Cryptocurrency trading strategy
What is cryptocurrency trading
Cryptocurrency trading is an operation to buy and sell an asset in order to earn income on the difference in rates. The investor makes paired short-term transactions and makes a profit both on the fall and on the growth of the digital currencies.
The main scheme of speculative asset trading (including cryptocurrencies) is to buy low and sell high. Or vice versa, sell the asset at the peak of the price and buy it at the bottom.
In this case, the actual acquisition of coins does not occur, since the exchange speculator makes paired transactions.
The trade algorithm is the following
- You must select the cryptocurrency pair that the trader wants to trade. a digital currency may be quoted against a fiat currency, stablecoin, or other crypto asset.
- Assess the probability of a change in the exchange rate in the near future, the direction and duration of the trend.
- Determine the point at which it is best to enter the market. If the exchange rate fluctuates, it is necessary to calculate the trend reversal moment. If the rate is constantly rising, the entry point will be the moment of correction.
- Create an order. If the trader expects the price to increase, he should buy the asset, if it decreases, he should sell. That is, he will have a long or short position.
- Expect price changes. Due to the volatility of the exchange rate, the value of an asset fluctuates greatly in the shortest possible time. To increase profits, you can use trading with leverage. Therefore, you will not have to wait long to receive income.
- Close position. To do this, you also need to determine the pivot point or the beginning of the correction. Timely closing will allow you to fix the maximum profit.
As noted above, e-money trading does not involve the physical acquisition of the coin, as you are trading derivatives. Now derivatives for cryptocurrencies are offered by many brokerage companies and exchanges.
YOU CAN OPEN A FREE DEMO ACCOUNT VERY QUICKLY AND TRY YOUR HAND AT CRYPTOCURRENCY TRADING.
At the same time, you can try to apply the trading strategy that you previously used when trading currencies or other classic trading tools.
There are a lot of cryptocurrencies on the market right now. It is unlikely that anyone will be able to determine the exact number, since new projects are launched daily that issue their own tokens.
At the same time, the list of the most popular and popular coins remains almost unchanged. These are Ether, Litecoin, Ripple, Bitcoin, Bitcoin Cash, Stellar, Cardano, IOTA, NEO, Monero and others.
From time to time, meme tokens, such as Shiba Inu, burst into the top, but in the long run, the popularity of such tokens, as a rule, fades and they fall out of the top.
Types of cryptocurrency trading analysis
The success of cryptocurrency trading depends entirely on how correctly the trader predicted the movement of the asset price. If it was correct, the profit is guaranteed. But in case of errors, the user will receive a loss. He may even lose his deposit if he does not use the rules of time and money management.
The correctness of predicting the direction of price movement depends on the type of analysis that you apply and the trading strategy. At the same time, we have already noted the similarity of the cryptocurrency market and the market of traditional assets. Therefore, strategies that, for example, are used in the currency pairs market, can be taken as the basis for a cryptocurrency trading strategy.
There are several ways to predict the rate of cryptocurrency assets:
- Independently, with the help of technical analysis or fundamental analysis tools.
- With the help of computer programs. They automatically detect reversal patterns and signal them to users.
- With the help of utilities for automatic trading. In this case, a trader can receive passive income without taking part in trading.
The second and third methods, in any case, are still based on the elements of technical analysis, but the analysis of the market situation is carried out not by a person, but by an algorithm. The parameters of the cryptocurrency trading strategy are entered into the program, and it independently analyzes the chart and performs trading operations.
There are many methods of market analysis. The most common remain:
- Method of graphical analysis. Graphical analysis allows you to find certain patterns and make correct predictions of further price movement with a probability of up to 80%. These patterns are called graphical analysis figures. The figures themselves are divided into continuation patterns, after which the price is likely to continue moving in the same direction as before. Reversal figures, after which the price is likely to change the direction of movement to the opposite and bidirectional figures, after which the price can change or maintain the direction of its own movement with equal probability.
- Method of mathematical analysis. Mathematical Analysis is one of the most popular methods for analyzing stock prices, it is directly carried out using indicators of mathematical analysis (Moving average (MA), Exponential moving average (EMA), Stochastic oscillator, Moving average convergence divergence (MACD), Bollinger bands, Relative strength index (RSI), Fibonacci and others), and as a rule is an integral part of the trading system of any trader. The indicators themselves work on the basis of mathematical formulas. There are two most important concepts in the market - price and time. Based on price, time and mathematical calculations, indicators are obtained that help the trader determine when to buy, when to sell, and when to fix the result. However, Mathematical and Graphical Analysis have another very important advantage - they allow the trader to understand when it is not necessary to enter the market, since there are simply no trading signals.
- News trading method. The fundamental analysis of the Crypto Market includes any news that is published and is related to cryptocurrencies. Statements and opinions of managers of large funds, data on the listing of a particular cryptocurrency on the stock exchange, unverified information leaked to the Internet, and much more... Finding useful information among these mountains is a very difficult task. In most cases, there are simply no special calendars, planned events and data scheduled for months ahead, and those that do not stand up to scrutiny.
All these methods are applied both in the traditional market and in the cryptocurrency market.
List of main technical indicators
For the analysis of cryptocurrency rates, algorithms are used that have long been implemented in technical analysis indicators. They have already proven their effectiveness in the currency and stock markets.
