With a strong crypto trading strategy, you will be able to achieve your investment and trading goals efficiently.
What is a Trading Strategy?
A trading strategy is a concrete plan for all the trading activities that an investor or trader performs. It is more like a framework that investors make to guide themselves in all their trading endeavours.
A trading strategy also helps you by alleviating the financial risk as it puts an end to plenty of inessential decisions. It is not always compulsory to have a trading strategy but having a trading plan is life-saving sometimes. Because when something unexpected and unfortunate happens then, this trading strategy will tell you how to react instead of your emotions.
To rephrase it, having a trading strategy is like you are prepared for all likely consequences. Which shields you by making reckless and impetuous decisions that generally lead to substantial financial losses. A detailed strategy includes the following:
- Which asset you choose to trade
- Which setups you have
- Which indicators and tools you use
- What dominates your position sizing
- Which thing activate your entries and exits
- How do you measure and document your portfolio performance?
Active Trading Strategies
Active trading strategies need more attention and time. Active trading strategies are known as active because these strategies involve continuous monitoring and persistent portfolio management.
1. Day Trading
Day trading is one of the most known active trading strategies. In day trading, traders make enter and exit positions on the same day. Day traders aim to take advantage of intraday price movements that are price movements which happen in one trading day. In day trading, the market opens only for a few specific hours. So, the traders don’t stay in a position overnight.
Day trading was a bit difficult in the old days. But now most of the digital currencies trading platforms work 24/7 and 365 days. So now the scenarios are quite different in the crypto trading market. Day trading is a short term trading style where day traders enter and exit the position in a time span of 24 hours or less. Day trading demands speedy and fast decisions, which is not ideal for beginners.
To prepare the trade ideas, day traders typically use technical analysis (TA) and price action strategy. Apart from these strategies may use other techniques as well. For some traders, day trading could be highly profitable, and for some traders, it is quite stressful and may prove to be riskier. That is why day trading is recommended to advanced traders who have enough experience.
2. Swing Trading
Swing trading is just the opposite of day trading. It is a longer-term trading strategy in which traders hold the positions for more than one day but not longer than a few weeks or a month. Swing trading stands in the middle of both trend trading and day trading.
Swing traders take advantage of volatility waves which take many days or weeks to work out. They use a combination of fundamental and technical factors to put together their trading plans. Technical indicators and chart patterns play a vital role in swing trading. It is the most convenient and effective crypto trading strategy for experienced traders as well as for beginners.
A notable advantage of swing trading is that it takes a longer time to work out. Hence, it’s easy to keep track of the trades. Swing trading allows you more time to think about your decisions. This gives you enough time to think and react to trade. One more substantial benefit of swing trading is that you can make your decisions with less recklessness and rationality.
3. Trend Trading
Trend trading is also known as position trading. It involves holding a position for more extended time periods which is generally more than a month. Trend traders take advantage of directional trends. They enter an uptrend in a long position and go short in a downtrend.
Most of the time, trend traders use fundamental analysis, but it is not always necessary. Fundamental analysis works out in trend trading because in FA events take a long time to work out is the move that trend traders look for.
Trend trading strategy surmises that the underlying instrument will continue to move in the direction of the trend. Although, there is always a possibility of a trend reversal in trend trading, so the traders are required to take care of that.
Trend traders can also use trend lines, moving averages, and other technical indicators along with their strategy to reduce the financial risks and increase their success rate. Trend trading is considered to be safe for beginners if they do proper research and are able to manage risk.
The quickest trading strategy, out of all strategies, is scalping. Traders who use this trading strategy are known as scalpers. With scalping, they do not run behind big moves—scalping focuses on using small moves frequently. For example, making a profit from the inefficiencies in the market such as gaps in liquidity, profit from bid-ask spreads etc.
Unlike other trading strategies, in scalping, traders don’t hold their position for a long time. It is a common phenomenon to open and close positions in seconds in scalping. This is the reason, that’s why scalping is generally associated with High-Frequency Trading (HFT).
Scalping is an attractive trading strategy when a trader discovers market inefficiencies which happen frequently, and they can use them. Every time when inefficiencies occur, the traders make a small profit which grows over time. Scalping is ideal for those markets where liquidity is higher, so, entering and exiting a position is comparatively smooth and predictable.
It is an advanced trading strategy; hence, it is not recommended to newcomers because of its complexity. Scalping demands a deep understanding of the working of the markets. It is typically suitable for whales (large traders). Because the profit per cent is quite smaller hence, larger positions are required.
5. Buy and hold
“Buy and hold” is a type of passive investment strategy in which traders purchase assets planning to hold it for a long time no matter what are the market fluctuations. It is mostly used in long term investment portfolios where regardless of the timing, traders enter the market.
According to this crypto trading strategy, entry price or timing doesn’t matter much; the main focus is on the time frame. The buy and hold strategy is based on fundamental analysis, and there is not much requirement of technical indicators in it. Also, this strategy does not involve frequent monitoring of the performance of the portfolio. Traders can do it once in a while, and that is sufficient.
In the crypto world, HODL is a term used to describe the people who are likely to hold crypto despite the increment and decrement in the market. So, this HODL phenomenon is usually compared with buy and hold strategy.
Compared to other financial instruments and assets, cryptos are more volatile and riskier. This Buy and hold strategy works well on Bitcoin as it is a popular cryptocurrency. But it may not work well with other cryptocurrencies.
6. Index Investing
Generally, index investing is about purchasing indices and exchange-traded funds (ETFs) in conventional markets. However, the same type of facility is also available in crypto markets. It is available in both decentralised finance which is also called “Defi” and in centralised crypto exchanges.
The main purpose of the crypto index is to take a bucket of cryptocurrency assets and make a taken from that which tracks their overall performance. The bucket is made up of coins, whether from similar sectors like utility tokens and privacy coins. Or it could be entirely different, but it should have a valid price feed. Most of these tokens from the bucket do rely on blockchain oracles.
Now the question arises how can traders and investors can use crypto indexes? For instance, instead of choosing an individual privacy coin, the traders and investors can invest in a privacy coin index. Using a privacy coin index, they can mitigate the risk of betting on a single coin along with betting on privacy coins as a sector.
In the upcoming years, tokenised index investing will be more popular than ever before. It empowers an additional hands-off approach that is used to invest in the crypto market and blockchain industry.
Crypto trading : Bottom Line
Formulating a crypto trading strategy which fit your personality, style and financial goal is not an easy job. In this article, we have explained some of the most common and popular crypto trading strategies so that you can find which suits you best.
There is no need to break the rules that you have made for yourself to find out which strategy works best for you. You can maintain a trading sheet or journal so that you can evaluate the performance of every strategy. Also, there is no need to follow the same strategies forever. You can discover your own methods of trading with enough trading records and data. Also, we can say that over time your trading strategies will also evolve as you are getting more and more trading experience.