When it comes to profiting from cryptocurrency trading, there are numerous methods to explore. To effectively navigate this landscape, it is crucial to develop a trading strategy that can organize and optimize your techniques. This article aims to shed light on the two primary schools of thought in trading strategy development: technical analysis (TA) and fundamental analysis (FA). Before delving deeper, it’s essential to grasp the disparities between these concepts.In this article, I have discussed extensively top 12 crypto trading strategies you need to know.
While this article primarily focuses on cryptocurrency trading strategies, it’s worth noting that these principles can be applicable to other financial assets like forex, stocks, options, or precious metals such as gold. So, if you are interested in devising your own trading strategy, this article will provide you with the fundamental knowledge required to speculate on the crypto markets effectively. A well-defined trading strategy increases your likelihood of achieving your trading and investment objectives.
Understanding Trading Strategy
A trading strategy can be described as a comprehensive plan that encompasses all your trading activities. It serves as a framework guiding your decision-making process throughout your trading endeavors. Having a trading plan in place is not only beneficial for managing financial risk but also helps eliminate unnecessary decision-making. Read also the pros and cons of digital currenciesbetter understanding.
In times of unexpected market events (which are bound to occur), your trading plan should dictate your response, rather than allowing emotions to influence your decisions. In essence, a trading plan ensures you are prepared for potential outcomes and prevents impulsive choices that often lead to significant financial losses.
For instance, a robust trading strategy may include the following components:
• Identification of the asset classes you trade
• Determination of the setups you pursue
• Selection of tools and indicators utilized
• Establishment of triggers for entry and exit points (including stop-loss placement)
• Guidelines for position sizing
• Documentation and evaluation of portfolio performance
Additionally, your trading plan may incorporate other general guidelines, down to minor details. For example, you may decide not to trade on Fridays or refrain from trading when feeling tired or sleepy. Establishing a trading schedule, such as only trading on specific days of the week, can also be part of your strategy. If you tend to monitor Bitcoin prices over the weekend, closing your positions before the weekend may be included as well. Personalized guidance of this nature can be integrated into your trading strategy.
Developing a trading strategy can involve verification through back testing and forward testing. For instance, you might engage in paper trading on the Binance Futures testnet.
In this article, we will explore two types of trading strategies: Active and Passive. It’s worth noting that the definitions of these strategies are not strictly defined, and there may be some overlap between them. In fact, considering a hybrid approach by combining multiple strategies could be a worthwhile consideration.
Active Trading Strategies
Active trading strategies demand greater time and attention as they involve constant monitoring and frequent portfolio management. These strategies are aptly named “active” due to the ongoing engagement required.
Passive Investment Strategies
On the other hand, passive investment strategies offer a more hands-off approach, requiring less time and attention for portfolio management. Although there are distinctions between trading and investment strategies, both aim to generate profits through the buying and selling of assets.
Importance of Primary Research for Trading
When it comes to trading, conducting primary research is crucial. You don’t have to be an expert trader to engage in primary research to assess the value of the asset you intend to purchase. This entails staying updated with the latest news in the crypto industry. WazirX is a platform that can assist you in efficiently gathering all the relevant news items you need to read before starting your day.
Additionally, it is essential to evaluate your financial situation and establish an investment goal well in advance before venturing into volatile asset classes like cryptocurrencies. By conducting research on cryptocurrencies such as Bitcoin, Ethereum, Tron, Ripple, Litecoin, and more, you can begin investing through WazirX.
Mastering Crypto Trading Strategies
Navigating the world of cryptocurrency trading can be complex due to its volatile and unpredictable nature. Therefore, it is crucial to have a well-defined trading strategy in place before entering the market.
When referring to crypto trading, we are discussing the practice of speculating on crypto price movements using a CFD trading account. These leveraged derivatives allow you to speculate on price changes without owning the actual asset.
Alternatively, you can purchase cryptocurrencies through an exchange, where you personally acquire the coins. However, this method involves creating an exchange account, funding the full value of the position, and securely storing the cryptocurrency tokens in your wallet until you decide to sell. It’s worth noting that buying cryptocurrencies directly can be intricate and is not recommended for novice traders.
1. Moving Average Crossovers
Trading moving average (MA) crossovers involves understanding MAs and crossover trading strategies. Let’s start with the basics: a moving average is a lagging technical indicator that combines price points of a financial instrument over a specific period and divides it by the number of data points to create a trend line.
This trend line helps determine the current trend direction while minimizing the impact of random price spikes. It also allows for the analysis of support and resistance levels based on previous price movements.
So, how can you incorporate this indicator into your cryptocurrency strategy? One effective approach is to use “crossovers.” A price crossover occurs when the asset’s price crosses above or below an MA, indicating a potential trend change.
To trade a moving average crossover in cryptocurrency markets, you need to wait for the price to cross over the MA before taking a long or short position on the specific cryptocurrency, typically using financial instruments like CFDs.
Another strategy is to apply two moving averages to the chart: one short-term and one long-term. When the shorter MA crosses above the longer MA, it signifies an upward shift in the trend, known as a “golden cross,” which can serve as a buy signal. Conversely, when the shorter MA crosses below the longer MA, it indicates a downward shift, known as a “death cross.”
2. Crypto Futures Trading
Crypto futures trading involves entering into a contract agreement between two parties to buy or sell a specific amount of an underlying cryptocurrency (e.g., BTC) at a predetermined future price on a specified date and time.
Futures trading strategies provide access to a diverse range of cryptocurrencies without requiring actual ownership. For instance, individuals holding cryptocurrencies can use futures contracts to safeguard themselves against market fluctuations. So, how can you trade cryptocurrency using futures contracts?
