If you are hoping to profit from trading cryptocurrency, then you’ll benefit from arming yourself with ample insight and a well-crafted crypto trading strategy.
There are many viable approaches to trading crypto. From spot trades and exchange arbitrage, scalping to day trading, and every cryptocurrency owner’s favorite buzzword, HODLing, traders have a wealth of options at their disposal. After choosing a reliable exchange, even a novice trader can start trading quickly.
This guide will take you through the fundamentals of strategic cryptocurrency trading. We’ll give you an overview of active and passive trading methods, long- and short-term crypto trading strategies, and how to use these techniques to your advantage.
What Is a Cryptocurrency Trading Strategy?
A cryptocurrency trading strategy is a plan for buying and selling cryptocurrency that minimizes risk while improving the chances of turning a profit. A well-defined trading strategy mitigates trading risks and dictates trading reactions to varying situations in the market.
Having a trading strategy helps keep emotions out of trading decisions, in order to more strategically coordinate trades.
A comprehensive trading strategy may include:
- Assets you trade
- Tools, indicators, and signal resources used
- Trading schedules
- Entry and exit plans, including stop-loss orders that limit losses
- Ways to measure portfolio performance
With assets, trading configurations, indicators, entry and exit patterns, and other trading guidelines stipulated beforehand, you can create a comprehensive plan.
There are two basic types of trading strategies.
Active trading strategies require your intervention and call for conscious, regular attention.
Passive trading strategies use less time and don’t require frequent attention. Usually, you’ll be following a well-established method that does not require constant monitoring. We’ll be discussing both approaches presently.
Forex Trading vs. Crypto Trading: Differences
Cryptocurrency trading is the trading of cryptocurrencies across various cryptocurrency exchanges. Forex trading is the trading of fiat currencies on the global Forex market.
Here’s a brief breakdown of the main differences between Forex trading and cryptocurrency trading:
Forex markets are typically far more liquid and deep than cryptocurrency markets, with larger institutional and corporate players buying and selling Forex for hedging and cross-border transactions. Cryptocurrency markets are still usually characterized by retail investors who are trading for individual portfolios.
Forex markets are regulated. They always go through centralized broker-dealers, exchanges, and clearinghouses. Cryptocurrencies, on the other hand, can trade peer-to-peer directly through centralized or decentralized exchanges.
Unlike cryptocurrency trading, where you have the option to buy cryptocurrency assets in the form of tokens or coins, Forex trades fiat currency pairs as contracts for differences (CFDs.) There is no ownership exchanged when trades are made, but rather simply profit or loss, according to the broker’s price movement.
Trading cryptocurrency doesn’t require any brokers, and both CFDs and ownership-based trading are available. Unlike Forex, which operates on weekdays only, crypto markets never close. The volatility of cryptocurrency markets is also much higher than in the highly liquid and tradable Forex markets.
Investors trade cryptocurrency across various crypto exchanges. Here is an overview of the definition of, and differences between, spot market trading and cryptocurrency derivatives markets.
A cryptocurrency spot market is any market in which a cryptocurrency coin or token trades directly, essentially “on the spot.” Trading on a spot market is the most fundamental form of trading in which to exchange and settle a cryptocurrency for another asset.
The process begins with traders depositing funds into an account held by a cryptocurrency exchange. Buy and sell orders are then placed and executed.
Cryptocurrency spot markets involve makers and takers. Makers place orders, such as a limit order, that don’t get filled immediately. Takers place orders that get filled in their entirety, “taking” existing orders created by makers.
A derivative is a financial security that derives its value from an underlying asset or group of assets. In the crypto market, these derivatives are typically futures contracts, options contracts, leveraged tokens and token swaps. For example, an option contract involves entering into an agreement to buy cryptocurrency at a predetermined date and value in the future.
Unlike spot markets, cryptocurrency derivatives exchanges can offer greater borrowing capabilities (leverage), which can magnify profits or losses. For example, Bybit offers crypto derivatives trading with up to 100x leverage. Derivatives contracts also offer the opportunity for advanced trading strategies like trading pairs, arbitrage, shorting the market, and spread trading, to name a few.
Short-Term Trading (Active Trading)
Short-term trading, otherwise known as active trading, involves more frequent transactions. Here is a breakdown of the main short-term trading strategies available.
Day trading cryptocurrency shares the same concept as the traditional markets. Traders are actively trading by entering and exiting a position throughout and typically within the day, aimed at turning a profit. Even though crypto exchanges do not close, day trading still refers to a short-term trading style whereby traders attempt to secure profits from same-day price movements.
Day traders devote their time to trading on favorable price movements within cryptocurrency markets as they happen. They may rely on a combination of fundamental analysis, technical analysis, and other analytical techniques to find inefficiencies in the market in the hope of profits. For example, day traders might try to trade off of one-, five- or fifteen-minute price charts.
