A Beginner's Guide to Cryptocurrency Trading Strategies

Introduction

Trading cryptocurrency can provide you with countless opportunities to earn money. It is important to organize trading strategies in order to follow a coherent framework with which you can follow these techniques. This will allow you to continuously monitor and optimize your cryptocurrency trading strategy.

Technical analysis (TA) and fundamental analysis (FA) are two of the main schools of thought you will need to examine when developing your trading strategy. As we move along, we will distinguish which of these works best with which of these strategies, but it is important that you recognize the differences between these concepts before we move forward.

In order to cover some of the most common trading strategies we will examine some of the most common ones. The main focus of this article is on cryptocurency trading strategies. The same may apply to other financial assets as well, such as forex, stocks, option, or precious metals such as gold. Would you be interested in developing your own trading strategy? If you've got a solid strategy for trading and investing, then you're much more likely to succeed in your endeavors.

What is a Trading Strategy?

An extensive plan covering all of your trading activities could be described as a trading strategy. An investment framework is a set of principles that guides you in all of your trading activities.

By eliminating a lot of unnecessary decisions and taking action based on a trading plan, it is also possible to mitigate financial risk. Although it is not mandatory for traders to have a strategy, it is helpful at times, as it can help them avoid making costly mistakes. As a trader, you should be able to use your trading plan, rather than your emotions, when determining how you will react in the event of an unexpected market event (there will be unexpected events). It is therefore important to have a trading plan in place that will help you to be prepared for the possible outcomes. The purpose of this is to prevent you from making hasty, impulsive decisions that can lead to a large amount of financial loss.

As an example of a comprehensive trading strategy, the following items may be included:

what asset classes you trade
what setups you take
what tools and indicators you use
what triggers your entries and exits (your stop loss placement)
what dictates your position sizing
how you document and measure your portfolio performance

Additionally, you may also include other general guidelines in your trading plan, even down to the finer details. The best way to define your trading rules is to define that you will never trade on Fridays or that you will never trade if you are feeling fatigued or sleepy. As another option, you can create a trading schedule that only allows you to trade on particular days of the week. How often do you check the Bitcoin price during the weekends? You should always close your positions before the weekend. You can also include individualized guidance such as this within your trading strategy.

As part of the development of a trading strategy, the backtesting and forward testing may also be included for verification. The following article will provide an overview of two types of trading strategies: active and passive.

As you'll see shortly, the definitions of trading strategies don't have to be strictly defined, and there might actually be overlap between them. A hybrid approach that combines multiple strategies may be worth consideration.

Active trading strategies

Active strategies require a greater amount of time and attention than passive strategies. The term active strategy refers to the fact that they involve constant monitoring of the investments and frequent portfolio rebalancing.

Day trading

There is no doubt that day trading is one of the most well-known active trading strategies. The common misconception about active traders is that they are by definition all day traders, but this is not true. Day trading means that one takes positions on the same day and sells them the same day. In other words, day traders are looking to capitalize on intraday price movements, i.e., movements in the price of a stock that occur within the course of one trading day.

As the term "day trading" indicates, the term refers to a practice similar to the one used in traditional markets, where trading is limited to certain hours during the day. Therefore, it follows that in these markets, when trading is halted, day traders don't stay in positions overnight.

There are a great number of trading platforms available that are open 24 hours a day, 365 days a year. When it comes to crypto markets, day trading is used in a slightly different context than it is in the global stock exchanges.

Day traders will typically formulate trades by using price action and technical analysis in conjunction with market analysis. In addition, they might use a wide range of other methods to look for inefficiencies in the markets. Cryptocurrency day trading can be very lucrative for many investors, but it is often quite demanding, stressful, and can have high risks of failure. This is why day trading cryptocurrency is recommended for more advanced traders only.

Swing trading

In swing trading, traders hold positions for longer than one day but typically not more than a few weeks or months. Swing trading is a form of longer-term trading strategy. Compared to day trading and trend trading, swing trading is somewhat in the middle between them.

Most swing traders attempt to take advantage of periods of volatility that tend to unfold over a period of several days or weeks. It's possible for swing traders to formulate their trade ideas based on both technical and fundamental factors. There is no denying that fundamental changes may take some time to play out, and for that reason the use of fundamental analysis is so important. Nevertheless, chart patterns and technical indicators play an important role in swing trading.

For beginners, swing trading might be the most convenient method for taking part in active trading. The main benefit of swing trading compared to day trading is that swing trades tend to take longer to complete than day trades. Despite the fact that they are short, it is not too difficult to keep track of the trades as they are not too long.

