Cryptocurrency trading strategy
Cryptocurrency has become popular and is attracting interest from a growing number of people as a source of income. It is a rising and promising sector for investment, bringing profit to a growing number of people.A cryptocurrency trading strategy is a set of actions aimed at making profits while trading. A strong crypto strategy is the best way to maximize profits and reduce losses. But it's also worth noting that it's a highly volatile asset, and investing in it comes with risks. Therefore, it is worth taking the time to carefully study this topic and choose the right strategy, and this article will help you do so.
What is cryptocurrency trading?
Crypto trading is speculation on the price movements of digital currencies.
The principle, as in any other market, is simple - you need to buy a certain asset cheaper, sell it at a higher price, and put the difference in your pocket.
In essence, trading cryptocurrencies is similar to trading on traditional currency and stock markets, but there are several significant differences.
Work 24/7. Unlike traditional markets, crypto exchanges operate without interruption - there is no need to close transactions at the end of the trading day or the week before the long weekend. This is important because gap (price gap between closing and opening of trading) can be unpredictable.
Volatility. Cryptocurrency rates can "jump" in one direction or another with an amplitude of 10% -20% per day. For many representatives of the fiat world, this seems too risky - but it is because of the powerful price fluctuations that crowds of traders come to this market.
For comparison, the volatility of the same EUR/USD pair does not exceed 3-5% per month on average - in order to capitalize on such a low price fluctuation, traders must invest huge amounts in their positions or use “leveraged” trading (borrowed funds). ) with the ensuing additional commissions and increased risks (this type of trading implies the possibility of losing the entire deposit when certain price levels are reached).
At the same time, these volumes can be easily achieved on the regular spot crypto market. To be fair, trading with leverage is also gaining popularity in the digital currency market, but this is still the lot of professional traders. For beginners, at first, it’s better not to go there because of the increased risks.
In any case, it is important to adhere to the main rule - to use only free funds for trading, the loss of which will not be fatal. Because It is important to understand that trading - both traditional and cryptocurrency - is a risk.
Most traders prefer to trade pairs involving some kind of cryptocurrency and the US dollar. Other traders exchange one cryptocurrency for another. In any case, the main goal is to make money on the constant change in cryptocurrency rates.
As with currency trading, each pair will have an exchange rate. This exchange rate fluctuates every second in the direction determined by supply and demand. That is, if there are more people who want to buy this pair than those who want to sell it, then the rate will go up. And if there are more sellers than buyers, then the rate will fall.
Cryptocurrency pairs are of two types. These are crypto to fiat pairs and crypto cross pairs
- Crypto-Fiat Pairs: If a pair consists of one cryptocurrency and one fiat currency, it is called a crypto-fiat pair. The fiat currency is usually the US dollar as it is considered the de facto currency in this market. Examples of such pairs are BTC/USD and ETH/USD.
- Crypto Cross Pairs: If you exchange one cryptocurrency for another, you are buying or selling a crypto cross pair. For example, if you are exchanging bitcoins for ripples, you are trading BTC/XRP. It is better for beginners not to trade crypto cross pairs yet, as it is more difficult.
Traditionally, most traders prefer the crypto-fiat option. Plus, such tools are offered not only by exchanges, but also by numerous brokerage companies where you can easily trade cryptocurrency in Qatar and other countries.
Types of cryptocurrency trading analysis
The analysis carried out according to the same principles as the analysis of the Forex currency market. There are two approaches by which the global financial market is analyzed, technical and fundamental analysis.
Technical analysis is the basis of any trading activity, whether it be stock or commodity exchanges or over-the-counter markets, including the cryptocurrency market.
When using technical analysis in the history of trading, certain patterns and trends are searched for, which, under similar circumstances, should repeat again and lead to a predictable result. This is how a forecast is made about in which direction and at what pace the value of each electronic currency will move within a given period of time.
The factors that affect the price are irrelevant, since the main postulate of technical analysis says that the real-time chart already contains and reflects all the reasons that influenced the price behavior of the cryptocurrency. It remains only to find patterns using various techniques and tools - graphic and mathematical.
The main advantages of the technical analysis of cryptocurrencies are as follows:
- Simplicity. The results of using such a method can always be depicted in the form of graphs, that is, in a visual form. Therefore, even a novice trader can easily deal with a possible change in the cryptocurrency rate.
- Possibility of instant application. As already mentioned, since the market movement already takes into account all the factors influencing the price of a cryptocurrency, its changes in a single statistical segment form a certain trend (orientation). And any trend is prone to repetition, which means that you can always say where and with what probability the price will be in a certain time corridor (obviously, if the analysis is carried out professionally).
- Identification of trends. As part of the technical analysis of cryptocurrency charts, it is possible to identify the beginning of the formation of a particular trend, with the prevalence of which the exchange rate will behave in a certain way. Each trader can choose for himself from the available methodological arsenal or independently develop his own system of signs indicating the emergence of a trend in order to predict the possible amplitudes and frequency of cryptocurrency volatility (currency fluctuations).
Fundamental analysis. It consists in the study of changes in the rate of electronic money in the long term. Within the framework of this method, all information about the cryptocurrency received through official and expert data channels is examined.
Such an analysis allows you to make a generalized forecast of how the cryptocurrency exchange rate will change in a month, and possibly a year. Due to the fact that the digital currency is still in the stage of active development, it is pointless to try to determine longer-term prospects. At any moment, factors can arise that will radically change the long-term trend.