The volatility of crypto leads to many potential opportunities, but it takes keen market insight, significant trading experience, and a bit of luck to rely on day trading for a predictable income. The truth is everyone can be a day trader but it takes time, effort, and it can be stressful at a time. Hence, day trading less suitable for beginner traders but rather recommended for advanced traders.
Scalp trading focuses on extremely short-term trades to profit from small cryptocurrency price movements on high volumes. Scalpers can open and close positions within seconds or minutes, taking advantage of lucrative market inefficiencies to rack up small profits. Scalpers are quick on the move making small moves consistently profiting from the bid-ask spreads and general inefficiencies in the crypto market. That is why scalping is relatively similar to high-frequency trading (HFT).
Mastering a scalping strategy takes both extensive knowledge of cryptocurrency and advanced analytical skills to take advantage of real-time volatility in the way that scalpers do.
Many day traders utilize scalp trading, devoting a portion of their trading budget to scalping. Experienced traders use technical analysis and extensive charting to find time-sensitive opportunities and decide quickly whether to implement their trading strategy. Traders also need well-defined goals associated with scalping, along with a clear exit strategy.
Scalping is more suitable for traders who aim to make more profits with larger positions. It makes the most sense for traders, institutions, or organizations that hold large amounts of crypto (whales) to scalp.
Arbitrage trading capitalizes on the price differences between cryptocurrencies across various markets. Arbitrage traders typically purchase a cryptocurrency from one exchange and then immediately sell it for a higher price on another, seizing the profit. While profits aren’t actually guaranteed, arbitrage trading holds the lowest risk and normally grants the slimmest profits.
The vast range of trading platforms means many opportunities for short-term traders to find and capitalize on inefficiencies. Arbitrage trading is recommended for those who have prior experience in this type of trading style. It’s labor-intensive and timing is everything.
Swing trading considers a longer-term trading strategy in which traders attempt to capitalize on short-to-medium-term price trends, or “swings,” in cryptocurrency market activity. Most swing trades involve gains over a period of a few days to weeks at a time. As opposed to day trades, swing trades typically take longer than 24 hours, and can even last days or weeks.
Swing traders identify the waves of the volatility of a cryptocurrency coin or token that is likely to move and then enter into a position for a variable period. If the move comes through, the trader captures a profit.
Swing trading is beginner-friendly as it gives traders more time to devise reliable trading plans. Swing charting techniques include seeking highs and lows with the Gann swing method, reversal pinpointing with candlesticks and oscillators, relative strength index, momentum indicators, and patterns like bearish and bullish engulfing patterns.
Trend trading, also referred to as position trading, makes cryptocurrency investment decisions based on a coin or token’s momentum. It is normal for traders to hold a position over an extended period which can last up to a few months. Trend crypto traders analyze momentum, looking for upward or downward trends, and then enter into a trading position while speculating that the coin or currency will trend upward or downward.
Trend traders often rely on Fundamental analysis is an approach used by cryptocurrency investors to establish the intrinsic value of a crypto asset.... to enter into advantageous trades. However, they can also factor in a variety of technical indicators. Moving averages, relative strength index (RSI), moving average convergence divergence (MACD) and trend lines are four common trend trading indicators used to increase the success rate. Alternatively, the aroon indicator is also great to identify trend changes in the price of an asset.
Short-Term Trading Methods
The two main ways to trade cryptocurrency over a short-term period are trading pairs and cryptocurrency derivatives trading. While trading pairs use a combination of spot trading and arbitrage to net profits, derivatives trading involves trading contracts initiated based on trader speculation. Let’s take a closer look at both styles.
Trading pairs in cryptocurrency takes advantage of the price difference between pairs of currencies or tokens exchanged across various markets. Traders may use arbitrage trading between crypto exchanges to secure a profit from the relative difference in value between pairs.
A base currency is used to initiate a trade. For example, a BTC/USDT trading pair listing would exchange BTC for USDT. Cryptocurrencies can either be exchanged for one another or for fiat money like the U.S. dollar (USD) in the form of USD-backed stablecoins, such as BUSD, USDT, etc.
Cryptocurrency Derivatives Trading
Derivatives trading uses financial instruments that determine their value based on an underlying asset. These instruments typically settle based on the spot value of a given asset. Derivatives add a layer of leverage and the ability to speculate on price action.
Futures, options, and perpetual contracts are the most commonly used derivatives. Let’s take a closer look at each type of cryptocurrency derivatives trading commonly available.
Cryptocurrency futures are contracts between two parties agreeing to exchange a coin or token at a given price on a predetermined future date. Neither party is bound to hold the underlying asset. In fact, the contract is usually settled in USD or another fiat currency.
