There are countless ways to profit off of trading cryptocurrency. Trading strategies help you organize those techniques into a coherent framework that you can follow. This way, you can continually monitor and optimize your cryptocurrency strategy. The two main schools of thought you’ll need to consider when building a trading strategy is technical analysis (TA), and fundamental analysis (FA). We’ll differentiate which one applies to which of these strategies, but make sure you understand the differences
between these concepts before going further. Since there are many different trading strategies, we’ll cover some of the most common
ones. This article mainly focuses on cryptocurrency trading strategies. However, these may also apply to other financial assets, such as Forex, stocks, options, or precious metals like gold.
Day trading might be the most well-known active trading strategy. It’s a common misconception to think that all active traders are by definition day traders, but that isn’t true. Day trading involves entering and exiting positions on the same day. As such, day traders aim to capitalize on intraday price movements, i.e., price moves that happen within one trading day. The term “day trading” stems from the traditional markets, where trading is open only during specific hours of the day. So, in those markets, day traders never stay in positions overnight, when trading is halted. Most digital currency trading platforms are open 24 hours a day, 365 days a year. So, day trading is used in a slightly different context when it comes to the crypto markets. It typically refers to a short-term trading style, where traders enter and exit positions in a timespan of 24 hours or less. Day traders will typically use price action and technical analysis to formulate trade ideas. Besides, they may employ many other techniques to find inefficiencies in the market. Day trading cryptocurrency can be highly profitable for some, but it’s often quite stressful, demanding, and may involve high risk. As such, day trading is recommended for more advanced traders.
Swing trading is a type of longer-term trading strategy that involves holding positions for longer than a day but typically not longer than a few weeks or a month. In some ways, swing trading sits in the middle between day trading and trend trading. Swing traders generally try to take advantage of waves of volatility that take several days or weeks to play out. Swing traders may use a combination of technical and fundamental factors to formulate their trade ideas. Naturally, fundamental changes may take a longer time to play out, and this is where fundamental analysis comes into play. Even so, patterns and technical indicators can also play a major part in a swing trading strategy. Swing trading might be the most convenient active trading strategy for beginners. A significant benefit of swing trading over day trading is that swing trades take longer to play out. Still, they’re short enough so that it’s not too hard to keep track of the trade. This allows traders more time to consider their decisions. In most cases, they have enough time to react to how the trade is unfolding. With swing trading, decisions can be made with less haste and more rationality. On the other hand, day trading often demands fast decisions and speedy execution, which isn’t ideal for a beginner.
Sometimes also referred to as position trading, trend trading is a strategy that involves holding positions for a longer period of time, typically at least a few months. As the name would suggest, trend traders try to take advantage of directional trends. Trend traders may enter a long position in an uptrend and a short position in a downtrend. Trend traders will typically use fundamental analysis but this may not always be the case. Even so, fundamental analysis considers events that may take a long time to play out and these are the moves that trend traders try to take advantage of. A trend trading strategy assumes that the underlying asset will keep moving in the direction of the trend. However, trend traders also have to take into account the possibility of a trend reversal. As such, they may also incorporate moving averages lines, and other technical indicators in their strategy to try and increase their success rate and mitigate financial risks. Trend trading can be ideal for beginner traders if they properly do their due diligence and manage risk.
Scalping is one of the quickest trading strategies out there. Scalpers don’t try to take advantage of big moves or drawn-out trends. It’s a strategy that focuses on exploiting small moves over and over again. For example, profiting off of bid-ask spreads (Link added by Austin) gaps in liquidity or other inefficiencies in the market. Scalpers don’t aim to hold their positions for a long time. It’s quite common to see scalp traders opening and closing positions in a matter of seconds. This is why scalping is often related to High-Frequency Trading (HFT) (Link added by Austin). Scalping can be an especially lucrative strategy if a trader finds a market inefficiency that happens over and over again, and that they can exploit. Each time it happens, they can make small profits that add up over time. Scalping is generally ideal for markets with higher liquidity where getting in and out positions is relatively smooth and predictable. Scalping is an advanced trading strategy that isn’t recommended for beginner traders due to its complexity. It also requires a deep understanding of the mechanics of the markets. Other than that, scalping is generally more suitable for large traders (whales). The percentage profit targets tend to be smaller, so trading larger positions makes more sense.
Understanding the ideology of HODL is simple: Hold on for dear life –– don’t sell. If you’re not an experienced day trader, then you will lose your cryptocurrency to the market. HODL is a verb, and it can be used the same way as the word “hold.” The biggest difference between someone who HODLs Cryptocurrency and someone who holds their crypto is their ideology. HODLers are bitcoin holders to the max –– holders who won’t sell their investments because they believe that cryptocurrency is the future of finance. If you really believe in cryptocurrency and aren’t an experienced trader, you should HODL. If crypto coins do become a mainstream commodity like precious metals, then each major cryptocurrency will trade for 6 figures. Due to the fact that only 21 million bitcoin will ever circulate, the price will continue to rise as long as more people and institutions recognize Bitcoin as a store of value. With Tesla CEO Elon Musk recently announcing that Tesla has added $1.5 billion of bitcoin to Tesla’s balance sheet, more corporations will likely consider major cryptocurrencies like Bitcoin as a valid reserve asset. If Bitcoin becomes a mainstream reserve asset, HODLing your cryptocurrency could give you massive returns.
–Pump And Dump
Pump-and-dump schemes are fraudulent price manipulations through the spread of misinformation and have been around in economic settings since at least the 1700s. With new technologies around cryptocurrency trading, the problem has intensified to a shorter time scale and broader scope. The scientific literature on cryptocurrency pump-anddump schemes is scarce, and government regulation has not yet caught up, leaving cryptocurrencies particularly vulnerable to this type of market manipulation. A pump-and-dump scheme is a type of fraud in which the offenders accumulate a commodity over a period, then artificially inflate the price through means of spreading misinformation (pumping), before selling off what they bought to unsuspecting buyers at the higher price (dumping). Since the price was inflated artificially, the price usually drops, leaving buyers who bought on the strength of the false information at a loss. Fig. 1 can be viewed as a script abstraction of three main stages—accumulation, pump, and dump.The accumulation phase usually occurs incrementally over a more extended period of time, in order to avoid raising the price before the pump.
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