3. Day Trading
Day trading is a strategy where traders take positions and exit them within the same day. The goal is to profit from intraday price movements in a chosen cryptocurrency. Successful day traders often rely on technical indicators to identify entry and exit points for their trades.
4. Event-Driven Trading
Event-driven trading focuses on capitalizing on the impact of strong media presence or specific events related to a particular cryptocurrency or exchange. This strategy is popular among new traders. News coverage and current events can influence not only cryptocurrency prices but also forex pairs, stock indices, and commodities. Experienced traders leverage this influence to their advantage.
To implement this strategy, traders typically wait for a consolidation pattern in the market before an expected news release, such as an earnings report. They then act as soon as a market breakout occurs. In the volatile and unpredictable nature of cryptocurrencies, it may be necessary to wait until after the news release before engaging in the trade. Traders buy the chosen cryptocurrency when positive news is announced and short it when negative news emerges.
5. Range Trading
Range trading relies on support and resistance levels provided by experienced analysts. Resistance refers to the price level where the price may rise, while support represents the price level where the price is not expected to fall. Traders use these levels to make trading decisions.
Scalping is a trading strategy that involves capitalizing on increased trading volumes to generate profits. It carries risks, but a knowledgeable trader manages margin requirements and follows important rules to avoid negative trading experiences. Scalpers analyze the crypto asset, historical trends, volumes, and select entry and exit points within a day.
7. High-Frequency Trading (HFT)
High-Frequency Trading (HFT) is an algorithmic trading strategy used by quantitative traders. It involves developing algorithms and trading bots to quickly enter and exit cryptocurrency positions. Building such bots requires a deep understanding of complex market concepts, as well as strong knowledge in mathematics and computer science. HFT is better suited for advanced traders rather than beginners.
8. Dollar-Cost Averaging (DCA)
Timing the market perfectly is considered difficult, so a sound approach to investing in cryptocurrencies is Dollar-Cost Averaging (DCA). DCA involves investing a fixed amount at regular intervals, allowing investors to avoid the challenge of timing the market and build wealth over the long term.
However, implementing an exit strategy in the DCA style can be tricky. It requires studying market trends, understanding market cycles, and analyzing technical charts. Monitoring oversold and overbought regions can help determine the right time to exit a position. WazirX live charts provide valuable insights into technical charts for various cryptocurrencies.
9. Index Investing
Index investing is a popular approach to cryptocurrency investment that involves holding a portfolio of cryptocurrencies derived from a pool of funds committed by investors. This can be achieved by purchasing exchange-traded funds (ETFs) like Bitcoin Futures or spot ETFs, or investing in indexes such as the decentralized finance (DeFi) Pulse Index. The main advantage of index investing is the elimination of the risk associated with investing in individual coins.
Index fund holders also have the opportunity to vote on governance recommendations for the underlying protocols without needing to divest their holdings. This concept of smart indexes allows for the retention of the benefits provided by direct token ownership.
One key benefit of index funds is that they replicate their underlying benchmark, eliminating the need for a large team of research experts to assist fund managers in selecting the best crypto assets. Additionally, when investing in an index, the portfolio is diversified across multiple assets, reducing the risk compared to investing in a single coin. However, it’s important to note that index funds still carry risks, and traders can potentially lose money.
Arbitrage is a trading strategy where a trader takes advantage of price differences between different markets. In the context of cryptocurrencies, it involves buying a cryptocurrency in one market and selling it in another market where the price is higher. The profit is made from the price spread between the buy and sell prices.
To capitalize on arbitrage opportunities, traders need to open accounts on exchanges that display significant price differences for the cryptocurrencies they are trading. These differences in liquidity and trading volume create opportunities for profit.
11. Betting on Bitcoin Volatility
Cryptocurrencies, particularly Bitcoin, are known for their high volatility. Traders can capitalize on this volatility by trading Bitcoin futures. One strategy is to buy a call option and a put option simultaneously, with similar strike prices and expiration dates. When crypto prices experience significant fluctuations, traders can sell both options to exit the position and potentially profit from the volatility.
12. Swing Trading
Swing trading is a strategy where traders aim to profit from short-term price movements in the market. Typically, swing traders hold their positions for a week or a month, utilizing both fundamental and technical trading indicators to inform their decisions.
While swing trading allows for more time to track the price movements of a cryptocurrency and make informed decisions, it requires quick judgment and execution, making it less suitable for beginners. Additionally, swing traders need to stay actively engaged in the market, even on days when they are not executing trades, making it a complex and time-consuming strategy.
However, there are automated technologies such as crypto bots and signals that can help execute swing trades more efficiently. Trading robots, for example, can scan the market, identify specific criteria, and execute buy and sell orders without human intervention.
Building a Balanced Portfolio
Crypto trading is still evolving, and there is inherent volatility and risk associated with it. To mitigate these risks, investors can build a balanced portfolio that includes a variety of cryptocurrencies such as Bitcoin, Dogecoin, and Ethereum. Diversification across multiple assets can help reduce the impact of volatility on the overall portfolio.
In addition, investors can consider maintaining a fixed amount of regular investments in different cryptocurrencies. This systematic approach can increase risk appetite and potentially yield favorable returns in the long term.
Avoid Making Trading Calls Based on Hype
Relying on social media for investment decisions is a common mistake made by new investors. It’s important to note that investment decisions should not be based solely on the hype created on social media platforms. False information spreads quickly in the digital currency space, and it’s crucial to conduct thorough research and analysis before making investment choices.