There are many ways to make money by trading cryptocurrency. Trading strategies help you to organize the different techniques that you have learnt into a coherent framework, so that you can follow it more easily. This allows you to keep track of your cryptocurrency strategy and make changes as needed.
The two main schools of thought you should consider when creating a trading strategy are technical analysis and fundamental analysis. We will explain the difference between these concepts so that you can choose the right strategy.
Throughout this article, we will be exploring some of the more commonly used trading strategies. This article mainly focuses on cryptocurrency trading strategies. While this may be the case for other financial assets, such as forex, stocks, options, or precious metals like gold, this is not always the case.
Would you like to create your own trading strategy? This article provides an overview of how to approach speculating on the crypto markets. It covers the basics of what you need to know in order to make informed decisions when investing in cryptocurrencies. If you have a good trading strategy, you will be more likely to achieve your financial goals.
What is cryptocurrency in simple terms?
Cryptocurrency is a digital asset that uses cryptography to secure its transactions, to control the creation of new units, and to verify the transfer of assets.
Although you can’t hold or touch cryptocurrencies like you would with regular currency, they are still digital assets. It is an internet-based medium of exchange.
While you can use cryptocurrencies to buy items in some stores, it is more commonly traded as an investment in order to profit from the returns.
Bitcoin is the most recognizable cryptocurrency and is gaining popularity quickly. It is starting to be used more by mainstream businesses.
Bitcoin is a digital currency that is created with an encrypted code. This code is similar to a string of numbers and letters. Creating new cryptocurrency is known as mining. The code for a cryptocurrency can be unlocked with an equation, which acts as a virtual key.
The ownership of cryptocurrency is recorded on a database that is protected by strong cryptography. The use of codes is supposed to bring greater security by protecting information.
A blockchain is a database that keeps track of all bitcoin transactions and prevents people from spending the same coin more than once.
How does cryptocurrency work?
Cryptocurrency is not run by a central authority, such as governments, central banks or financial institutions.
The blockchain is a distributed database that maintains a continuously-growing list of data records. Blockchain technology is used for Bitcoin transactions because it doesn’t require a central authority to clear or settle transactions. A database that is maintained across a computer network and can be viewed by anyone at any time is a blockchain. This database cannot be hidden.
The ledger makes it possible to share data globally so that cryptocurrency transactions can be verified and double spending prevented.
Cryptocurrencies work by having a ledger of all transactions that is maintained by miners who validate the authenticity of the transactions by solving complex computational problems. When a miner solves a computational problem, they are rewarded with a small amount of cryptocurrency. Transactions can’t be faked, or overwritten.
The ledger is a database that is:
- Public
- Online 24/7
- Not controlled by any central bank or government
Cryptocurrencies are appealing to some people because the details of the people who are trading them are not public.
It is nearly impossible to counterfeit cryptocurrency. The public ledger for blockchain technology is stored and updated on all computers that are part of the network. These computers must all agree on the correct version of the ledger in order for the system to work correctly.
This key allows you to spend your cryptocurrency. When you buy digital currency, you own a private key that allows you to spend your cryptocurrency. The code authorizes outgoing transactions on the blockchain network. This allows you to spend the funds.
So if cryptocurrencies aren’t regulated by banks or governments, where do they come from?
What is a trading strategy?
A trading strategy is a plan that covers all aspects of your trading activities. Your trading framework is like a set of guidelines that you follow to help you make trading decisions.
A trading plan can help reduce financial risk by eliminating unnecessary decisions. Trading without a strategy can be riskier than trading with one. Your trading plan should define how you react to unexpected market changes, not your emotions. Having a trading plan in place makes you prepared for the possible outcomes. It helps to prevent you from making decisions that are too quick and could result in large financial losses.
