Knowing Crypto Trading Strategies
The Risks and Rewards of Trading in Digital Currencies
One of the factors that have brought digital currencies into the spotlight is trading. The ability to buy and sell a highly volatile instrument in real time, in a global financial market with low volatility, has led to the success and explosion of numerous platforms for speculative trading in Bitcoin and other digital currencies. The lure of easy profits has attracted both experienced and inexperienced traders, as well as many first-time investors.
Investors’ interest in Bitcoin and other cryptocurrencies is usually driven by different investment theses. Some view Bitcoin as a kind of digital gold, a safe haven from the devaluation of fiat currencies. Others see cryptocurrencies as a new asset class that will increase in value as more institutional investors add them to their portfolios. Still others view Bitcoin and other cryptocurrencies as uncorrelated, volatile assets suitable for diversification under modern portfolio theory.
However, this type of investment is currently only suitable for very high-risk profiles where market movements are particularly strong. The risk is that the investor may even lose more than the amount invested. Those approaching these instruments need to have a thorough understanding of the technical aspects and risks - including product dynamics, volatility and uncertain valuation frameworks - and carefully weigh the probability of loss against the underlying movements.
Acknowledging the Opportunity: Considerations Before Investing in Crypto Assets
Despite such challenges, crypto’s unique attributes are unassailable and investor interest is understandable.
Usually, the initial stage of investing typically involves allocating assets. This involves distributing investments among various instruments to attain diversified returns over an extended period. This principle also applies to cryptocurrencies, where the allocation of a portfolio's assets requires great skill in balancing risk appetite, financial objectives, time horizon and capital.
In particular, some of the factors that influence investing in crypto are:
- Market conditions: The state of the crypto market, such as bullish, bearish, or sideways, can affect the performance of different strategies. For example, trend following strategies work well in bullish or bearish markets, but not in sideways markets.
- Volatility: The degree of price fluctuations in the crypto market, which can be influenced by news, events, sentiment, supply and demand, and more. Volatility can create both opportunities and risks for traders. For example, high volatility can lead to large profits or losses in a short time.
- Liquidity: The ease of buying and selling crypto assets without affecting their price. Liquidity can vary depending on the asset, the exchange, the time of day, and more. Liquidity can affect the execution speed and cost of trades. For example, low liquidity can result in slippage or higher fees.
- Time horizon: The duration of holding a crypto asset before selling it. Time horizon can depend on the trader's goals, preferences, and risk appetite. Time horizon can affect the choice of strategy and the frequency of trades. For example, long-term traders may use fundamental analysis and hold assets for months or years, while short-term traders may use technical analysis and make trades within minutes or hours.
While it may seem easy to buy when prices are low and sell when they are rising, it is not always that simple. To navigate these markets, investors often follow investment strategies, which are guidelines that help them make decisions about what to invest in, when to invest, how much to buy, and when to sell to hopefully make a profit.
And before entering and investing in the cryptocurrency market, it is essential to become acquainted with crypto analytics, distinguish between different types of investments and how to implement effective risk management strategies.
6 Basic Strategies to Know for Investing in Crypto
#1 - Buy and hold
Buy and hold is a passive investment strategy where an investor buys stocks or other securities and holds them for a long period of time, regardless of market fluctuations. The idea behind this strategy is that, over the long term, the stock market tends to rise, so by holding onto investments for a long time, investors can benefit from this growth.
This strategy is often used by investors who are looking for long-term growth and are willing to ride out short-term market volatility. It can be a good strategy for those who are not comfortable with the risks associated with more active trading strategies, or who do not have the time or expertise to actively manage their investments.
One advantage of the buy and hold strategy is that it can be relatively low-maintenance. Once an investor has chosen their investments, they can simply hold onto them and let them grow over time. This can also help to reduce trading costs, as the investor is not frequently buying and selling securities.
However, it’s important to note that buy and hold is not a completely hands-off approach. Investors still need to monitor their investments and make adjustments as needed. For example, if an investor’s financial goals or risk tolerance changes, they may need to rebalance their portfolio to reflect these changes.
#2 - Dollar-cost averaging (DCA)
Dollar-cost averaging (DCA) is an investment strategy where an investor divides the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase. This can help to spread out the cost of investing and reduce the risk of investing a large amount of money at a single point in time.
For example, let’s say an investor wants to invest $12,000 in a stock over the course of a year. Instead of investing the entire amount at once, they could use DCA to invest $1,000 per month for 12 months. This would allow them to buy more shares when the price is low and fewer shares when the price is high, potentially reducing the average cost per share over time.
DCA can be a good strategy for investors who are looking to invest a fixed amount of money over time, or who want to reduce the risk of investing in a volatile market. However, it’s important to note that DCA does not guarantee a profit or protect against loss in declining markets.
#3 - Early-bird investing
Early-bird investing is a strategy where investors invest in a company or project at an early stage, often before it has become widely known or popular. This can provide the opportunity for high returns if the company or project is successful, as the investor is able to buy in at a lower price before the value increases.
However, early-bird investing also carries a higher level of risk, as there is often less information available about the company or project at this stage, and it may be more difficult to accurately assess its potential for success. It’s important for investors to carefully research and evaluate any early-stage investment opportunities before committing their funds.
Some examples of early-bird investing include investing in startups through crowdfunding platforms, participating in initial coin offerings (ICOs) for new cryptocurrencies, or buying shares in a company when it first goes public through an initial public offering (IPO).
