Crypto assets such as Bitcoin, Ethereum, and others quickly gained popularity, capturing the attention of investors and traders worldwide. More and more traders are entering cryptocurrency trading every single day, making it one of the most exciting financial markets for traders. However, managing this dynamic and quick-moving market required the basics understanding of how trading works on crypto assets.
What does ‘trading’ actually mean on the crypto market? And how do investors make sure that they are trading safely and responsibly? We will cover all you need to know about basics on crypto trading strategies.
It is really important for investors to be aware of the risks associated with cryptocurrency trading, such as high market volatility and liquidity issues. Cryptocurrency prices can be highly volatile and move rapidly, which may lead to potential losses. This is why investors need to understand several methods to trade crypto safely and responsibly.
In order to make informed logical decisions, many traders in every trading’s assets use two different approaches to analyze the markets. The fundamental and the technical analysis. The fundamental analysis involves researching the underlying factors that affect a cryptocurrency’s value, such as its technology, team, adoption, and market demand. While the technical analysis involves studying historical price and volume data to identify patterns and trends that may project future price movements.
This basic knowledge we about to share you may also apply to another tradable assets, such as gold, forex and stocks
Crypto Trading Strategies
In this article we will divide the crypto trading strategies by two types; Active trading and Passive trading strategies. As its name suggests, the active strategies require traders to actively observe and interpret the market’s situation to spot potential trading opportunities. The passive strategies require traders only to buy or sell assets for a specific period of time, while most of the time they are only required to hold the crypto assets.
1. Active trading strategies
Scalping is the quickest available trading approach. Scalper traders avoid attempting to profit from significant movements, in fact they are only getting into the crypto markets only to seize tiny price movements to their favor. The core strategy of scalpers repeatedly takes tiny profits which also on the tiny price movements.
Scalping is an effective strategy when the market movements are slow, scalpers can make a series of small profits which can be huge profits when all the successful trades are combined. Scalping is typically the best strategy for markets with higher liquidity because it allows relatively smooth and predictable entry and exit of trading positions.
However, scalping is an advanced trading approach and the hardest one to learn, which is why this approach is not recommended to beginner traders due its complexity and high concentration level required.
- Day Trading
Day trading is the practice of entering and closing trades on the same day. The phrase originates from conventional equity markets, which are open only during predetermined times for each day. A day trader cancels all open positions by the closing of business and doesn’t hold any trading positions overnight.
The cryptocurrency markets differ slightly from traditional markets, it is never closed. 365 days a year, 7 days a week, and 24 hours a day, any traders can trade cryptocurrencies. In order to choose trading’s entry and exit positions, day traders mostly use technical analysis. While daily trade may result in reduced profits or smaller profits, this approach can give traders the opportunity to trade a wider variety of assets.
This approach is popular since it offers plenty of action, while it also reduces traders’ stress because they are not concerned about waking up to unexpected changes in positions held overnight.
- Swing Trading
Swing trading is when trading positions can be kept for days or even up to several weeks, which focuses more on longer-term market patterns. The objective is to identify undervalued assets that are just starting to increase in terms of buying activity and price movement. The swing trader aims to buy the asset when it rises in value and sell it for a profit much later.
Since swing trading does not involve the fast pace and stress of day trading and other short term trading strategies, it tends to be a more friendly approach for beginners. A trader can take their time and make more informed decisions when using a swing trading approach.
Fundamental analysis may also be applied in swing trading since the analysis is centered on a longer time frame. Swing traders would choose to consider crypto projects that are likely to experience a longer-term rising trend in their price momentum, such as the projects that soon will undergo a significant update or soon will launch a mainnet.
- Position Trading
Position trading is almost similar to investing which is a longer trading strategy approach. The trading positions are generally held for months at a time to capture crypto assets’ long-term price trend.
Position traders frequently rely more on fundamental analysis due to their preference for longer time frames. That is because they have the freedom of watching the development of fundamental events due to their longer trade window. However, that does not mean they do not use technical analysis. Technical indicators can be helpful in spotting probable trend reversals because they operate under the presumption of a continuing trend and far longer trends.
