Cryptocurrency trading strategy
What is cryptocurrency trading?
Cryptocurrency trading is a type of trading that includes the exchange of one coin for another, the purchase and sale of coins, as well as the exchange of fiat money for digital assets.
Crypto trading usually revolves around buying/selling assets rather than owning real coins. You exchange one digital asset for another in the hope of selling it at a better price.
You can trade virtual currency both on stock exchanges and with brokerage companies, since trading is carried out in derivative instruments. Derivatives allow traders to bet on both the rise and fall of a currency.
This concept is similar to the currency exchange or the stock market, but there are still some differences. How does trading in the cryptocurrency market differ from traditional currency and stock markets? Consider the main differences:
- High volatility. Coin prices can change very dramatically in a short period of time. The factors influencing the value of a digital currency can be very different and often unpredictable (for example, the value of other cryptocurrencies is strongly affected by changes in the price of bitcoin);
- Low entry threshold. A novice crypto trader can make his first transaction with a small amount of money on his account;
- You can trade digital coins around the clock and without interruption. You can trade at any time convenient for you.
Despite the differences in cryptocurrency trading, trading strategies that are used in the regular market can be applied. For the most part, cryptocurrency trading strategies do not differ significantly from conventional strategies. Traders can only make certain adjustments to the money management rules due to the high volatility of the instrument.
Now there are a huge number of cryptocurrencies on the market, which in theory can be traded. But this is only in theory. In practice, the vast majority of these coins have very low liquidity and are not available on most trading platforms.
Therefore, traders, as a rule, opt for the most popular cryptocurrencies. For example, it can be Bitcoin, Bitcoin Cash, Stellar, Cardano, IOTA, NEO, Monero, Litecoin, Ripple.
These are very liquid coins and they are present in the list of instruments of most exchanges and brokers. Moreover, such tools tend to be more technical and more amenable to analysis. Thanks to this, traders can apply various cryptocurrency trading strategies that will bring good results.
Types of cryptocurrency trading analysis
The technical analysis of the cryptocurrency market consists of two parts, otherwise it is carried out by two main groups of methods:
- Method of Graphic Interpretation. It involves the use of graphical models (geometric shapes - patterns) as price indicators, or trading signals (to buy or sell). For example, indicators of trend continuation are such figures as "triangles", "flags", "diamonds", "pennants", and indicators of a trend change - "head and shoulders", "triple top", "double top", "double bottom". ”, “triple base”, etc. The problem of the effectiveness of graphical methods lies mainly in the ability to correctly interpret the existing figures on the chart. Indeed, in the same chart, different traders can see completely different figures, which will be signals for completely different actions. That is why graphical analysis is an art, not a science, it is very difficult to translate into computer algorithms and is comprehended only with experience. Vivid examples of graphical methods are "Japanese candles", "tic-tac-toe" and others, which are certain systems for recognizing graphic patterns and interpreting them into trading signals.
- Methods of algorithmic analysis (mathematical approximation and digital filtering). They are based on the construction (calculation) of moving averages and oscillators. Unlike purely graphical methods, they are more objective and easily translated into computer algorithms, i.e., their application can be fully automated. But the ease of use of such methods is often deceptive. After all, if traders do not understand the essence of the algorithms that are embedded in the mathematical methods of signal indication, but blindly use them within the framework of software and hardware trading platforms (terminals), where they are usually presented in finished form, then further trading in cryptocurrencies is also conducted blindly.
The true utility of charts depends on the trader's ability to successfully synthesize standard concepts and his own experience. In the right hands, charts can be extremely valuable in predicting significant market trends.
List of main technical indicators
Since the principle of operation of the technical analysis of the financial market and indicators is based on the study of price behavior in the past, one can never be completely sure of the correctness of the forecast.
Experienced traders usually use two or three indicators in their cryptocurrency trading strategy to confirm signals, which is called a trading strategy. It is allowed to use more, but in this case the noise increases. In addition, it is difficult to choose the settings for a large group of indicators for one market situation and chart period, so many strategies are focused on only one or two indicators and certain settings.
It is important to understand that technical analysis indicators will not help you "look into the future" with 100% certainty. They allow you to see the main trends at the moment, assess their direction and strength. This helps to make the right decision in time.
Currently, a large number of different indicators are available to the cryptocurrency trader, which came to this new market from traditional financial ones. For convenience, they are divided into four main groups.
- Volume indicators show the overall market activity over a given period.
- Trend indicators allow you to timely determine the emerging trend and its direction.
- Oscillators are the main technical analysis indicators that are used to determine trend reversal points when opening trades in the opposite direction.
- Moving average indicators are tools that show price changes over certain periods.
Of course, each trader chooses those indicators that are most convenient for him to work with. Practice shows that most often traders trading digital coins use such indicators as: Moving average (MA), Exponential moving average (EMA), Stochastic oscillator, Moving average convergence divergence (MACD), Bollinger bands, Relative strength index (RSI), Fibonacci retracement, Ichimoku cloud Standard deviation, Average directional index.