- Swing trading: This is a trading technique that seeks to capture gains in a stock within one to four days. Swing traders use technical analysis to look for stocks with short-term price momentum.
- Staking: This is the process of holding funds in a cryptocurrency wallet to support the operations of a blockchain network. In exchange for holding the funds, users are rewarded with additional cryptocurrency.
- ICO investing: An initial coin offering (ICO) is the cryptocurrency industry’s equivalent of an initial public offering (IPO). A company seeking to raise money to create a new coin, app, or service can launch an ICO as a way to raise funds.
- Buying micro-cap altcoins: Micro-cap altcoins are digital assets with a small market capitalization, usually below $50 million. They are often overlooked by mainstream investors but have the potential for high returns if their projects succeed.
- Participating in airdrops: An airdrop is a marketing campaign where tokens or coins are distributed to users for free or in exchange for completing tasks such as joining social media groups or promoting the project on social media.
- Technical analysis trading: This is a trading technique that uses historical price and volume data to forecast future price movements of assets such as stocks, commodities, and currency pairings. It can be applied to any market, including cryptocurrency.
- Arbitrage trading: This is trading that exploits the tiny differences in price between identical assets in two or more markets. The arbitrage trader buys the asset in one market and sells it in the other market at the same time in order to pocket the difference between the two prices.
- High-frequency trading (HFT): This is a type of algorithmic trading characterized by high speeds, high turnover rates, and high order-to-trade ratios that leverages high-frequency financial data and electronic trading tools.
#4 - Scalping
This is a trading strategy that involves opening and closing positions within a very short time frame, often within seconds to a maximum of 15 minutes. The goal of scalping is to capture small profits from short-term price movements in the market. Scalpers open multiple trades throughout the day, relying on substantial position sizes to drive profitability.
Scalping requires close monitoring of the trading station and quick decision-making. Charting time frames play a critical role in determining when to enter and exit trades, with forex scalpers typically focusing on 1-minute or 5-minute price charts2. Scalping can be a high-risk strategy due to the large number of trades and the need for quick reactions to market movements.
There are several technical indicators and strategies that can be used in scalping, including the Parabolic SAR Indicator, Stochastic Indicator, and Moving Average. It’s important for scalpers to have a strict exit strategy and to manage risk carefully.
#5 - Range trading
Range trading is a strategy that takes advantage of non-trending markets by identifying stable high and low prices, which are represented as resistance and support levels on candlestick charts. Resistance is a price above the current price, while support is a price below it. Traders can buy at the support level and sell at the resistance level when the price ranges between these two levels. Day traders using this strategy for cryptocurrency trading will buy a crypto asset when it's oversold and sell when it's overbought to make profits.
Volume is a crucial component of range trading, as analyzing trends in volume can help validate patterns and determine if the timing is right to use this strategy. It's believed that volume precedes price, so when confirming any trend, it's important to keep in mind that volume should increase in the direction of the trend.
#6 - Golden Cross/Death Cross
The Golden Cross and Death Cross are technical analysis indicators based on the moving averages of historical prices.
A Golden Cross occurs when a shorter-term moving average (e.g., 30-day) positioned below a longer-term moving average (e.g., 200-day) rises above (in other words, crosses) the longer-term one. This is typically interpreted as a bullish trading signal, meaning that the price may be expected to rise. The cross is interpreted as the short-term price trend gaining momentum to rise above the longer-term trend, and the conjecture may be that the price momentum upwards will continue.
On the other hand, a Death Cross occurs when a shorter-term moving average positioned above a longer-term moving average drops below the longer-term one. This is typically interpreted as a bearish trading signal, meaning that the price may be expected to drop. The cross is interpreted as the short-term price trend dropping in a downward momentum to fall below the longer-term trend, and the conjecture may be that the price momentum downward will continue.
Different traders will have different approaches to crossover signals. Some traders might wait for a confirmed Golden or Death Cross before entering or exiting a trade, while others might use the crosses as confirmation signals in conjunction with other technical indicators. It's important to note that these indicators are not foolproof and should be used in combination with other types of trading signals, market analysis, and risk management strategies.
In conclusion, a knowing trading strategies is essential for achieving success in trading. It is a systematic method for identifying and trading securities that takes into account a number of variables, including time, risk, and the investor's objectives.
Firstly, different strategies work better in different market environments. By understanding various trading strategies, you can choose the one that is most suitable for the current market conditions and increase your chances of success.
Secondly, different strategies have different levels of risk and reward, and by knowing them, you can choose the one that aligns with your risk tolerance and investment goals.
Thirdly, different strategies require different levels of time commitment and trading frequency. By understanding them, you can choose the one that fits your lifestyle and schedule.
In summary, knowing trading strategies helps traders maintain a disciplined and systematic approach to their trades, removing subjectivity from trading decisions, make informed decisions about how to approach the market and increase chances of success.
Most trading experts recommend that no capital is risked until a trading plan is made.
- Crypto Investing--A New Investor's Guide (forbes.com)
- Cryptocurrency Investment Strategies — A How To Guide | Zignaly
- 20 Top Trading Strategies You Need to Learn (+ Tips) (stockstotrade.com)
- How to Invest in Crypto?  | Cryptocurrency Trading 101 (finbold.com)
- 10 Steps to Building a Winning Trading Plan (investopedia.com)
- Golden cross vs. death cross explained By Cointelegraph (investing.com)