A couple of years back, terms like cryptocurrency, Bitcoin, and digital assets felt so alien to the common man who is removed from the ever-evolving technical landscapes of the world. Even some of the most influential people in the business world including Warren Buffet, are not completely convinced by the utilities of non-tangible assets.
Regardless, they have become more mainstream, and many of the financial institutions have started including cryptocurrencies in their portfolio. Now there is more awareness of what cryptocurrency is, and what is it used for.
However, trading cryptocurrency in the market and potentially earning profits would require a bit more homework from your side. There are several types of crypto trading strategies and each has its advantages and disadvantages. In this guide, we will explore some of the most popular trading strategies to find out the suitable one for you.
What is Cryptocurrency Trading?
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As with any other form of trading, crypto trading is the process of buying and selling cryptocurrencies. Just like trading in forex or stocks, to make a profit, crypto traders need to buy when the price drops and sell when it peaks.
To predict the price, traders would need to have a good understanding of the market and analyze various factors such as market sentiments, demand, etc. To be good at cryptocurrency trading, you need to have a better understanding and research of the trading world and should have contingency plans to recover from potential losses.
Advantages and Disadvantages of Crypto Trading
As with any form of trading, cryptocurrency trading comes with many advantages and disadvantages. Before becoming a cryptocurrency trader, you should be aware of both.
Advantages
- Unlike traditional trading markets, the cryptocurrency trading market is highly volatile increasing the possibility of high gains. The volatility also comes with a degree of risk.
- Virtually anyone with an internet connection can take part in the cryptocurrency market.
- Decentralized cryptocurrency trading markets are open 24 hours, making it easily accessible for any user regardless of their time zone.
- Crypto transactions are secured by blockchain technology, making it immutable and secure.
The crypto market is decentralized and completely controlled by the community, cutting down the influence of the middle-man.
Disadvantages
- The volatility of the cryptocurrency market can lead to significant risk.
- It would be hard to buy and sell some cryptocurrencies without significant loss of value due to low liquidity.
- Lack of accountability due to decentralization.
- Cyber security risks and threats are prevalent in the crypto market.
- The technology can be overwhelming for newcomers.
Tips for Crypto Trading Beginners
The cryptocurrency market can be lucrative if you have enough knowledge, dedication, experience, and discipline. But without enough knowledge, it can be a pitfall. So, here are some tips to help you
1. Always do your research
The very first rule for anyone new to the cryptocurrency market is that regardless of the common notion, you should do your research before investing. You can do research by reading the whitepaper on cryptocurrency, analyzing historic price variations, overall media sentiment, etc. By proper research, you can significantly reduce risks and even implement contingency plans.
2. Diversify the portfolio
As the popular saying goes, it is not good to put all your eggs in one basket. When it comes to the cryptocurrency market, investing all your savings in one token increases the risks due to the inherent volatility.
So, it is better to trade multiple cryptocurrencies at the same time. Many traders use the barbell strategy, where they invest 80% of the total amount in a low-risk cryptocurrency and the rest in a highly volatile crypto to capitalize on price swings while minimizing the risks.
3. Don’t go all in
Always remember that the cryptocurrency market will swing either way and it will not stay static, which is what makes the market an exciting trading venue. However, it is not good to go all in by investing your life savings. Only invest what you can afford to lose, at least when you are starting.
4. Analyze the order book
If you do not know when to enter and exit a market, it is best to analyze the order book first. The order book lists the buy and sell orders of an asset. When more sell orders are there than buy orders, then the asset’s value decreases and vice versa. By analyzing the order book, you can decide when to buy and sell your cryptocurrency.
5. Consider the market capitalization
Many people in cryptocurrency trading make the mistake of not considering the market capitalization and solely making decisions based on the price of a token. But in reality, it is also important to consider the market capitalization to get the whole picture. Market cap will help you compare the potential of different cryptocurrencies.
6. Learn trading strategies
One of the most important aspects of cryptocurrency trading is realizing that beyond just buying and selling in the hope of making a small profit, there are many trading strategies you can implement to maximize profit and minimize risks. Some of the most popular trading strategies include day trading, HODL trading, dollar-cost averaging, crypto futures trading, and more.
10 Popular Crypto Trading Strategies
To have a successful run in the cryptocurrency market, you need to have efficient trading strategies that can keep you away from huge risks. Here are some of the most popular cryptocurrency strategies that can potentially keep you afloat:
1. Day Trading
A type of trading strategy where the buying and selling happens the same day. Here, you are trying to capitalize on the high volatility of cryptocurrencies. Here, you have to put enough thought into the right time for buying and selling the cryptocurrency because the market can swing either way. To be good at day trading, you might need constant practice and good enough knowledge about the market. So, the day trading strategy is typically suitable for advanced traders.
