About Crypto Trading Strategies
The cryptocurrency market is a new trading market compared to traditional financial markets such as securities, commodities, futures, options, and precious metal markets.
The Crypto market is known for its volatile nature in which some traders gain large profits while others might experience big losses. What makes the difference between these two groups is not simply chance, as successful traders use several types of analysis to make decisions, while most unsuccessful traders highly rely on their emotions that are influenced by market news.
These strategies are a series of rules based on tested assumptions about the nature of price movement and market performance.
Several types of trading strategies are around, each of which is suitable for certain traders who can use them to gain more profits.
In the following, we try to cover these strategies and show how they could be used successfully.
Crypto Trading Strategies’s frameworks
A trading strategy includes a fixed plan that is set to achieve profit by going in a long (buying) or a short (selling) position in markets.
Several properties have a role in the success of a trading strategy, such as verifiability, quantifiability, objectivity, and consistency.
In general, a trading strategy needs to study a certain asset to trade, define entry/exit (buy/sell) points, and money management rules.
Trading strategies are not a new concept they are around for more than a century.
However, these strategies are adjusted and developed to be used in various new markets such as the cryptocurrency market.
Typically, crypto trading strategies are based on two types of frameworks or financial analysis:
– Fundamental analysis
– Technical analysis
It is also possible to define a strategy that uses both of these types of analysis. These two types of analysis are not contradictory and studying both of them is recommended to traders.
In short, fundamental analysis is a method used by traders and investors to assess the intrinsic value of an asset by examining as most qualitative and quantitative factors as possible, such as industry health, market capitalization, and various economic factors.
The main assumption in this type of analysis is that the future potential of an asset relies on more than just prior performance. Both microeconomic and macroeconomic conditions are studied in fundamental analysis for knowing their effect on price movements.
Technical analysis, on contrary, tries to predict future market behavior based on previous price movements and volume data. It, also known as charting, strictly focuses on historical price action.
Technical analysis gives traders a series of tools known as indicators. These indicators could be used by the trader to identify existing trends. also could be used to provide insight about trends that could appear in the future.
So what is a trading strategy?
Several activities and decisions are involved in the trading of a certain asset.
From finding the momentum to enter into the market, to place various points like taking profit, stop-losses, and even getting signals to buy or sell. A trading strategy acts as a guide or plan for all of these activities.
A trading strategy also helps traders and investors in risk management, as it could be used to avoid unnecessary decisions.
While having a crypto trading strategy is not mandatory to participate in the market. However, it could be used to decrease the risk and increase the chances to have a successful trade.
A suitable trading strategy defines several potential conditions for when unexpected things happen in the market. In other words, it gives traders plans to respond to unexpected possible outcomes.
With a suitable crypto trading strategy, you can avoid emotional, impulsive decisions that most of the time lead to big financial losses.
However, trading strategies are not predetermined solutions to make a profit. They are nothing on their own and don’t make any return when not applied correctly.
The key to a successful trading strategy is its right application, which requires experience and knowledge about market mechanisms.
Components of crypto trading strategies
Now that you understand what is a trading strategy, you might ask a trading strategy contains what components.
These components highly depend on the particular requirements of a trader.
For example, some traders may define a schedule for a specific day of the week to trade, while others may define trades that should be closed in a matter of hours.
In other words, you can apply personal adjustments to crypto trading strategies to meet your particular needs.
General types of crypto trading strategies
Depending on the number of activities required for a particular trading strategy, it can fall into one of these two general types:
– Active trading strategies
– Passive trading strategies
Active trading strategies require more attention and time. Traders who use these strategies should constantly monitor price movements and frequently manage their portfolios.
Passive trading strategies, on the other hand, let traders choose a more hands-off approach, as they specify less time monitoring the market and manage their portfolios.
This type of trading strategy is somehow similar to investment strategies. However, their main difference is that trading, after all, means buying and selling the asset to make a profit.
Active crypto trading strategies
In the following, firstly we try to introduce active crypto trading strategies from short-term trading to more long-term types. Then we cover a few types of passive trading strategies that are commonly used in the crypto market.
Scalping crypto trading strategy
Scalping is one of the fastest types of crypto trading strategies that are used by traders.
These traders, who are known as scalpers, try to exploit the smallest moves in price action to gain a profit. They don’t try to make big profits from large moves or long-term trends.
Scalpers make small profits from the lowest changes in prices. They don’t intend to hold their cryptocurrencies for a long time.
For example, they make a profit from bid-ask spreads in different markets, gaps in liquidity, and various types of inefficiencies in the market. So, it is common for them to buy an asset and sell it in a matter of seconds.
In general, scalpers prefer gaining small safe profits rather than big risky, and time-consuming profits. They also prefer making money with high-frequently trades rather than betting on the continuation of a trend.
For example, scalpers take advantage of market inefficiencies by identifying gaps in prices between two resources.
However, scalping is one of the most advanced trading strategies that is not recommended for beginners due to its sophisticated nature.
Scalpers also have a deep and clear understanding of the mechanisms of the markets. Additionally, this crypto trading strategy makes a small percentage of profits, which could be profitable for large-scale traders.
