- Devising a crypto trading strategy that resonates with a trader’s financial goals and personality style is among the largest demotivation into exploring the diverse blockchain industry and the cryptocurrency markets
- A trading strategy is an extensive plan that guides crypto traders on their trading activities
- The strategy helps to mitigate financial risks by eliminating rush and unnecessary decisions. It, however, does not qualify as a mandatory tool to be a successful crypto investor
There are countless ways to profit from trading cryptocurrencies, and to do that, one needs trading strategies to help monitor and optimize a cryptocurrency portfolio.
Devising a crypto trading strategy that resonates with a trader’s financial goals and personality style is among the largest demotivation into exploring the diverse blockchain industry and the cryptocurrency markets.
Below is a comprehensive analysis of crypto trading strategies that can help beginners and even advanced traders in the market engage in the profitable trading of crypto assets.
What is a trading strategy?
A trading strategy is an extensive plan that guides crypto traders on their trading activities. The strategy helps to mitigate financial risks by eliminating rush and unnecessary decisions. It, however, does not qualify as a mandatory tool to be a successful crypto investor.
The cryptocurrency market is highly volatile and can be an emotional market. In other words, having a plan on how to trade makes you prepared for the many possible outcomes. It prevents making hasty, impulsive decisions that often lead to considerable financial losses.
A workable trading strategy includes:
- Asset classes a trader is engaging in and how they should distribute capital.
- Setups that a trader takes. Setups are ways through which one tracks the progress of a particular asset.
- What tools and indicators do a trader use, for example, the relative trade index, Moving Average Convergence Divergence and Bollinger bands.
- What triggers a trader’s entries and exits in the crypto market.
- What dictates a crypto trader’s position sizing. Position sizing is the dollar amount that a trader is willing to trade.
- How a trader document and measure their portfolio performance.
A trading strategy should also contain other general guidelines narrowing it down to the most superficial personal details. For example, the day you rest from trading, how many times you should check your portfolio performance and the current prices of the tokens and coins you have invested in etc.
There are two types of trading strategies
- An active trading strategy
- A passive trading strategy
Active trading strategies
An active trading strategy requires time and attention, sometimes taking more than 20 hours a day. They require constant monitoring and time-to-time portfolio management.
An active trading strategy can be grouped into: Day trading, swing trading, Scalping and trend trading.
Day trading is the entering and the exiting of trading positions on the same day. For example, you buy a crypto asset or token and sell it on the same day as per your satisfaction. Day traders capitalize on intraday price movements, that is, price movements that happen in one trading day.
To be an affluent day trader, one needs to stick by the following rules:
- Have updated information about the market you are trading.
- Set aside trading funds that you are willing to lose.
- Set aside time and move quickly on an opportunity.
- Start small. As a beginner, avoid engaging in more than two socks a day.
- Read extensively on a particular market before making any move to invest in it.
- Write down your exit point and stick to the plan.
- Last but not least, stay calm. Govern your decisions through logic and not emotions.
Day traders typically use technical analysis to formulate trade ideas. Technical analysis aims at predicting future market behaviour based on previous price action and volume data.
Day trading cryptocurrency sometimes can be highly profitable for some traders, but it is often stressful, demanding, risky and very volatile, and is mainly recommended for more advanced crypto traders.
Swing trading attempts to capture short- to medium-term gains in a stock or a cryptocurrency for less than a few weeks or at most a month.
Swing traders take advantage of volatility waves that usually take several days or weeks to play out most of the time. These traders may use a combination of fundamental and technical analysis to formulate their trade ideas.
Instinctively, fundamental changes may take a longer time to play out, which is where fundamental analysis comes into play.
Financial markets’ traders use fundamental analysis and investors to assess the intrinsic value by examining qualitative and quantitative factors such as company management and reputation, market capitalization and industry health.
Swing trading qualifies as the most convenient active trading strategy for beginners, significantly because swing traders take longer to play out while being short enough to keep track of the trade.
This allows traders more time to consider their decisions critically.
In most cases, swing trading gives enough time to react to the progress of the trade, allowing a trader to make decisions with more rationality and less haste.
Trend/ Position trading
Trend trading is a strategy of holding positions for a more extended period, typically at least a few months, to isolate and extract profit from trends; trend traders gain through analyzing an asset’s momentum in a particular direction.
Usually, trend traders enter a long duration in an upward trend accompanied by short durations of downward trends.
Trend trading typically uses fundamental analysis, but the analysis does not always apply.
A trend trading strategy assumption: The asset will keep moving in the direction of the trend. However, this does not rule out the possibility of a trend reversal. A trend trader may include techniques such as technical indicators, moving averages, and trend lines, among other techniques, to try and mitigate financial risks and increase the chances of a success rate.
This is one of the quickest active trading strategies in the market. Scalping is a strategy that prioritizes making high volumes of small profits. However, Scalping is dangerous as one significant loss could neutralize all the small gains a trader has made in a long time. Scalpers must have a strict exit strategy.
Usually, scalpers do not hold their positions for a long time, and it is not alien scalp traders opening and closing positions in seconds.
This strategy is lucrative, especially if a trader finds a market inefficiency that happens repeatedly and that they can exploit.
Scalping is the most ideal for markets with higher liquidity. Liquidity measures how smooth one can convert an asset into cash or another asset.
Scalping is an advanced trading strategy only recommended for well-advanced traders such as whale traders due to its complexity. This strategy also requires a deep and comprehensive understanding of the mechanics of the crypto and stock markets.
Passive investment strategies
A passive investment strategy portfolio requires less time and attention. Here are a few ways one can become a hands-off crypto trader.
Buy and hold
As simple as it sounds, this strategy means buying and holding. It is a passive strategy where a trader buys an asset and holds it for a long time, regardless of the fluctuations in the market.
Buy and hold is used in long-term investment portfolios, where a trader gets in the market without any regard for timing their entry.
This strategy is almost all the time always based on fundamental analysis. Typically, this method does not concern itself with technical indicators and portfolio tracking strategies to monitor the positions of the bought stocks and cryptocurrencies.
While bitcoin and other cryptocurrencies have only been around for less than a decade, many traders fall under this strategy, which specifically works for bitcoin.
Typically, index investing means buying exchange-traded funds (ETFs) and indices in the traditional markets. This type of product is also available in the cryptocurrency markets, On centralized cryptocurrency exchange platforms and within the Decentralized Finance (DeFi).
The idea behind cryptocurrency index investing is to take a basket of crypto assets and create a single token that tracks the combined performances of all the assets in the basket.
An example of index investing is when a trader, instead of picking an individual privacy coin, invests in a privacy coin index.
Tokenized index investing is most likely to become more popular among traders over the coming years. It presents a more hands-off approach to investing in the blockchain and the crypto markets.
Finally, it is worth noting that you don’t have to stick to one trading strategy forever. With enough experience, data and trading records, trading strategies should constantly evolve.
One key point of focus is that a trader may allocate different parts of their portfolio to different strategies, which helps track each strategy’s performance while exercising proper risk management.