2. HODL Trading
In the HODL strategy, users buy a cryptocurrency and hold it for a long term. The investors wait till the price goes significantly high before considering selling it. Here, the traders need to find a future-proof cryptocurrency to buy in the first place and should constantly keep an eye on its market value. This method can eliminate the short-term volatility of cryptocurrencies.
3. Dollar-Cost Averaging
The first step of the dollar-cost averaging strategy is to select a cryptocurrency and set a goal of investing a set amount regularly over a predetermined time. Here, you don’t need to change your strategy according to the price variation, instead keep on investing till you achieve the set goal.
The aim of the dollar-cost averaging strategy is that since you buy cryptocurrency at extremely high and extremely low, on average you can make a profit or at least limit the loss. However, since you have to buy cryptocurrency in fractions, you may have to pay a higher transaction fee than you’d normally do.
4. Crypto Futures Trading
Cryptocurrency futures is a strategy where two investors bet on the future price of a cryptocurrency. This strategy will give the users an array of cryptocurrencies to choose from. There are many trading venues such as exchanges that offer crypto futures trading. While some are regulated some are not. This strategy allows you to enter into cryptocurrency without actually owning any.
5. High-Frequency Trading
High-frequency trading (HFT) involves designing special programs and bots that can enter and exit a market quickly. Essentially you are automating the trading process to capitalize on any potentially lucrative trading opportunities.
Here, you need to have enough technical skills to design the algorithm or may have to use one available online. There are multiple HFT trading strategies you can utilize such as arbitrage, market-making, liquidity detection, and momentum trading.
6. Arbitrage Trading
Here, you are taking advantage of the price differences of a cryptocurrency on markets. The first step is to identify what the price difference between the two markets is, and then buy from the market with a lower price to sell it on the market with a higher price. On paper, this strategy may seem simple, but you need to consider the volatility of cryptocurrency markets.
If you bought the tokens from one market and the price in the second market goes low, you may lose your profit. You also need to factor in the transaction fee, deposit fee, and withdrawal fee of both markets before attempting an arbitrage trading strategy.
7. Scalp Trading
Scalp trading is a strategy where the traders execute multiple trades to capitalize on small price fluctuations. In this day trading strategy, the trader will assess historical data thoroughly to predict market trends and decide an exit and entry point based on that. It is given that all trading strategies require discipline, but in the case of scalp trading, the risk is much higher demanding all your attention. Regardless, you can see many traders that make significant profits with the scalp trading strategy.
8. Range Trading
Here it is all about making a prediction and stocking with it. In the range trading strategy, you look at the current price of the token then analyze the market trend and predict that the token will reach a price over a short period. You buy at the current price and wait till it reaches the predicted price before selling, making a profit.
9. Swing Trading
Swing trading is a strategy that utilizes fundamental and technical trading indicators that will give the idea of what to buy and when to buy. This strategy aims to capitalize on the volatility of the market over a week or a month. While swing trading can be effective and lucrative, it will consume a lot of time to figure out a good entry and exit strategy.
During swing trading, the traders will have to dedicate a considerable amount of time to studying the developments in the market. There are some crypto bots and AI-enabled platforms that will constantly analyze the market for you. Reputable bots can provide lucrative trading signals and may even offer to buy and sell without active user intervention.
10. Index Investing Strategy
In the index investing trading strategy, the investors hold a portfolio of cryptocurrencies instead of just one, which can potentially reduce the risks. Here, users can select from exchange-traded funds (ETFs) or decentralized finance (DeFi) pulse indexes according to their comfort and overall market trends.
The indexes allow users to give recommendations on underlying protocols through voting, making it a democratic space where all users have a voice. It is also noteworthy that since the index fund replicates the underlying protocols, it eliminates the need for a huge team to select the best cryptocurrency. However, investors should know that as there are rewards for choosing index funds, it is not devoid of risks.
Conclusion
Cryptocurrency trading is the process of buying a crypto token at a lower price and selling it at a higher price to make a profit. There are both advantages and disadvantages to crypto trading. But with popper knowledge and strategies you can make substantial gains. In this article, we have seen the 10 most popular trading strategies you can implement for potentially gaining profits while minimizing risks.