So, now let's look at the most common indicators that are used in the cryptocurrency trading strategy:
- Trendy. They indicate the main direction of change in quotes. These are support and resistance levels (mainly Fibonacci), Ichimoku Clouds, Momentum and others.
- Oscillators. They help to look for overbought and oversold moments. In such a situation, there is a high probability of a correction or a trend change. It can be Stochastic, MACD, Relative Strength Index (RSI), etc.
- Based on moving averages. It can be a simple moving average (MA), an exponential moving average, Bollinger Bands, etc.
- Volume. They analyze not the asset rate, but volatility (the rate of price change).
Your cryptocurrency trading strategy does not have to be limited to these technical indicators only. You can use any indicators in your trading strategy. The main thing is that in the end it would give a positive result.
Basic cryptocurrency trading strategies
There are many ways to approach cryptocurrency trading and these strategies can range from simple to very complex. This article will review the most commonly used cryptocurrency trading strategies.
Fundamental analysis is one of the most popular trading strategies that investors use in traditional markets such as stocks. The essence of fundamental analysis is to find undervalued assets before the market recognizes their underlying value.
The theory is that an undervalued asset will rise in value as the broader market realizes its value. At this point, you are already long and making a solid profit from the rise in price.
Traders often use financial ratios to help determine the underlying value of a company. In general, a fundamental analysis trading strategy requires a longer investment time horizon, usually medium to long term.
You may be wondering how fundamental analysis can be applied in the context of the cryptocurrency market. At first, this may seem impossible, since cryptocurrencies like Bitcoin are not companies and do not have cash flows associated with them.
However, the same principle of using metrics to identify undervalued assets can be used in cryptocurrency trading, although the metrics used may be slightly different. When using this strategy, you need to be prepared for the fact that you will have to hold positions for quite some time. However, the main perceived benefit of this strategy is that, just like the stock market, prices tend to rise, so you will earn a positive return on your capital in the long run.
This trading strategy is the most commonly used tactic when it comes to cryptocurrency trading. The reason for this lies in the volatility of cryptocurrencies. For example, the price of bitcoin can fluctuate in one direction by 20%, and in an hour fall by 30%.
This kind of volatility is actually very beneficial for traders as volatility creates trading opportunities that we can take advantage of. The difficulty with implementing a swing trading strategy is that it requires you to know how to time the market. You will need to be able to determine when price action is likely to go up or down.
Given the volatility of the cryptocurrency market, this can be extremely difficult, especially if you are making trades manually.
This is another solid trading strategy that is especially effective in the cryptocurrency market. Arbitrage trading is an easy to understand and implement trading strategy. It involves exploiting the price difference that may exist between two different cryptocurrency exchanges. For example, there are often times when prices for cryptocurrencies such as Bitcoin differ on different exchanges.
For example, the price of Bitcoin could be $10,000 on Binance and $10,500 on Coinbase. In arbitrage trading, you can use this price difference by buying Bitcoin on Binance and then selling it for a higher price of $10,500 on Coinbase. An important component of arbitrage trading is speed, so you need an automated system to effectively use the price difference between exchanges.
Of course, there are still countless cryptocurrency trading strategies that you can use when working on the market. However, the strategies mentioned in this article are a good starting point, especially if you are new to cryptocurrency trading.
Creating cryptocurrency trading strategy
The process of creating a cryptocurrency trading strategy is a large and lengthy process that consists of trial and error. But there are 4 main steps that will help you in this difficult task:
- Choose a trading style. Trading can be long-term, medium-term, short-term or intraday. There is no ready-made recipe to choose from - it all depends on your temperament, the size of the deposit, your goals and many other factors. The timeframe and other parameters used will depend on which trading style you choose.
- We select technical indicators. A prerequisite is understanding the principle of the indicator. If the indicator draws a channel on the chart, then you must clearly understand where it comes from and what it means. And whether it will be the classic Bollinger Bands or some advanced modification - this is not so important.
- Choose a tool for trading. Each instrument has its own "character". Some "love" long-term sustainable trends, some pairs often show long, no-rebound movements. This is important to consider.
- We determine the ways of fixing losses and profits. It seems that there are no special issues with fixing profits. However, there are pitfalls here as well. Very often, a trader closes a trade that could bring even more profit. It is necessary, as they say, to let profits grow. To do this, you can consider using the method of partial closing of deals in the strategy, the trailing stop function, etc.
Creating your own cryptocurrency trading strategy is not a quick and rather laborious task. It is unlikely that you will be able to create a sufficiently effective strategy the first time. However, this is not a reason to despair.
Start with simple systems, gradually increasing complexity and using more advanced and effective indicators - don't be afraid to experiment. And in the end, you will have at your disposal a profitable trading strategy that will suit you 100%. Try trading on a demo account, for example, it is very convenient, especially during training!
What is the best trading strategy?
There is no strategy that would be ideal for all traders. Otherwise, everyone in the market would be trading this strategy. You must individually select or create a trading strategy for yourself.
What percentage of the deposit can I risk?
The percentage of risk depends directly on the money management rules that underlie your trading strategy.
What lot size should I trade?
The lot of size directly depends on your deposit and the percentage of risk taken into account in your trading strategy. This is not a universal indicator. It is calculated individually.
How to determine measurement objective target (potential profit)?
This indicator is determined by the parameters of your trading strategy.