For instance, a comprehensive trading strategy may include the following:
what asset classes you trade
what setups you take
what tools and indicators you use
What causes you to enter and exit trades (where you place your stop loss)?
what dictates your position sizing
how you document and measure your portfolio performance
Your trading plan may also contain other general guidelines, even down to some minor details. For example, you can set rules for yourself like never trading on Fridays, or only trading when you’re feeling alert. You have the option to establish a trading schedule, so that you only trade on certain days of the week. Do you find yourself regularly checking the Bitcoin price on weekends? Always close your positions before the weekend. This type of personalized guidance can also be included as part of your trading strategy.
This means testing your strategy on historical data to see if it would have worked in the past, and testing it on live data to see if it works in the present. For example, you could use the Binance Futures testnet for paper trading.
In this article, we’ll consider two types of trading strategies: active and passive.
You will see that the definitions of trading strategies are not always clear, and there may be some overlap between them. It may be worth considering a combination of multiple strategies instead of just one.
Active trading strategies
Active strategies require more time and attention. We refer to these types of investors as “active” because they are constantly monitoring their portfolios and making adjustments as needed.
Day trading
The most well-known active trading strategy is day trading. Many active traders don’t day trade.
Trading that involves buying and selling assets on the same day. Day traders try to take advantage of price changes that happen during the day.
The term “day trading” describes trading in the traditional markets, where trading is only open during specific hours of the day. This means that day traders in those markets never hold a position overnight, when trading is halted.
Many digital currency trading platforms are available to use 24 hours a day, 7 days a week. When it comes to crypto markets, day trading is used in a slightly different context. It is a type of trading where traders buy and sell within a 24-hour period.
Day traders will look at how prices are moving and use technical analysis to come up with trade ideas. Besides finding inefficiencies in the market, they may employ many other techniques.
Some people can make a lot of money through day trading cryptocurrency, but it can be very stressful, require a lot of time, and be quite risky. This means that day trading is only recommended for experienced traders.
Swing trading
Swing trading is a type of longer-term trading strategy that involves holding positions for a longer period than a day but shorter than a few weeks or a month. Swing trading is a type of trading that falls in between day trading and trend trading.
Swing traders typically look to capitalize on periods of volatility that last several days or weeks. In particular, they may use technical analysis to better time their entries and exits Swing traders use a mix of technical and fundamental factors to come up with their trade ideas. They may specifically use technical analysis to choose better times to enter and exit trades. Fundamental analysis looks at how underlying factors can affect a company’s financial situation, and it can help you determine whether a stock is a smart investment. Even though some people might not think so, chart patterns and technical indicators can have a huge impact on a swing trading strategy.
Swing trading is a great option for active trading beginners. The main advantage of swing trading over day trading is that swing trades take more time to complete. Even though the text mentions that the trade is not too hard to keep track of, it still says that they are short.
This allows traders more time to consider their decisions. Most traders have enough time to react to how the trade is unfolding. Swing trading allows for slower decision making, which can be more rational. Alternatively, day trading often requires quick decisions and prompt execution, which may not be ideal for a beginner.
Trend trading
This strategy is also known as position trading and it involves holding onto your positions for a longer amount of time, typically at least a few months. They will go long (expect prices to rise) when they identify an up-trend and short (expect prices to fall) when they identify a down-trend. Trend traders seek to profit from directional trends by buying assets when an up-trend is identified and selling when a down-trend is identified. If a trend trader is following an uptrend, they may enter a long position. On the other hand, if the trader is following a downtrend, they may enter a short position.
While trend traders typically use fundamental analysis, this is not always the case. Even though fundamental analysis looks at events that may take a while to develop, traders who focus on trends try to take advantage of these changes.
This trading strategy is based on the idea that the asset will continue to move in the same direction as the trend. Even though trend traders try to predict which direction the market will move, they must be prepared for the possibility that the market could move in the opposite direction. As a result, they may also use moving averages, trend lines, and other technical indicators in their strategy to try and increase their success rate and reduce financial risks.
If beginner traders do their research and manage risk well, trend trading can be a good option for them.
