There are many ways to make a profit from trading cryptocurrencies. Trading strategies help you organize your techniques into a coherent, followable framework. This way, you can continue to monitor and optimize your crypto strategy.
The two main schools of thought that you need to consider when building a trading strategy are technical analysis (TA) and fundamental analysis (FA). We’ll differentiate which one applies to a particular strategy, but make sure you understand the difference between these concepts before going any further.
Since there are many different trading strategies, we will cover some of the most common. This article will focus on cryptocurrency trading strategies. However, this also applies to other financial assets, such as forex, stocks, options, or precious metals such as gold.
What is a trading strategy?
We can describe a trading strategy as a broad plan in all your trading activities. Is a framework created to guide you in all your trading endeavors.
A trading plan can also help reduce financial risk, as it eliminates many unnecessary decisions. Even though having a trading strategy is actually not mandatory, however, it is very necessary, because it can save you from time to time. If something unexpected happens in the market (and it will), it’s the trading plan that determines how you react – not your emotions. In other words, having a trading plan prepares you for all the possibilities, and prevents you from making hasty and impulsive decisions, which often lead to huge financial losses.
As an illustration, a comprehensive trading strategy will include the following:
- what asset class you are trading
- what kind of settings do you do
- what tools and indicators you use
- what triggers your entry and exit positions (stop loss placement)
- what determines the size of your position
- how you document and measure portfolio performance
Apart from that, the trading plan can also contain other general guidelines, even down to a few minor details. For example, you can decide that you will never trade on a Friday, or you will never trade if you feel tired or sleepy. Or you can create a trading schedule, so that it only trades on certain days of the week. Do you always check the Bitcoin price over the weekend? Always close your position before the weekend. A personal guide like this can also be included in a trading strategy.
In this article, we will discuss two types of trading strategies: active and passive.
1. Active trading strategy
Active strategies require more time and attention. We call it active because it involves continuous monitoring and a lot of portfolio management.
Day trading or day trading is probably the best known active trading strategy. However, you are misunderstanding if you think that all active traders are day traders.
Day trades enter and exit positions on the same day. Thus, day traders aim to take advantage of intraday price movements, that is, price movements that occur within a single trading day.
The term “day trading” comes from traditional markets, where trades are only open during certain hours of the day. So, in such markets, day traders never spend the night in the same position, when the trade is closed.
Most cryptocurrency trading platforms are open 24 hours a day, 365 days a year. So, day trading is used in a slightly different context, when we talk about crypto markets. It usually refers to a short-term trading style, where traders enter and exit positions within 24 hours or less.
Day traders generally use price action and technical analysis in formulating trading ideas. In addition, they may use many other techniques to find inefficiencies in the market.
Day trading crypto assets can be very profitable for some, but it is also often stressful, very demanding and carries high risks. Because of this, this type of trading is recommended for advanced traders.
Swing trading or swing trading is a type of long-term strategy by holding positions for more than a day but usually for less than a month. In some cases, swing trading is between day trading and trend trading.
Swing traders generally try to take advantage of waves of volatility that occur over a few days or weeks. Traders of this type can use a combination of technical and fundamental factors in formulating their trading ideas. Basically, fundamental changes may take longer to play out, and this is where fundamental analysis comes into play. Even so, chart patterns and technical indicators can also play a major role in a swing trading strategy.
Swing trading is probably the most convenient active trading strategy for beginners. The main advantage of this type of trading when compared to day trading is that swing trading is carried out over a longer period of time. However, it is short enough that it is not that difficult to track trades.
Allowing traders more time to consider decisions. In most cases, they have enough time to react to the ongoing trade. With swing trading, decisions can be made more quickly and more rationally. On the other hand, day trading often demands fast-paced decisions and execution, which of course is not ideal for beginners.
Sometimes also referred to as position trading, trend trading or trend trading is a strategy of holding a position for a longer period of time, usually at least several months. As the name suggests, trend traders try to take advantage of trend movements. This type of trader may enter a long position during an uptrend and a short position in a downtrend.