Day Trading
Day trading is one of the crypto trading strategies that should be done in a single day and buy a certain asset. Wait for its price movement on the same day to sell it.
As its name suggests, this trading strategy tries to exploits changes in price during a day.
Day trading strategy is a concept that is derived from more traditional markets in which trading was possible during specific hours of the day.
Day traders in these markets close their positions before the end of the day and take their profits.
However, cryptocurrencies are traded in digital crypto trading platforms which are open 24/7.
As we mentioned earlier, market inefficiencies provide a great chance for these traders to make profits.
Since the crypto market is a new market that is not regulated or even tested for a long time, several types of market inefficiencies and price gaps could be found in it.
However, exploiting these gaps and inefficiencies requires high experience, fast decision makings, and deep knowledge about market procedures.
Swing Trading
Swing trading is a type of trading in which traders hold their positions for longer than a day, but typically not longer than a week or a month.
If you look at a price chart, you will see waves of highs and lows that show the volatility of the price.
These waves typically take several days or weeks to complete. Swing traders try to take advantage of these waves using a combination of technical and fundamental analysis to formulate their trade plans.
In general, swing trading is an easier one among crypto trading strategies that could be used by beginners.
It does not require fast responses to price movements, and its patterns take a longer time to complete.
Fundamental analysis typically is used by swing traders to find the potential momentums of buy/sell in the market.
Swing traders have more time to find the most suitable decisions. They follow certain rules that let them decide with more rationality.
Trend trading
Trend trading, which also is called position trading, is a strategy that involves taking advantage of directional trends. Trends typically are the directions of price movements that last for weeks or a few months.
Trend traders often hold their cryptocurrencies or assets for a few months when an uptrend runs on the chart. They simply buy an asset in an uptrend and sell it when the price enters into a downtrend.
The main assumption of the trend trading strategy is that the asset price will keep the move in the direction of the trend. But they are also aware of the possibility of a trend reversal, which occurs frequently in financial and crypto markets.
Several technical tools such as moving averages, trend lines, and various technical indicators are used by trend traders. Trend trading is one of the most suitable crypto trading strategies that could be used by beginners when combined with proper risk management.
Passive Crypto Trading Strategies
Passive trading strategies require less attention to price movements and news and analysis offered by various news channels.
This type of trading is highly similar to an investment. However, their difference is that traders don’t try to support an asset by buying it for a long time, instead, they want to make a profit by this activity.
Passive trading strategies in essence are buy-and-hold strategies in which traders don’t require trade much.
However, in recent years with the development of trading platforms, some new trading methods are introduced in which beginner traders can simply follow and copy the tradings of experienced traders.
This method of trading also could be considered a passive strategy. In the following, we will introduce a few types of passive crypto trading strategies.
HODLing or Buy and Hold
This type of crypto trading simply involves buying cryptocurrencies, particularly in their first stages when they could be bought very cheaply. Holding them and waiting to gain value after a relatively long time regardless of market fluctuations.
This type of trading requires trust and belief in the growth of a certain asset.
HODLing is a term coined in Bitcoin forums, where an investor declared Bitcoin will be the future of finance and money, which means no amount of money would be equal to its investment.
You might think this type of trading can not be used to make large profits and requires a very optimistic view about an asset.
However, when we assume that some traders who bought Bitcoin in its first stage, for example in 2012, when it traded for less than a dollar, you can see that these traders are those who gained more than almost every other trader.
Index investing
Index investing is another type of crypto trading strategy that does not require so much attention to price movements and media news.
It is a concept that was originally used in traditional markets such as stock markets in which various types of indices show the performance of high-performing assets.
Some financial products that contain several assets in their basket are produced in these markets to follow these indices.
That idea is also applied to cryptocurrency markets, and some tokens are made that follow the price action of some profitable performing cryptocurrencies.
These tokens typically are made up of coins from a similar sector, such as utility tokens, privacy tokens, or even stable coins.
Copy Trading
This strategy is a result of the combination of social platforms with trading platforms.
In recent years, several trading platforms are developed in which beginner traders can follow and copy positions and portfolios of experienced traders. This type of passive trading helps new traders gain large profits by simply copying experienced investors’ trades.
This new type of trading strategy also helps new traders to learn principles of trading and crypto trading strategies from the most successful traders.
However, it requires total trust in the knowledge of other traders and doing exactly what they do. As you might know, after all, financial markets in general, and the cryptocurrency market in particular, are not predictable, and there are chances to fail a prediction even for experienced traders.
Closing Thoughts
The cryptocurrency market is a relatively new financial market. Crypto traders, like any other trader, need to have predetermined sets of rules and actions for various potential outcomes.
These predetermined sets of rules that are based on certain assumptions make crypto trading strategies that could be used to make a solid trading plan.
Without these strategies, chances are very high for traders to respond to news and movements of prices emotionally, which can not be a reliable source of decision making.
Additionally, Nominex offers a unique social trending experience by providing different types of crypto tournaments, in which traders have the chance to win crypto rewards daily.
Nominex provides a place in which beginner crypto traders can learn crypto trading strategies easily and also interact with professionals to find suitable methods that work best for them.
Nominex also provides several educational sources that beginners can learn from by simply watching them.
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