A beginner’s guide to cryptocurrency trading strategies

Understanding cryptocurrency trading

The trend of financial institutions including cryptocurrencies in their portfolios has intensified in recent years. The first pure digital assets to be included in an investment portfolio by asset managers are called cryptocurrencies. Although they share the same characteristics as traditional assets, they have their own distinct nature.

The act of buying and selling cryptocurrencies to earn a profit is known as cryptocurrency trading. The three elements that make up the definition of cryptocurrency trading are the operating mode, the object and the trading strategy. 

The type of transaction determines the manner of operation of cryptocurrency trading in the cryptocurrency market. For instance, the trading of cryptocurrency contract for differences (CFD), which is a contract between a buyer and a seller, provides that when the position closes, the buyer will pay the seller the difference between them. The object being exchanged is cryptocurrency, hence cryptocurrency trading.

An investor-formulated trading strategy in cryptocurrency trading is an algorithm that defines a set of established rules for buying and selling digital assets on cryptocurrency marketplaces.

This article will deep dive into various crypto trading strategies like day trading, futures trading, high-frequency trading (HFT), dollar-cost averaging and scalping, and discuss the pros and cons of trading cryptocurrencies.

Crypto trading strategies

Financial risk can be mitigated with an efficient trading strategy. It keeps you from making rash and impulsive judgments that can cost you a lot of money. If you are a beginner, you could even consider trading on the Binance Futures testnet to become familiar with the world of highs and lows.

Here are some of the common strategies that are popular among crypto traders:

Day trading

The strategy of crypto day trading entails entering and exiting a position in the market on the same day within crypto trading hours. It’s also known as intraday trading because trades are typically started and concluded within a single day. So, can you day trade Bitcoin (BTC)? Yes, day trading BTC is like playing with Bitcoin volatility throughout the day.

The entire point of day trading cryptocurrency is to profit from tiny market movements. Because cryptocurrencies are volatile, day trading in the crypto market may be pretty rewarding. Trading strategies are devised using technical analysis by day traders, but it is a time-consuming and risky strategy that is mainly suitable for advanced traders.

HODL (buy-and-hold)

HODLing is an investment technique devised from a misspelling of hold, in which people buy cryptocurrencies and keep them for a long time. This permits investors to profit from an increase in the asset’s value. So, how to take profits in crypto with the HODL strategy?

HODLing lets investors take profits from long-term value appreciation when they invest for an extended period. Investors can benefit from the HODL strategy since they are not subject to short-term volatility and can avoid the risk of selling low while buying high.

As cryptocurrencies have a short history compared to commodities like gold and silver or fiat currencies like the United States dollar and euro, they are prone to fraudulent activities such as money laundering. Therefore, some countries may not support cryptocurrencies, affecting the value of digital assets.

Crypto futures trading

A crypto futures trading strategy involves entering into a contract agreement between two parties to buy and sell a particular amount of an underlying cryptocurrency like BTC at a predetermined future price on a predetermined date and time.

Futures trading strategies provide you access to a wide selection of cryptocurrencies without requiring you to own any of them. For example, individuals who hold cryptocurrencies can use futures to protect themselves from market fluctuations. So, how can you trade cryptocurrency with future contracts?

Read our guide on crypto derivatives to understand how to trade Bitcoin futures.

Arbitrage trading

Traders rely on arbitrage opportunities to earn profits through cryptocurrency or Bitcoin trading strategies. Arbitrage is a trading method in which a trader purchases cryptocurrency in one market and sells it in another. The spread is the difference between the buy and sell prices. 

Traders may be able to book profit due to the differential in liquidity and trading volume. They register accounts on exchanges with a significant price discrepancy for the cryptocurrency they’re trading to take advantage of this opportunity.

Related: Binance vs. Coinbase: How do they compare?

However, the traders need to pay a deposit, withdrawal and trading fee twice, reducing your take-home profits. Also, if you miss the price difference on two exchanges (as mentioned above), you cannot capitalize on that arbitrage opportunity.

High-frequency trading

HFT strategy entails the creation of algorithms and trading bots that aid in the speedy entry and departure of a crypto asset. The design of such bots necessitates a thorough comprehension of complicated market principles and a solid foundation in mathematics and computer science. As a result, it is more suited to experienced traders than newbies.

Arbitrage, market-making, liquidity detection and momentum trading are four sorts of HFT strategies. As previously stated, arbitrageurs look for price differences between two identical assets and benefit from the price discrepancies on different exchanges. HFTs could utilize latency arbitrage to exploit these misalignments, which are frequently induced by low latency.

Quant traders utilize HFT, which is an algorithmic trading approach to benefit from bid-ask price discrepancy to sell/buy assets in microseconds using latency. However, short-term price differences are spotted by trading following momentum strategies to act on anticipated reactions to the volatile crypto market.

Liquidity detection systems rely on recognizing the market engagements of other traders, frequently institutional investors. Moreover, their primary purpose is trading on other traders’ market activity.

However, please note that algorithms can react to market conditions in real time. As a result, algorithms may significantly expand their bid-ask spreads during volatile markets or temporarily halt trading, reducing liquidity and increasing volatility.

Dollar-cost averaging (DCA)

In the DCA strategy, a set amount of money is invested at regular intervals but in small increments, allowing traders to profit from market increases without putting their holdings under market risk. 

Simply choose a fixed amount of money to invest in your preferred cryptocurrency over a set time to use the dollar-cost averaging strategy. Then, regardless of the market movement, you keep investing until you attain your goal.

You buy in at both the highs and lows of the market when you use the dollar-cost averaging strategy. Moreover, DCA smooths out your investments to invest in your preferred cryptocurrency over time without being as influenced by extreme highs or lows as you would be if you invested a large quantity all at once.