Typically, the market offers a specific time frame or duration for the contract. After deciding to speculate that a cryptocurrency asset will increase in value, a trader can open a long position. Similarly, a trader who expects a decrease in value can open a short position, which means selling the contract without actually owning the asset. Every trading position is matched to another trader taking the opposite side.
At the settlement date, each trade will be settled against the settlement price. If you’ve chosen to go long and the price moves up, you’ll profit. If you’ve chosen to short and the price goes against you, you’ll then make a loss.
Cryptocurrency options are derivatives contracts that don’t force the trader to settle after reaching the pre-specified future date. Instead, traders are given the option to buy or sell at that time and price.
A call option gives the contract owner the right to buy a cryptoasset at a predetermined price when the contract reaches its settlement date. A put gives the contract owner the right to sell. Both scenarios leave the owner of the option with the choice to trade, according to the previously determined parameters at the expiration date.
One of the most commonly used forms of cryptocurrency derivatives trading is a perpetual contract. Perpetual contracts work similarly to other derivatives, but they don’t expire. Instead, perpetuals let traders keep their open position for an indefinite period. They require a margin, or minimum cryptocurrency balance, to be maintained.
Perpetual traders must keep the funding rate in mind. The lack of a settlement date on perpetual contracts can lead to price deviation between the contracts and a cryptocurrency’s value. If a positive funding rate occurs from an imbalance of long positions, all long positions pay shorts. When a funding rate is negative, short positions pay longs.
Leverage And Derivatives Trading
Leverage allows traders to trade in a larger position than the value of cryptocurrency held on their accounts. Essentially, leverage and margin trading lets you borrow from the crypto exchange so that you stand a chance to make a higher profit with that larger position.
Leveraged trading requires the trader to retain an amount known as a margin, which is calculated according to the leverage offered.
For example, if the broker or exchange requires a 1% margin for 1:100 leverage, the trader will need to retain a balance of at least $1,000 to open a $100,000 trading position.
Long-Term Trading (Passive Income Trading)
Long-term trading, also known as passive income trading, holds distinct advantages over short-term strategies for traders who do not have much time or advanced insight into crypto markets.
Here’s a breakdown of the main long-term cryptocurrency trading methods:
Buy and Hold (HODL)
Buy and Hold, better known as the misspelled acronym “HODL,” is a trading strategy that involves holding onto investments in hopes of long-term gains. By buying and holding cryptocurrency and speculating on exponential growth, HODLers may disregard much of the volatility of cryptocurrency markets.
By ignoring short-term swings, instead ”Holding On for Dear Life,” traders no longer suffer from Fear Of Missing Out (FOMO) and Fear, Uncertainty and Doubt (FUD). FOMO is the number one cause of buying at too high a price, while FUD leads to SODLing (or “selling at too low” of a value.)
A buy-and-hold strategy has additional advantages, such as cutting out short-term market noise, lowering transaction costs and relieving investors of the psychological burden of watching markets constantly.
Cryptocurrency index trading means investing in tokens or coins grouped together as an index. Indices are used to track the collective movements of the assets. These grouped assets also usually have lower volatility than individual assets. The best part, it’s both on centralized cryptocurrency exchanges and within the Decentralized Finance (Decentralized Finance (DeFi) takes the decentralized concept of blockchain and applies it to the world of finance. Build...) space.
Crypto indices group cryptoassets according to price weighting and The market capitalization (or market cap) of a cryptocurrency is a measurement of its market value. In other words, it... weighting. Price weighting is when the higher-priced coins and tokens influence the index’s movement more than lower-value assets. Market cap weighting groups cryptocurrencies by ranking them according to market capitalization.
Index traders trade these instruments through derivatives products such as options, and futures. The goal of index trading is to gain broader exposure to more than one individual asset.
Proof-of-stake (PoS) blockchains use staking, instead of crypto mining, to validate transactions. Blockchains operating on PoS reward cryptocurrency owners with staking rewards for validating transactions. This involves holding a specific amount of funds in a crypto wallet to support the security and operations of a particular blockchain network in exchange for set rewards.
Maintaining a minimum balance qualifies a wallet as a staking node. The value of the stake increases the chances that the node will be used to create the next block. If a block is created on the node, stake rewards are distributed to the validator.
Trading in traditional financial markets shares similarities across asset classes, requiring discipline and defined strategies over the short or long term. Cryptocurrency trading is no different, and understanding various approaches offers investors frameworks to use in a competitive market.
Every trader will have a trading style and strategy that suits their individual personality and trading budget. The most successful crypto traders combine approaches while tracking their performance, changing methodologies as they gain experience. At the same time having a planned crypto risk management and hedging strategies to minimize losses.
The more information and insight that you have regarding cryptocurrencies and cryptocurrency trading — for instance, fundamentals, analytics and trends, — the better you’ll be able to shape profitable trading strategies of your own.