Cryptocurrency trading strategies are fundamental if we want to make our capital profitable in the markets.
We are going to see what the trading strategies are, and we are going to talk about four of the most used, which will serve as a basis for you to start developing yours.
Cryptocurrency trading strategies
A cryptocurrency trading strategy is a plan for buying and selling crypto assets that minimizes risk while improving the chance of profit.
A trading strategy is based on predefined rules and criteria used to make decisions. Here are some examples of items to include:
- The assets we will operate
- time intervals
- Plan your market entry and exit
- Irrigation of each operation
- stop-loss placement
- How are we going to make profit
On the other hand, a strategy must have an advantage market statistics and must also be reproducible: must be defined and must be replicable over time.
Below, we’ll look at four of the most popular cryptocurrency investing strategies that can be used as a general framework in which to develop your own. Basically, the biggest differences between one and the other are in the duration of the operations.
Dollar-cost averaging (DCA)
The DCA or average cost is a long term strategy and it is the simplest of all. More than a trading strategy, it is an investment strategy, but it is useful to know for anyone wondering how to invest in cryptocurrencies step by step.
It simply consists of divide your available capital into smaller amounts and then open positions at regular intervals. In this way, over time, we obtain average purchase prices and reduce the impact of the volatility of the prices at which we obtained cryptocurrencies.
Thereafter and according to our profit-taking plan, we will resell our cryptos to materialize our profits. An example would be to do something quite similar: sell in stages when the price hits various bullish targets.
Before its execution, we must go through a process of finding cryptocurrencies with investment potential and that meet certain requirements according to the analysis we perform.
Let’s take an example of this strategy. We performed an analysis of Bitcoin and determined that for the next two years, price expectations are bullish. Our thesis is that Bitcoin adoption will continue to grow as institutional interest grows. All supported by on-chain metrics and patterns that indicate a strong accumulation is underway.
We have $2500 to invest and we divide it into 5 tranches of $500. We will make recurring purchases on the 10th of every month, regardless of the value of Bitcoin at that time.
Despite its simplicity, using it would have allowed most people to make money investing in cryptocurrencies, earning far higher returns than any other strategy over time. The key is to build a wallet with potential cryptos like Bitcoin, Ethereum, Cardano or Link.
- Low-stress: No need to regularly check charts, calculate entries precisely, or analyze price action over short periods of time.
- If we stick to the strategy, we avoid FOMO because shopping moments are very defined and leave no room for improvisation.
- Low commission cost
- It takes a while to run.
- It is important to have knowledge in the fundamental analysis of cryptocurrencies.
- You can experience sustained losses over time if you don’t periodically assess market cycles and the state of your investment fundamentals.
Position trading is a medium-long term strategy where you keep your positions open for weeks or months. The time periods used will be long, usually daily and weekly.
When looking for candidates for vacancies, a good idea is to start with candidates with good fundamentals and combine it with technical analysis to determine the optimal time to enter the market.
This is an appropriate strategy for the early stages of a bull market. Usually we seek to position ourselves on the market in the accumulation phase or at most in consolidation with the start of the new trend. Different crypto indicators can be very useful for this purpose.
Another way to enter the market is in situations of deep declines caused by very negative news added to other factors such as excessive leverage or very wide prices. When these types of corrections occur, usually very fast and violent, they can be good times to position yourself for the long term.
An example is the sharp decline that occurred across all markets in March 2020, with Bitcoin falling to $3,800. From that moment, a strong bull cycle started which took Bitcoin to $64,000 within a year.
- You don’t need a lot of time because it’s a medium-long term strategy.
- Little stress, because price fluctuations over short periods of time are not significant.
- Gains may be higher than DCA performance as we are starting from a higher potential risk/reward.
- Requires in-depth knowledge of fundamental analysis, technical analysis and market cycles
- The number of trades you make at a time is very low and the variance can be significant. Large doses of patience are required.
Position trading is a the medium-term strategy in which you maintains positions open days or weeks.
The time periods used will generally be daily and 4 hours.
The goal of a swing trader is capture a single move in our favor in the market (known as a swing).
Some ways to execute this strategy can be:
- Buy a stand
- Sell at resistance
- Buy or sell with withdrawals
- Trade technical patterns such as triangles, pennants or feathers.
The ideas above are in turn different trading strategies or modes of operation, but they all have in common that the goal is to take advantage of a swing in the cryptocurrency we are trading, whether long or short.
- You can find more opportunities to operate.
- Can be combined with other full-time activities or jobs.
- You won’t be able to take advantage of big upside moves as you will usually close positions early.
- You are exposed to the market at night and on weekends
Day trading is a short-term strategy where you keep your positions open for minutes or hours.
The time periods used will generally be 15 minutes and 1 hour.
Basically it is a similar strategy to swing trading, but at a faster pace.
The purpose of day trading ands profit by taking advantage of intraday volatility.
As we saw in the previous example, we can execute the strategy in different ways:
- Buy a stand
- Sell at resistance
- Buy or sell on pullbacks
- Trade in technical models like pengnats etc.
The difference is that in this case we will use smaller time intervals. For example, if we are going to trade a bull flag, in the case of day trading we would locate the pattern in 15 minutes and in swing trading it could be a formation in a 4 hour time frame.
Another one important difference is that a day trader will not be concerned with the fundamentals of the cryptocurrency or the token. The long-term trend will also not be relevant, as it will have virtually no impact on our operations.
Instead, it will be necessary to identify your bias for the day you will be trading (the prevailing trend that day) to determine whether to go long or short during the session.
- A day trader can get more returns on his capital because he can make more trades.
- No day-to-day risk as positions will usually be closed
- Trading style with the highest level of stress
- Higher commission spend than the rest of the strategies
- It is not compatible with other work activities for the time required to operate
What is the best cryptocurrency trading strategy?
Like most questions in trading, there is no concrete answer.. The best strategy is the one that works for you in every way.
It depends on how much time you have to trade, how knowledgeable you are, and whether you position yourself closer to the long-term investor or the short-term trader.
As I say, it all depends on the individual, but in general in the world of cryptocurrencies and given the volatility of the market, I advise it initially starts somewhere in the middle like position trading or even swing trading.
We have to think that DCA is very much about long-term investing (in fact, it can be compatible with other trading styles). And at the other extreme we would find Scalping, which I didn’t even name. It works in very short timeframes, 1 and 5 minutes, and I honestly consider it completely inadvisable for trading cryptocurrencies, given the characteristics of the cryptocurrency market.
Therefore, choosing a trading strategy that falls somewhere in the middle seems like a good idea to start with.
I hope the article was helpful to you and gives you an idea of the most popular cryptocurrency trading styles. This is only the beginning because before starting to trade it is necessary to make a complete trading plan and test our strategy.
Want to learn how to trade bitcoins and cryptocurrencies? Access our free guide where we explain everything about how to trade with cryptocurrencies