Cryptocurrency trading strategy
About crypto trading
A cryptocurrency is a digital asset designed to be used as a payment means. It is based on blockchain cryptography that guards transactions, controls emissions and confirms the transfer of funds. Thus, cryptocurrency is a decentralized digital currency.
It is a product of the digital society, and like the digital society, they operate 24/7. Trading cryptocurrency is possible at any time. Unlike stocks and commodities, the cryptocurrency market is traded not only on regulated broker platforms. Digital coins can be traded around the clock on an ever-increasing number of crypto exchanges.
Cryptocurrency exchanges may have a large difference in prices for the same digital coin. There were cases that Bitcoin had a price fluctuation of up to $ 500 on different exchanges. The reasons for this price chart mismatch are related to differences in liquidity across different exchanges and often to the geographic location of this trading platform. The price distortion becomes more pronounced after large price spikes.
There are two methods to trade cryptocurrencies. You can obtain coins on one cryptocurrency exchange. In this case, you become the owner of these assets and can sell them at any other exchange when their price increases to get a profit.
Alternatively, you can trade a Contract for Difference (CFD) on a specific cryptocurrency. A CFD is a derivative product in which the broker agrees to pay the trader the difference in value of the underlying security between two dates; opening and closing dates of the contract. You can hold a long position (assuming the price will rise) or a short position (assuming the price will fall). For example, when trading Bitcoin CFDs, you are also speculating on the BTC / USD pair.
Buying coins and trading cryptocurrency CFDs are not the same activities. When you buy digital coins, you keep it in your wallet. But when trading CFDs, the position is held in your trading account, which is regulated by the financial authority. You have more flexibility when you trade CFDs as you are not tied to an asset. You just buy or sell a derivative contract. You just need to have a reliable cryptocurrency trading strategy. Moreover, CFDs are a more common and regulated financial product.
On average, 350,000 bitcoin trades are made every day as traders are constantly trying to buy or sell them profitably. In 2020, the total number of transactions has surpassed 506 million with over 18 million bitcoins in circulation. This is about 4 transactions per second.
Today, there is a huge number of coins on the crypto market, all of them can be divided into three main types: bitcoin, altcoins and tokens.
Bitcoin is the first digital coin, launched in 2009. Its founder is known as Satoshi Nakamoto. But nobody has ever seen this person, and there are assumptions that it is a group of people. Bitcoin is the leader among all cryptocurrencies and is often called electronic gold. Its exchange rate has undergone severe ups and down, and in 2020, it exceeded $ 12,000. The issuance limit of the coins is 21 million.
Litecoin (LTC) was created in 2011. It was one of the first cryptocurrencies to emerge after Bitcoin. Litecoin is known for generating new blocks at a faster rate, which speeds up transactions.
Ether (ETH) is younger than bitcoin or litecoin. It was created in 2015. This coin can program blockchain and launch programs called DApps and smart contracts. Ether itself is a piece of code that acts as a currency needed by application developers or investors. It is a digital payment required to pay for the launch of an application or program.
Ripple (XRP) was launched in 2012. Ripple is more of a network that makes immediate transactions with minimal fees. Its purpose is to send money around the world. This feature made Ripple especially relevant for banks wishing to settle international transactions. Unlike bitcoins, Ripple does not require mining, so it uses less computing power than some other altcoins.
Bitcoin Cash (BCH) is a cryptocurrency that was created as a result of the hard fork of the Bitcoin blockchain on August 1, 2017. Bitcoin Cash can be sent, received, or exchanged for Bitcoin or Ether.
IOTA is an electronic financial unit released in 2015. It became the main coin for servicing the Internet of Things, hence the name - IoT (Internet of Things). It is an open source universal cryptocurrency used for instant seamless transactions between people, computers and programs.
This list is very long, you may have heard about such cryptocurrency as NEO, Stellar, Cardano and Monero. These coins are also on the list of top best traded crypto assets.
Types of trading analysis
Crypto traders use many tools for evaluating the cryptocurrency market. The most famous instruments are technical analysis and fundamental analysis. Traders who use these methods can better visualize the situation on the market and see trends. Likewise, it is possible to obtain data for the generation of more grounded forecasts and reasonable deals.
Technical analysis considers the path of a coin with price charts and trading volumes, regardless of what the project does. With its help, traders can identify market trends and conditions as well make correct investment decisions. Technical analysis is a practical method that evaluates past price movement for certain coins and their trading volume. But this type of analysis ignores the news of the crypto market. The cryptocurrencies are very changeable, and traders need to closely monitor the most recent changes. So it is recommended to combine technical analysis and fundamental analysis to make sound investment decisions. Fundamental analysis assesses the real value of an investment and then compares it to the speculative price in financial markets to predict the potential price increases or losses.
You can profit by taking advantage of market fluctuations in its two possible trends: a bear market or a bull market. In other words, traders analyze these fluctuations in the price of cryptoassets and decide which direction to move. If at the moment the forecast buy or sell is correct, the profit is obtained in accordance with the volume of the transaction.
List of main technical indicators
Computer analysis is one of the most progressive methods for evaluating the situation in the cryptocurrency market and forecasting the near future. It is based on processing the data provided by the price chart, trading volume graphs, and so on using mathematical formulas. The result of processing is a variety of technical indicators that can tell the trader a successful entry point and exit point, help assess current market trends and generally make a decision when it is the right time to buy stop or sell stop. What is the most popular technical indicator? There are several of them:
Moving average (MA). It is one of the most common technical indicators. It shows the average value of the instrument price over a given period of time. This indicator allows you to observe short-term price fluctuations and thus better understand the underlying market trend. The moving average is overlapped on the price chart, allowing you to make decisions based on its position compared to the spot price.