Any of these indicators can be used in a cryptocurrency trading strategy.
Remember that effective trading in the cryptocurrency market, as well as in other financial markets, is impossible without a professional approach. Even the most advanced indicators will not be able to make the right decision for you. Only experience, the ability to analyze the market and understand its dynamics will help you become a real professional trader and make good profits.
Basic cryptocurrency trading strategies
Crypto assets are high-risk investments and trading them without a plan can often result in a loss of capital. This can be a dangerous game for beginners or those who do not follow a well-thought-out strategy and trade intuitively or with passion.
The trading strategy should be chosen based on your goals, opportunities, trading style and circumstances. Use our detailed trading strategy guide to find the right one for you.
Active traders may use one or more of the strategies. However, before deciding to participate in them, it is necessary to study and consider the associated risks and costs. Let's analyze some of the most popular cryptocurrency trading strategies.
The arbitrage trading strategy is simple and conceptually very clear. Simply put, an asset is bought when the price is low and sold when the price is up.
For example, arbitrage trading in the bitcoin market would be when you buy bitcoin for 60,000 USD on one cryptocurrency exchange and then sell it on another cryptocurrency exchange platform for 62,000 USD. In this example, a trader will be able to make a profit of 2,000 USD simply by buying and selling cryptocurrency. It is important to note that this is just an example and in the real world a price difference of 2000 USD will probably not exist between cryptocurrency exchanges.
Swing trading is a strategy by which traders seek to profit from price movements in the short and medium term. The idea is to catch any "fluctuations" in the market that may occur over the course of days, weeks or months.
There are two fluctuations that traders pay attention to:
- Swing highs are when the market peaks before a pullback, which provides an opportunity for a short trade.
- Swing lows - when the market falls and bounces, providing an opportunity for a long trade.
Successful cryptocurrency swing traders typically use technical analysis to watch charts of short to medium time frames to capture daily and weekly trends. The use of fundamental analysis is also important as economic events can often occur over days or weeks.
The day trading strategy aims to take advantage of market volatility over shorter time frames of a few hours rather than days and weeks.
Day traders identify market trends and trade with the prevailing sentiment until a support or resistance level is reached or until a predetermined price point is reached.
Day trading can be time consuming and requires a lot of flexibility and the ability to respond to rapidly changing market events.
Scalping is the execution of small trades with a minimum duration of time with a small profit.
The length of time should be short, ideally no more than an hour. The biggest importance for scalpers is volume; the number of transactions is more important than the profit from one transaction. Scalpers will never seek big profits and cannot afford to wait for the market to turn around to mitigate losses.
Scalping should never be done at uncertain times and the best market to scalp is a calm market with limited volatility.
Reverse trading is considered one of the best trading strategies for cryptocurrencies and is based on a change in the general trend in the market. The strategy is to find the exact moment when the trend is about to change. If the coin has been bullish for a while, the reverse trader will look for a time when he will reverse the trend and bet on it.
Another interesting version of reverse trading is trading by forecasting the high/low of the day and making money from that forecast. The risk associated with this strategy is the general risk of incorrectly forecasting the turnaround time.
Golden cross and cross of death
The golden cross and the death cross is a pretty exciting cryptocurrency trading strategy, and you need to understand both of these terms in order to implement it correctly. The golden cross is basically defined as the time when the short-term average of a particular cryptocurrency crosses the long-term average. The short-term average is usually defined as the 50-day average, and the long-term average as the 200-day average.
On the other hand, the death cross is the exact opposite of the golden cross and is defined as the moment when the short-term average falls below the long-term average.
Creating cryptocurrency trading strategy
A trading strategy is a set of rules that allow you to systematize trading, give the trader a clear idea of when to enter a trade, when to exit it, and when it is better to refrain from trading altogether.
The system also provides at what time and on what timeframe to trade, what currency pairs to use and what lot to enter into transactions. TS helps to turn off emotions and protect against their negative impact on trading.
Each strategy should include certain points that, in combination, will ensure the stability of trade:
- Rationale. This is the main idea on which the trading strategy is built. It is the foundation on which all other components are based;
- Currency for trading;
- Timeframe and trading time (trading session);
- Entry rules (signals to open a position);
- Exit rules. How stop loss and take profit are set;
- Trading lot volume and risk limitation.
If all these parameters are taken into account, you can start testing the strategy on a real account or a demo account. Now it will take only a few minutes to open a demo account and you can try out your trading strategy in the real market without any risk. Moreover, brokerage companies offer the opportunity to trade not only cryptocurrencies, but also standard instruments. You can trade all instruments on one trading account.
Only after successfully testing the trading strategy on a demo account, you can switch to a real account.