Cryptocurrency trading is the act of buying or selling a certain coin/digital asset to take advantage of price moves. If it is played correctly, it could be a lucrative game. However, it remains a risky bet for newbies or those unwilling to adhere to a well-thought-out strategy.
Anyone who has spent considerable time trading cryptocurrencies will tell you that there’s no “holy grail” that would yield you consistent gains 100% of the time. Profitable traders will more likely tell you that they’ve only developed a trading plan/strategy in advance, along with the self-discipline to stick to it.
Below, we’ll look at some crypto trading principles and then go through common strategies, basic trading styles, and managing risks.
What is a trading strategy?
A cryptocurrency trading strategy is a comprehensive plan/framework to guide you in all your investment activities in its narrowest definition. Having a strategy helps mitigate financial risks and psychological pitfalls, eliminating many impulsive decisions and harmful human emotions.
If something unexpected happens in the cryptocurrency markets (and it will), your strategy rules should define how you react — and not thoughts of fear and greed.
A comprehensive trading plan may include a precise definition for what cryptocurrencies you trade, setups you take, position-sizing, and technical indicators you use to spot entries and exits.
Furthermore, your trading strategy may encompass other general guidelines — as you will never trade ahead of blockchain forks — even down to some minor details.
In addition to the know-how of basic trading procedures, cryptocurrency traders need to keep up with the latest market news and events that affect the assets they are investing in. Devising a trading strategy takes a lot of practice and backtesting, but some tips should be considered when formulating your plan.
1. Do your homework
Make a wish list of cryptocurrencies you’d like to trade and keep yourself informed about the selected coins. If you are a beginner, try to focus on a maximum of one to two coins/tokens. Tracking and finding opportunities is more straightforward with just a few assets under the radar.
2. Manage your capital and be cautious
Assess how much money you’re willing to risk and set aside a surplus capital to top-up your account when needed to compensate for the losses sustained. Also, make sure to risk each trade with a fixed percentage of your account equity.
3. Stay cool and realistic about profits
A successful strategy doesn’t mean it’s profitable all the time. Many successful strategies only win 50% of their trades, but their profit on their winners is more significant than the amount they lose on their losers.
4. Stick to your strategy rules
There are many times when the cryptocurrency markets will test your nerves. Actually, Bitcoin and altcoins values have been historically quite volatile. This is the normal of crypto investing, and you should just get used to it. For this to happen, keep greed and fear at bay and build your decisions upon the thoroughly tested logic of your strategy.
Basic crypto trading strategies
Since there are many different cryptocurrency trading strategies, we’ll cover some of the most common ones.
Following the trend
There’s a mantra among traders: “The trend is your friend until the end when it bends.” When you follow the trend, this involves the express expectation that the current direction of prices will not change until further notice.
A trend-following strategy is built on the assumption that cryptocurrencies that have been rising or falling steadily will continue to do so until a reversal occurs. Thus, you should buy when crypto prices are rising, and if you trade derivatives such as Contract of Differences (CFDs), you can also short sell when they drop.
Scalping
This is a trading style where a trader exploits small price changes to make a fast profit. This technique requires a trader to have a strict strategy for entering and exiting positions swiftly — within minutes or even seconds.
Trading with a stablecoin
This is a common trading strategy to offset the volatility associated with trading other cryptos. Trading a traditional cryptocurrency — like Bitcoin or ether — against a stablecoin helps you to only focus on the fluctuations in the price of one of the coins that make up your pair.
Buy the Rumor, Sell the News
When the news hits, investors using this strategy digest the outcome against market expectations. They buy when good news is announced or short sell when there’s bad news. This involves staying up to date on both crypto events and regulators’ announcements to anticipate and take advantage of the volatility that occurs when vital news causes a shift in sentiment.
HODL
This passive investment strategy involves a more hands-off approach, where you dedicate less time and attention to managing your portfolio. This strategy is typically used in long-term investments. The idea is simply to buy your favorite cryptocurrency intending to hold it for a long time, regardless of market fluctuations.
Crypto Arbitrage
Unlike traditional trading, arbitrage refers to the simultaneous buying and selling of the same cryptocurrency in different exchanges to cash in on the tiny differences in prices. Arbitrage exists due to crypto market inefficiencies, and it exploits short-lived variations in the price of identical coins.
Arbitrage is one of the best forms of making money in cryptocurrencies. However, to take advantage of these split-second opportunities, you must closely watch various crypto exchanges simultaneously. You should be able to identify and act upon temporary price inefficiencies as the opportunity is often eliminated in a matter of seconds.
That said, having trading accounts with multiple cryptocurrency exchanges raises many challenges, such as executing trades on different platforms and tracking your portfolio in real-time.
Zenfuse brings you a smooth and sophisticated crypto trading desk with one-stop access to the top crypto platforms with many technical complexities involved. The all-in-one solution allows you to trade across multiple digital-asset exchanges on a single interface.
On top of that, Zenfuse features real-time streaming quotes, news aggregation, charting tools, analytics, portfolio management, and news aggregation.
Closing thoughts
Although cryptocurrency trading has become somewhat of a controversial phenomenon, it is challenging to master. It requires time, skill, and discipline.
As a beginner, you may be prone to emotional biases. However, you should be able to cut these emotions out of your trading strategy when it’s your hard-earned money at stake. The techniques and guidelines described above can significantly improve your chances of beating the odds.
Always follow your formula closely rather than try to chase profits or losses. In other words, plan your trade and trade your plan.
About Zenfuse
Zenfuse is a powerful all-in-one platform for cryptocurrency traders and investors.
It aggregates multiple cryptocurrency exchanges, allowing control of funds via API, and powers up the trading process, making trading more profitable, simple, and stress-free.
Our cross-platform app provides rich analytics of both your portfolio and order history, giving you the ability to control your funds on a mobile device.