Exponential moving average (EMA). This indicator is calculated by adding to the previous value the average share of the closing price valid at the time of calculation. Thus, this indicator is focused on the last price values on the chart. Exponential Moving Average is a better solution compared to MA, as it more accurately reflects the current market situation.
Stochastic oscillator. It is a popular indicator used to identify overbought and oversold periods in the market, as well as to identify points of potential trend reversal based on bullish or bearish divergence.
Moving average convergence/divergence (MACD). It is one of the most popular indicators, which is quite simple, but at the same time, very versatile. This tool can be used both as a trend indicator (since it is based on moving averages) and as an oscillator. The indicator consists of three components: MACD line, signal line, histogram. It helps to determine in which direction the price may go, the potential strength of this movement, and the likelihood of a trend reversal.
Bollinger bands. The indicator consists of 3 lines, and their task is to measure the current market volatility. It works well on all timeframes, but the higher the time period is, the more reliable the parameters are.
Relative strength index (RSI). This indicator determines the strength of a trend and the probability of its change. In simple words, it is an indicator of oversold/overbought level of an asset/coin. It helps define buy and sell zones. Like other indicators, it does not give a 100% correct of entering/exiting a position, but it shows the market mood quite well.
Fibonacci retracement. It is an additional technical analysis tool that plots Fibonacci levels on a chart. The tool is designed to determine correction levels on any timeframe.
Ichimoku cloud. This indicator’s main purpose is to determine the direction and reversal points of the market trend. But it has other features too. As a versatile instrument, Ichimoku can also act as an oscillator. In other words, it measures the rate of price change for a given asset. Moreover, Ichimoku can also find support and resistance levels.
Standard deviation. It is a technical indicator that displays the average deviation of data against their average value for the period under review. In other words, it measures the market volatility. If the indicator value is too small, that is, the market is completely at rest, then it makes sense to expect an imminent surge in activity. And if the parameter is extremely large, it means that this activity is likely to decline soon.
Average directional index. It is another oscillator. Unlike a stochastic oscillator, it does not define the direction of the trend. It only measures its strength. Therefore, it is usually used to understand if a new trend is appearing in the market.
USDT is the third popular cryptocurrency after BTC and ETH. This currency became popular only a year ago, and is currently one of the most stable ones. USDT is used all over the world because its exchange rate is linked to USD, yet it has all the advantages of a cryptocurrency.
Basic cryptocurrency trading strategies
Common active trading strategies include the following ones:
- Day trading
This term is used to describe the purchase and sale of coins for trading times of less than one day. Short term trading uses a combination of strategies and analysis to predict market movements and make profits within hours, minutes, and even seconds, seeking to exploit arbitrage opportunities, price divergences, and volatility following news announcements. Day trading cryptocurrency strategy is built on fast and accurate decisions designed to minimize financial risk and maximize your profits. Of course, no trader can be 100% right, so be prepared to close positions even with significant losses. Learn to identify possible levels of support and resistance, re-enter your trades at the right time, set targets and also set stop loss, and sooner or later you will develop your day trader skill.
- Swing trading
Swing trading is about taking the right step at the right time. The goal is simple - to get as much profit as possible during price changes in the crypto market. Regardless of whether prices are rising or falling, you are always trying to capture some of the potential price movement. The trick is to set specific entry points, stop loss and take profit levels before each trade and then stick to them.
This strategy presupposes purchase of financial instruments for the purpose of selling them within a short period of time (from seconds to several minutes). It allows traders to make more than 100 transactions per day. It makes scalping the most stressful psychologically money management strategy. Scalper traders rely more on their intuition than on a market signal. In recent years, trading robots have been widely used in intraday trading and scalping.
Passive Investment strategy options:
- Buy and Hold
It is one of the most often used strategies among crypto investors. It is simple, convenient and quite profitable. You need to buy and hold assets for a long time with the expectation of an increase in its value in the distant future. This tactic is appropriate for cryptocurrency, which has significant prospects in the future.
- Position trading
It is a long term trading strategy. It is a passive strategy, where a trader enters the market at the maximum or minimum of the price and holds it for a certain time (from 1 trading day to 2 years). This approach is considered to be the least risky trading system, since a trader has a sufficiently large margin of time to think over the situation, which improves the ability to predict the movement of position prices.
The most popular crypto pairs are BTC / ETH, BTC / LTC, USDT / BTC, ETH / LTC and a few others. Their popularity is driven by the global demand for Bitcoin, Ethereum, Litecoin and other parallel cryptocurrencies. This way, traders can easily find buyers at the right time.
Creating cryptocurrency trading strategy
The algorithm for creating a strategy looks like this:
- Determine the goals and type of trade in general.
- Select tools. Alternatively, you can take a ready-made solution, but first you need to study it well and adapt to your needs.
- Test the chosen instruments individually and in combination. We draw up a draft version of the trading strategy.
- Complete your strategy, adjusting the rules for entering the market, position tracking and profit fixing.
- Test it on a demo account for a couple of months.
- If the profit is stable, go to the real account and continue working. Try to withdraw only part of the profit and let the deposit grow. Do not forget to monitor the statistics of trading results.
How to build a crypto trading strategy?
Start for the simplest options and constantly add new features. A new trading plan should be tested on a demo account.
What is the best strategy for crypto trading?
All types of day trading strategies are very popular. But you should master them well before investing real money.
What percentage of the deposit can I risk?
You can never predict the result of your deal with 100% guarantee. So you should understand that trading is associated with a high level of risk no matter what sum you invest.
What lot size should I trade?
Some brokerage companies offer deals from $ 1.
How to determine measurement objective target (potential profit)?
Use risk-oriented metrics to predict your theoretical loss or profit.