There are countless ways to benefit from trading with crypto. Cryptocurrency trading strategies help you organize these techniques into a coherent framework that you can follow. This way, you can constantly monitor and optimize your cryptocurrency strategy.
The two key perspectives you should consider when creating a trading strategy are technical analysis (TA) and fundamental analysis (FA). We’ll break down which applies to which of these strategies, but make sure you understand the differences between these concepts before you go any further.
Since there are many different cryptocurrency trading strategies, we’ll cover some of the most common ones. This article focuses mainly on cryptocurrency trading strategies. However, these can also apply to other financial assets such as foreign exchange, stocks, options or precious metals like gold.
So would you like to create your own trading strategy? This crypto tutorial will help you with the basics of how to approach speculation in the crypto markets. With a reliable trading strategy, you are more likely to achieve your trading and investment goals.
What is the trading strategy?
We can describe a trading strategy as an extensive program for all your trading activities. It is a framework that you create to guide you through your every trading venture.
A trading program can also help mitigate financial risk by eliminating many unnecessary decisions. Although having a trading strategy is not mandatory for trading, sometimes it can be a lifesaver. If something unexpected happens in the market (and it will), your trading plan should dictate your reaction – not your emotions. In other words, having a trading program prepares you for possible outcomes. It prevents you from making hasty, impulsive decisions, which often lead to large financial losses.
For example, a comprehensive trading strategy might include the following:
- which asset classes you use in your trading
- which settings you make
- what tools and indicators you use
- what triggers your entries and exits (stop loss entry)
- what dictates the size of your position
- how you document and measure the performance of your portfolio
In addition, your trading plan may also contain other general instructions and even some minor details. For example, you may specify that you never trade on Friday or that you never trade if you feel tired or sleepy. Or you can set up a trading schedule so that you only trade on certain days of the week. Do you continue to check the price of bitcoin over the weekend? Always close your positions before the weekend. Personalized guidance like this can also be included in your trading strategy.
Creating a trading strategy can also include verification with future and posterior testing. For example, you could run trading simulations on the Binance PSP testnet.
In this article, we will look at two types of cryptocurrency trading strategies: active and passive.
As you will soon see, the definitions of cryptocurrency trading strategies are not necessarily strict and may overlap. In fact, it may be worth considering a hybrid approach by combining multiple strategies.
Active Cryptocurrency Trading Strategies
Active strategies require more time and attention. We call them active because they involve constant monitoring and frequent portfolio management.
Day trading is probably the most well-known active trading strategy. It is a common misconception to believe that all active investors are by definition day trading investors, but this is not true. Day trading involves entering and exiting positions on the same day. As such, day-trading investors aim to capitalize on intraday price changes, i.e. price changes that occur within a trading day.
The term “day trading” comes from traditional markets, where trading is only open at certain times of the day. Thus, in these markets, day-traders never stay in positions overnight when trading is interrupted. Most digital currency trading platforms are open 24 hours a day, 365 days a year. Therefore, day trading is used in a slightly different context when it comes to crypto markets. It usually refers to a short-term trading style, where investors enter and exit positions in a 24-hour period or less.
Day traders typically use price movement and technical analysis to formulate trading ideas. Besides, they may use many other techniques to identify inefficiencies in the market. Day trading cryptocurrency can be highly profitable for some, but it is often quite stressful or demanding and can involve high risk. Therefore, day trading is recommended for more advanced investors.
Swing trading is a type of long-term trading strategy that involves holding positions for more than one day, but usually no more than a few weeks or a month. In some ways, swing trading is something between day trading and trend trading.
Swing trading investors generally try to take advantage of volatility waves, which take several days or weeks to develop. Swing trading investors can use a combination of technical and fundamental factors to formulate trading ideas. Of course, fundamental changes can take longer to take place, and this is where fundamental analysis comes into play. Even so, chart patterns and technical indicators can also play an important role in a swing trading strategy.
Swing trading might be the most convenient active trading strategy for beginners. A major advantage of swing trading over day trading is that swing trades take longer to execute. However, they are short enough that it is not too difficult to keep track of the trade.
This gives investors more time to consider their decisions. In most cases, they have enough time to react to the development of the trade. With swing trades, decisions can be made with less haste and more rationality. On the other hand, day trading often requires quick decisions and immediate execution, which is not ideal for a beginner.