Scalping
Scalping is a quick trading strategy. Instead, they ride small, rapid price changes. Scalpers attempt to take advantage of small, rapid price changes instead of big moves or drawn-out trends. The strategy focuses on making small, repeated moves to achieve a goal. An example of this would be if someone were to take advantage of the difference in prices between what someone is willing to buy an item for and what someone is willing to sell it for. Another example would be if someone were to exploit a situation where there is a lack of buyers or sellers in the market.
Scalpers generally don’t hold their positions for extended periods of time. Scalp traders are people who open and close positions very quickly, usually within a few seconds. The reason scalping is often related to High-Frequency Trading is because both strategies involve making a large number of trades in a short period of time.
If a trader finds a market inefficiency that happens repeatedly, scalping can be a very profitable strategy. They can make small profits each time it happens that add up over time. When it comes to scalping, it’s best to stick to markets where there’s a lot of liquidity. That way, it’s easier to get in and out of positions.
Scalping is a complex trading strategy that is not recommended for beginner traders. A deep understanding of the mechanics of the markets is also required. However, scalping is more effective for large traders. If the goal is to make a smaller profit percentage, then it would stand to reason that trading larger positions would be more advantageous.
Passive investment strategies
With passive investment strategies, you don’t have to manage your portfolio as closely, so it takes up less of your time. While there are differences between trading and investment strategies, the bottom line for trading is buying and selling assets in order to make a profit.
Buy and hold
The “buy and hold” investment strategy involves buying an asset and holding onto it for a long period of time, regardless of any changes in the market.
Investors who use this strategy don’t try to time the market, but instead buy investments and hold them for the long term. This strategy is based on the idea that in the long run, the timing or entry price won’t make much difference.
The buy and hold strategy is usually based on fundamental analysis and usually doesn’t concern itself with technical indicators. The strategy will likely only involve checking on the portfolio every so often, rather than constantly monitoring it.
The buy and hold strategy is an investing technique where you purchase an asset and hold onto it for a long period of time, regardless of market conditions. Similarly, HODL is a crypto investing strategy where you buy Bitcoin or another cryptocurrency and hold onto it for the long term, regardless of market conditions. However, cryptocurrencies are a risky and volatile asset class. The “buy and hold” strategy is popular among Bitcoin investors, but it may not work as well with other cryptocurrencies.
Index investing
Index investing typically means buying ETFs and indices in the traditional markets. This type of product is also available in cryptocurrency markets. Both on centralized cryptocurrency exchanges and within the Decentralized Finance (DeFi) movement, there is a focus on Ethereum.
A crypto index is a basket of cryptoassets that tracks their combined performance. This group of coins may come from a similar area or focus, such as privacy coins or utility tokens. As long as an asset has a reliable price feed, it could be anything. A large majority of these tokens use blockchain oracles.
How can investors use crypto indexes? Instead of investing in an individual privacy coin, they could invest in a privacy coin index. This allows them to bet on privacy coins as a group while reducing the risk of betting on a single coin.
Analysts predict that tokenized index investing will grow in popularity in the coming years. This tool allows you to invest in the blockchain industry and cryptocurrency markets without having to be directly involved.
Closing thoughts
It’s not easy to come up with a crypto trading strategy that meets your financial goals and personality type. We looked at some of the strategies that are most commonly used for trading cryptocurrency, so hopefully you can figure out which one might work best for you.
You should track each trading strategy you use to find out which ones are really working and which ones are not. Make sure not to break any rules you set for yourself. Creating a trading journal or sheet can help you to understand how different trading strategies perform.
It’s important to note that you don’t have to stick to the same strategies forever. By analyzing your data and past trading behavior, you can figure out what methods work better for you and adjust your strategies accordingly. This means that your trading strategies should be changing as you get more experience with trading.
You may also find it helpful to invest different parts of your portfolio in different ways. You can monitor the performance of each strategy separately while still managing risk effectively.
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