This analysis is based on three principles:
- the value of the electronic currency changes based on certain factors
- these factors can be established by a detailed analysis of a particular cryptocurrency
- if you establish all the factors and the degree of their influence, you can predict a change in the course in the long term
The methods of fundamental analysis differ from the general methods of analyzing the foreign exchange market. This is due to the peculiarities of digital money: decentralization, a high level of volatility (rate fluctuations), ways of using it in society. Therefore, the analytics of the cryptocurrency exchange rate by the financial method is carried out by studying the following factors:
- The popularity of cryptocurrencies. Due to the fact that electronic money does not have a centralized provision, their exchange rate depends on the demand among the population. Therefore, the analysis examines how each cryptocurrency can be used in the future and whether it will be popular. As part of this factor, the attractiveness of the electronic currency for mining, the number of issued coins and their maximum number on the market are investigated.
- Current position in the market. The larger the market capitalization of a coin, the higher the likelihood of its popularity in the future. In addition, when analyzing the growth of cryptocurrencies, the number of investors is studied, as well as the dynamics of the volume of trade in a particular currency.
- Attractiveness outside the cryptocurrency sector. Some digital money is used in real life for trading. The possibilities of such use of cryptocurrency directly affect its course.
- Rating of the development team. People's trust in developers allows us to conclude that the popularity of cryptocurrency is growing, and therefore stability in the future.
A certain community is formed around each digital currency, which includes miners, holders, investors and developers. Their attitude to the coin and confidence in its future can have a positive impact on the growth of the exchange rate.
Most traders, and not only in the crypto-currency field, use these methods of analysis. However, wave analysis of cryptocurrencies has gained great popularity at the moment.
Basic cryptocurrency trading strategies
Now that you already know how cryptocurrency trading works, we can discuss the cryptocurrency trading strategy. Experienced investors always have a number of cryptocurrency trading strategies that they would like to implement. By mastering the numerous ways to buy and sell cryptocurrency pairs, you will increase your chances of getting rich over time in this market.
Popular cryptocurrency trading strategies include:
- Swing trading. Swing trading is a flexible cryptocurrency trading strategy ideal for beginners. The essence of this strategy is to buy and sell cryptocurrency pairs at the time of the emergence of new trends. Such trends can be short-term and only last a few days.However, swing traders, unlike day trading investors, have no problem keeping a position open for even a few weeks.
- Market corrections. Corrections occur in all markets. In essence, a correction is a temporary cessation of an uptrend or downtrend.
- RSI indicator. The Relative Strength Index (RSI) is a technical indicator used by experienced cryptocurrency traders. This indicator shows whether a given cryptocurrency pair is overbought or oversold. If it is oversold, then its rate will fall, but there are good chances for a correction. That is, it is possible to make a short-term trade and catch the reverse movement even before it starts. If the RSI indicator shows that the cryptocurrency pair is oversold, then a wave of buyers may flood the market. Then again, there is an opportunity to quickly open and close a position in this digital asset in anticipation of a correction in the market.
There are a huge number of other cryptocurrency trading strategies. It is physically impossible to list all the trading strategies, so we have noted only those that are most often used by traders.
Creating cryptocurrency trading strategy
A trading strategy is something without which it is impossible to work on the stock exchange. Without a trading strategy, trading becomes a game of chance for adrenaline, not profit. Therefore, the importance of a trading strategy cannot be overstated.
A trading strategy is a complete trader's guide. The goal of the strategy is to ensure profit on the exchange.
The cryptocurrency trading strategy is usually based on:
- rules for market analysis and search for favorable opportunities
- rules for entering a position with a favorable forecast
- position holding rules
- exit rules
- risk management
- error handling rules
Any trading strategy should be consistent with the personal qualities and discipline of the trader. How he analyzes the information coming from the market and evaluates its nature, how he creates a forecast based on actual data. Whether he tends to keep profits and cut losses. A finished trading strategy is like a clear action plan that is applicable to both manual and automated trading.
It will not be difficult to start trading on the crypto market - it is important to approach business with a cool head and a sober mind, as well as to use exclusively free funds, understanding that trading is always a risk.
It is better for a beginner to first decide on a trading strategy: investing or active trading. The choice of an exchange or a broker for trading will largely depend on this. Then you need to allocate an amount that you will not be sorry to lose in case of failure, and start trading.
There is no need to rush to open a deal for the entire deposit in pursuit of profit - for a start, you can use no more than 1-3% of the total deposit. It is better to diversify risks and open several trades for small amounts as part of your strategy.
Register on the platform for free, experiment and choose the winning strategies that are convenient for you. Good luck!
How to create a cryptocurrency trading strategy?
First of all, you need to decide on your preferences. Next, you need to follow a series of steps that we discussed in the last section of this article.
What is the best strategy for crypto trading?
There is no best strategy for everyone. This is the uniqueness of the market. Using the same strategy, two traders can get opposite results. Therefore, you yourself must determine the most suitable strategy for yourself.
What percentage of the deposit can I risk?
As a rule, the risk per one trading operation should not exceed 1-3%.
What lot size should I trade?
The size of a trading position is calculated based on the size of the deposit and the risks per trade included in the trading strategy.
How to determine measurement objective target (potential profit)?
The target for a trade is determined based on the rules of your trading strategy. The trading strategy should clearly state not only the conditions for entering the market, but also the conditions for exiting a trading position.