Since it is a long-term strategy, you have to pay more fees while trading your crypto assets. Therefore, conduct your own research before adopting any trading strategy.

Scalping

Scalp traders exploit market inefficiencies to make a profit. However, the scalping trading method entails increasing trading volumes to make a profit. Scalpers examine the historical trends and volume levels before deciding on an exit or entry point within a day.

Despite the risk, a savvy trader pays attention to the margin requirement and other crucial rules to avoid having a terrible trading experience. Scalp traders prefer highly liquid markets as it is pretty predictable when one should enter or exit the market. Whales or large traders usually utilize this strategy to trade large positions.

Range trading

Range trading is an active investing approach in which the investor determines a price range to purchase or sell crypto over a short period of time. For example, suppose BTC is currently trading at $35000, and you anticipate it will hike to $40000 in the following weeks, you can expect it to trade in a range between $35000 and $40000.

You might try range trading it by buying BTC at $35000 and selling when it rises to $40000. This approach would be repeated until you believe Bitcoin will no longer trade in this range.

Index investing

A cryptocurrency index fund is an investment vehicle that holds a portfolio of cryptocurrencies and is derived from a pool of funds committed by investors. Index investing involves purchasing exchange-traded funds (ETFs) such as Bitcoin Futures or spot ETFs or investing in indexes such as the decentralized finance (DeFi) Pulse Index to eliminate the risk of investing in an individual coin.

Holders of the index can vote on governance recommendations for the underlying protocols without leaving them. This is part of the team’s concept of smart indexes that keep the usefulness provided by direct token ownership.

Because an index fund replicates its underlying benchmark, it doesn’t require a large team of research experts to assist fund managers in selecting the best crypto assets. Additionally, when money is invested in a percentage similar to an index, the portfolio is diversified across multiple procedures. On the other hand, index funds are still riskier than government bonds or fiat/cash in that traders can lose money.

Swing trading

Swing traders play with market volatility for about a week or a month. They form strategies using fundamental and technical trading indicators. In swing trading, traders have enough time to keep track of a crypto asset’s price and make investment decisions.

On the other hand, Swing trading frequently necessitates quick judgments and execution, which isn’t ideal for a novice. Also, traders need to stay active every day and gauge the market even if they are not trading daily, making it a complex and time-consuming strategy.

However, crypto bots and signals are examples of automated technologies that can help you execute swing trades faster. For instance, trading robots will scan the market and buy and sell assets without human intervention once specific criteria are met.

Trend trading

Trend or position trading involves holding positions for a few months to profit from directional signals. Usually, trend traders enter into short positions when they anticipate downward traders. However, they invest for the long-term if they foresee upward market movement. 

Regardless, they must consider trend reversals using indicators like moving average convergence divergence and stochastic oscillator to increase the success of their investment strategy. 

Since beginner traders are concerned about the financial risks involved with crypto investments, trend trading is suitable for them. Nonetheless, whether a novice or an advanced trader, one must conduct their due diligence before committing funds.

Advantages of trading cryptocurrencies

There are many benefits of trading cryptocurrency, as explained below:

Drastic price fluctuations

Because of their high volatility, cryptocurrencies are prone to attracting speculative attention and investors. For instance, intraday price changes can give traders excellent profit, but they also carry a higher risk like a sudden downward price trend leading to losses.

Near anonymity

Purchasing goods and services with cryptocurrencies is done online and does not require revealing personal information. Also, with growing concerns about privacy and identity theft, cryptocurrencies may be able to provide users with some privacy benefits.

For identifying users or customers, each exchange has its own set of Know Your Customer (KYC) measures. The KYC process used by exchanges allows financial organizations to limit financial risk while preserving the anonymity of wallet owners.

Programmable smart capabilities

Other perks to holders of some cryptocurrencies include restricted ownership and voting rights. A partial ownership interest in physical things like artwork or real estate may also be included in a cryptocurrency portfolio.

24-hour market

Does the crypto market close? No, it doesn’t because it is a decentralized market. The cryptocurrency market is open 24 hours a day, seven days a week and is not physically transacted from a single location. Instead, individuals can conduct cryptocurrency transactions in various locations globally.

Peer-to-peer transactions

One of the most significant advantages of cryptocurrencies is that they do not require the involvement of a financial institution as an intermediary, which can lower transaction costs. Furthermore, people who are wary of established systems may find this feature appealing.

Disadvantages of trading cryptocurrencies

Despite the above benefits, the crypto space is not without risks or disadvantages. Some of these are explained below:

Cybersecurity problems

Cryptocurrencies, like digital technology, are vulnerable to cybersecurity breaches and can fall into the hands of hackers, leading to crypto heists. Mitigating this problem necessitates constant security infrastructure maintenance as well as the use of advanced cybersecurity measures that go beyond those utilized in traditional banking.

Scalability concerns

The quantity of transactions and transaction speed could not compete with traditional currency trading before the tremendous increase in technical infrastructure. For example, in March 2020, scalability concerns caused a multi-day trading delay. The backlog hurt traders who wanted to transfer cryptocurrency from their own wallets to exchanges.

Regulatory challenges

As there is currently no legal structure in place to offer asset protection, crypto investors have little to no protection in the market. However, in the United States, certain exchanges comply with regulations by federal and state authorities.

What is the best way to trade crypto?

There isn’t any best or worst way of trading crypto. If you are looking for the best crypto exchange for day trading or the best app to trade cryptocurrency, you must focus on financial or investment objectives first.

Additionally, you need to be aware of the asset classes you are willing to add to your investment portfolio, along with the level of risk you want to be exposed to. Furthermore, familiarize yourself with cryptocurrency trading basics such as order types and decide on trading indicators you want to adopt.

Related: Bull vs. bear crypto market: What’s the difference and how to handle both