Trend traders will usually use fundamental analysis, but this is not always the case. Even so, fundamental analysis considers events that may take a long time to play out – these are the moves that trend traders want to take advantage of.
The trend trading strategy assumes that the underlying asset will continue to move in the direction of the trend. However, traders must also take into account the possibility of a reversal. As such, they can also include moving averages, trend lines and other technical indicators in the strategy to try to increase the success rate, and reduce financial risk.
Trend trading can be an ideal choice for novice traders if they do proper due diligence and manage risk.
Scalping is one of the fastest trading strategies available. Traders don’t want to take advantage of big moves or protracted trends. Strategy focuses on exploiting small repetitive movements. For example, profiting from bid-ask spreads, liquidity gaps, or other inefficiencies in the market.
Scalping traders do not intend to hold their positions for very long. It is very common to see this type of trader opening and closing positions in a matter of seconds. This is why scalping is often associated with High-Frequency Trading (HFT).
Scalping can be a very profitable strategy if there are repeated market inefficiencies, and traders can exploit them. Whenever this happens, they can make small profits that add up over time. Scalping is generally ideal for markets with thicker liquidity, where the entry and exit positions are relatively smooth and predictable.
Scalping is a sophisticated trading strategy that is not recommended for novice traders due to its complexity. It also requires a deep understanding of market mechanisms. In addition, scalping is generally more suitable for wholesalers (whales). The profit target percentage tends to be smaller, so trading with a larger position makes more sense.
2. Passive investment strategy
The passive investment strategy provides an easier approach, where portfolio management requires less time and attention. Although there are differences between trading and investing strategies, in essence, trading means buying and selling assets in the hope of making a profit.
Buy and hold
“Buy and hold” is a passive investment strategy in which traders buy assets with the intention of holding them for a long time, regardless of market fluctuations.
This strategy is usually used in long-term investment portfolios, where the idea is to enter the market regardless of timing. The idea behind this strategy: in the long run, timing and entry prices should not be a problem.
Buy and hold strategies are almost always based on fundamental analysis and are usually not influenced by technical indicators. With this strategy, portfolio performance may also not need to be monitored regularly – just occasionally.
While Bitcoin and other cryptocurrencies have only been around for a decade, the HODL phenomenon is comparable to a buy and hold strategy. However, cryptocurrencies are a risky and highly volatile asset class. Although buying and storing Bitcoin is a well-known strategy in the crypto world, however, this strategy may not be suitable for other cryptocurrencies.
Generally, index investing means buying ETFs and indices in traditional markets. However, this type of product is also available in the crypto market. Either on centralized cryptocurrency exchanges, or in Decentralized Finance (DeFi).
The idea behind crypto indexes is to take and group crypto assets and create tokens that track the performance of those aggregates. This pool can be a pool of coins from a similar sector, such as privacy coins or utility tokens. Or, it could be something completely different, provided it has a reliable price feed. As you can imagine, most of these tokens rely heavily on blockchain oracles.
How do investors use crypto indices? For example, they can invest in a privacy coin index instead of choosing one privacy coin. This way, they can bet on privacy coins as a sector by eliminating the risk of betting on a single coin.
Tokenized index investment is likely to become more popular in the coming years. This approach makes it easier to invest in the blockchain industry and cryptocurrency market.
Designing a crypto trading strategy that fits your financial goals and personality is no easy task. We’ve covered some of the most common crypto trading strategies, so hopefully, you’ll find out which one works best for you.
In order to know what really works and what doesn’t, you need to follow and track every trading strategy – without breaking the rules you set. It is also helpful to keep a trading journal or sheet, so that you can analyze the performance of each strategy.
It’s worth noting that you don’t have to follow the same strategy forever. With sufficient trading data and records, you should be able to adapt and adapt your methods. In other words, the trading strategy must continue to evolve as you gain trading experience.
It may also be useful to allocate parts of your portfolio to different strategies. This way, you can track the performance of each strategy while carrying out proper risk management.