Position trading approach is also a good strategy for beginner traders as the longer time frame gives them plenty of time for analysis before making any trade decisions.
2. Passive Trading Strategies
Hodl is renowned in the crypto industry for holding crypto assets without the need to sell it. The term originated from a misspelling of the word ‘hold’ for the same meaning. It refers to a long term investing strategy in which investors keep their crypto holdings for an extended length of time despite the short term market swings.
However it is also important to remember that HODL-ing has risks as well. Cryptocurrency markets are very volatile and can be unpredictable, there are no guarantees of returns. It is advisable to do your own research to understand the risks involved, and have a clear investment plan.
- Index Trading
Similar to traditional ETFs or indices, crypto indexes is a basket of multiple cryptocurrency which its price is determined by certain parameters. Crypto indexes provide a benchmark or reference point for investors to assess the overall trend or cryptocurrency market’s performance.
The advantages of using cryptocurrency indices for trading is that the indexes provide a way to diversify investments across multiple cryptocurrencies, reducing the risk of concentration in a single crypto asset. Also it is important to remember that crypto indexes also have risks in them as the index tracking multiple cryptocurrencies prices. Choosing potential indexes such as top 10 market cap index or DeFi index are also crucial for investors to decide.
Cryptocurrency Trading: Before the First Trade
1. Find the crypto exchange that suitable for you
Find a crypto exchange to trade on once you’ve found a trading strategy that works for you. When choosing a crypto exchange, take into account elements like user-friendliness, trading fees, exchange reputation, and exchange liquidity. If you can, find a crypto exchange that provides a demo account for traders to test their strategies without risking any funds.
2. Understands the basic of crypto trading orders
- Market order, the simplest type of order and used to buy or sell a cryptocurrency at the current market price
- Limit order, Allows traders to specify the exact price at which they want to buy or sell. When investors place a limit order, they set a specific price at which they want to buy or sell. If the market reaches the specified price, the order will be executed.
- Stop-loss order, used to minimize potential losses by automatically selling a cryptocurrency if its price falls to a certain level. When investors place a stop loss order, they are setting a specific price which is below the current market price. If the cryptocurrency’s price reaches the stop loss level, the order will be triggered, and the cryptocurrency will be sold at the best available market price.
- Take-profit order, used to secure potential profits by automatically selling a cryptocurrency when its price reaches a certain level. When investors place a take profit order, they are setting a specific price above the current market price. If the cryptocurrency’s price reaches the take profit level, the order will be triggered, and the cryptocurrency will be sold at the best available market price.
3. Margin and Leverage
Margin trading is a trading activity that utilizes borrowed money from a third party. The crypto exchange and/or other financial entities typically work as the liquidity providers for investor margin trading.
Trading on margin increases the outcomes, both in terms of profits and losses. Margin trading allows traders to open larger positions with much less capital than they may have.
Margin and leverage trading are two concepts that are frequently addressed together. Margin is the amount of capital supplied by the trader and is indicated as a percentage, such as 10% margin or 2% margin. Leverage on the other hand, is measured in terms of 2x or 10x, indicating how much the trading position is doubled.
However, it is highly advisable that beginner traders not take high risk trades on margin and leverage markets. Any doubled positions also mean doubled risks when trading on margin and leverage mechanisms. Also important to remember that the crypto market is volatile assets which amplifies its risks if users trades using margin or leverage, any funds can be wiped out in a single day/night in most cases.
In conclusion, understanding and implementing an effective crypto trading strategy that aligns with your financial goals and personality style can be a challenging task. To determine which strategies work and which do not, it is important to deeply do each strategy, without deviating from the rules you have set. Maintaining a trading journal or sheet can be immensely helpful in analyzing the performance of each strategy.
It is also important to note that not all trading strategies are perfect, the market conditions may change from time to time, and investors need to review their trading strategies regularly.