Therefore, traders can take their time to think about their decisions. Most of the time, they have enough time to react to what is unfolding in the market. The main advantage of swing trading is that decisions can be made with a greater degree of rationality and with less haste. Day trading, on the other hand, frequently involves making quick decisions and executing those decisions as soon as possible. This method may not be ideal for beginners.

Trend trading

In addition to trend trading, position trading may also be known as long-term trading, a strategy that involves holding positions for a longer period of time, usually a few months at a time. Trend traders can be described as people who try to take advantage of directional trends as their name implies. Trades that are trend-following may be entered in an uptrend and short positions may be entered in a downtrend.

Fundamental analysis is typically used by trend traders, but this may not always be the case. However, you need to remember that fundamental analysis considers events that may take time to unfold - and it is these types of events that trend traders look to exploit.

Trend trading strategies are based on the assumption that the underlying asset will continue to move in the direction of the trend. It is important for trend traders to realize that there is also the possibility of a trend reversal. Consequently, in order to increase their success rate and minimize financial risks, they may also employ moving averages, trend lines, and other technical indicators in their strategy as well.

Scalping

Among all the trading strategies available, scalping is among the fastest. The purpose of scalping is not to try and take advantage of big moves or long-lasting trends. The strategy consists of exploiting small moves on a regular basis in order to maximize profits. A good example is making profits from bid-ask spreads, gaps in liquidity, or other market inefficiencies

The goal of a scalper is not to hold onto a position for an extended period of time. Scalpers are quite common, and they frequently open and close their positions within seconds. The reason for this is that scalping is often related to High-Frequency Trading (HFT).

Trading with a scalping strategy can be especially lucrative if the trader is able to find a market inefficiency that pops up on a regular basis, one that can be easily exploited. Every time this occurs, a small profit can be generated, which adds up over time. Scalping is generally ideal for markets where there is a lot of liquidity, where it is relatively easy and predictable to take positions in and out of the market.

In spite of the complexity of scaling, it's not recommended for beginners as it is an advanced trading strategy. A deeper understanding of how market mechanics work is also required to profit from it. Apart from that, scalping is generally suited to larger traders (whales). Trading larger positions makes more sense since the percentage profit targets tend to be smaller.

Passive investment strategies

A passive investment strategy allows investing in a portfolio without having to be hands-on, where the management of the portfolio does not require as much attention as active investment strategies. Trading strategies differ from investment strategies in several significant ways, but ultimately, trading is about buying and selling assets in order to make a profit.

Buy and hold

An investment strategy called "buy and hold" is a way of investing passively, when a trader buys a stock with the intention that they will hold it for a long time without regard to market fluctuations.

As a long-term investment strategy, this type of strategy is usually used in portfolios where the idea is to simply get in the market without regard for when to enter the market. The idea behind this strategy is that over an extended period of time, the timing of the entry or the entry price does not matter very much.

It is generally accepted that buy and hold strategies are almost always based on fundamental analysis, which does not necessarily focus on technical indicators. It is also unlikely that the strategy will involve frequent monitoring of the portfolio's performance - only once in a while.

The HODL phenomenon is similar to the buy and hold strategy when it comes to Bitcoin and cryptocurrencies, even though they have only been around for a little more than a decade. The problem with cryptocurrencies is that they may be volatile and risky. While it is well known that one of the most common strategies within the cryptocurrency space is to hold on to Bitcoin for a prolonged period of time, this strategy may not be applicable to other cryptocurrencies.

Index investing

Index investing typically involves the purchase of ETFs and indices in the traditional markets. The cryptocurrency market has, however, also become a relatively active market for this type of product. As well as on centralized cryptocurrency exchanges and within the Decentralised Finance Movement (DeFi).

Essentially, a crypto index is a way to create a token that tracks a basket of cryptoassets by taking the performance of each cryptoasset separately and adding it to the index. The coins in this basket could be from the same or similar sectors, such as privacy coins or utility tokens. The price feed may be a currency, or it may be something entirely different, as long as the price feed is reliable. There is no doubt that most of these tokens use blockchain-based oracles heavily.

In what ways can investors make use of crypto indexes? For example, they may be able to pick a privacy coin index instead of investing in a single privacy coin. In this way, they can bet on privacy coins as a whole sector without having to concern themselves with the risks associated with betting on just one coin. Investing through tokenized indexes will likely grow in popularity in the years to come. This allows investors to have a more hands-off approach to investing in the blockchain industry as well as cryptocurrency markets.