Trend trading, often referred to as position trading, is a strategy that involves holding positions for a longer period of time, usually for at least a few months. As the name suggests, trend trading investors seek to take advantage of directions in the trend. Trend trading investors may enter a long-term position in an uptrend and a short-term position in a downtrend.
Trend trading investors usually use fundamental analysis, but this may not always be the case. Even so, fundamental analysis looks at events that may take a long time to occur – and these are the moves that trend trading investors try to take advantage of.
A trend trading strategy assumes that the underlying asset will continue to move in the direction of the trend. However, trend trading investors must also take into account the possibility of a trend reversal. Therefore, they may 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 novice investors if they do their due diligence and manage risk properly.
Scalping is one of the fastest cryptocurrency trading strategies available. Scalping investors are not trying to profit from big moves or prolonged trends. It is a strategy that focuses on taking advantage of small moves over and over again. For example, on profiting from the difference between the buy and sell price, liquidity gaps or other market inefficiencies.
Scalping investors do not aim to hold their positions for a long period of time. It is quite common to see scalping investors opening and closing positions in a matter of seconds. This is why scalping is often associated with High-Frequency Trading, or HFT.
Scalping can be a particularly profitable strategy if an investor identifies a market imperfection that occurs over and over again that can be exploited. Each time it happens, they can make small profits, which add up over time. Scalping is generally ideal for markets with higher liquidity, in which the entry and exit of positions is relatively smooth and predictable.
Scalping is an advanced trading strategy that is not recommended for novice traders due to its complexity. It also requires a deep understanding of the mechanics of the markets. Apart from this, scalping is generally more suitable for high volume investors (whales). The targets for the profit rate tend to be smaller, so trading larger positions makes more sense.
Passive Cryptocurrency Trading Strategies
Passive investment strategies allow for a more detached approach, in which portfolio management requires less time and attention. While there are differences between trading and investment strategies, trading ultimately means buying and selling assets for profit.
Buying and holding
“Buy and hold” is a passive investment strategy in which investors purchase an asset that they intend to hold for a long period of time, regardless of market fluctuations.
This strategy is typically used in portfolios with long-term investments. The strategy consists of entering the market without regard to any time frame. The idea behind this strategy is that, over a long enough period of time, the timing or entry price will not matter much.
The buy and hold strategy is, almost always, based on fundamental analysis and usually not derived from technical indicators. The strategy also probably will not involve frequent monitoring of portfolio performance – only from time to time.
Although Bitcoin and cryptocurrencies have only been around for a little over a decade, the HODL phenomenon could be compared to a buy and hold strategy. However, cryptocurrencies are a risky and volatile asset class. While buying and holding Bitcoin is a well-known strategy in the cryptocurrency space, the buy and hold strategy may not be appropriate for other cryptocurrencies.
Typically, index investing means buying ETFs and indexes in traditional markets. However, this type of product is also available in the cryptocurrency markets. Both on centralized cryptocurrency exchanges and in the decentralized finance (DeFi) movement.
The idea behind a crypto index is to take a basket of crypto assets and create a token that tracks their combined performance. This basket could consist of coins from a similar domain, such as privacy coins or utility tokens. It could be something completely different, as long as it has a reliable price feed. As you can imagine, most of these tokens are heavily based on oracle’s blockchain.
How can investors use crypto tokens? For example, they could invest in a cryptocurrency index instead of choosing an individual cryptocurrency. This way, they can bet on crypto currencies as a domain, eliminating the risk of betting on a single currency.
Investing in tokenized indexes will likely become more popular in the coming years. It allows for a more detached approach to investing in the blockchain industry and cryptocurrency markets.
Cryptocurrency Trading Strategies – Conclusions
Creating a crypto trading strategy that matches your financial goals and your personality is not an easy task. We’ve looked at some of the most common crypto trading strategies, so hopefully you can discern which one might suit you best.
To determine what really suits you and what doesn’t, you’ll need to stick to and monitor each trading strategy – without breaking the rules you’ve set. It is also helpful to create a diary or trading spreadsheet so that you can analyze the performance of each strategy.
It’s worth noting, however, that you don’t have to follow the same strategies forever. With enough data and trading records, you should be able to adjust your methods. In other words, your cryptocurrency trading strategies should constantly evolve as you gain experience in trading. It can also be beneficial to allocate different parts of your portfolio to different strategies. This way, you can monitor the individual performance of each strategy while practicing proper risk management.