Cryptocurrency trading strategy
The issue of cryptocurrencies is getting more popular day by day. It is a great asset to invest in, both for the long term and for trades on the exchange. But we should not forget that investing always involves risk, especially in the case of crypto, because it is a highly volatile asset. That's why it's worth taking the time to study the topic in detail and develop an effective strategy. This article will help you do that.
What is cryptocurrency trading?
The main task of crypto trading is to buy a digital coin as cheaply as possible, and sell it as expensive as possible. The difference in price is the trader's profit. In principle, nothing complicated. It should be noted right away that buying and selling digital money is a little different from transactions with precious metals and stocks.
Most traders, not necessarily beginners, dream of millions of dollars in profitability. But in the stock markets, such returns are more of a dream than a reality. At least not in the first years of operation. What can not be said about crypto trading, where such profits are quite real.
Deciding to become a trader, you should learn the basic skills:
- Know how to use a chart.
- Conduct competent technical analysis.
- Timely conclude transactions for the purchase / sale of cryptocoins.
- Do not ignore the trading history (it is necessary for the analysis).
Of course, in combination, all these factors will allow you to increase the profitability of transactions. Having studied the charts, one can conclude how relevant the value of the coin is, determine the further movement of its price, etc.
Now, it is much easier to do this, since you can easily open a demo account with any brokerage company and start trading cryptocurrencies or other assets. It's easy, fast and absolutely safe, since a demo account does not require any financial investment from you.
Cryptocurrency is traded via CFD (contract for difference) through a broker, which is as simple and secure as trading traditional stocks or currency pairs.
You can even try the same strategy. When using CFDs on coins, you do not own a physical asset, but simply speculate on the price movement, that is, you can make a profit regardless of whether the price rises or falls.
Although Bitcoin is one of the most popular assets in the digital realm, many companies also offer a range of other cryptocurrencies for CFD trading. The list of tools of many companies includes more than a dozen of the most popular digital coins. As a rule, this list includes: Ether, Litecoin, Ripple, Bitcoin, Bitcoin Cash, Stellar, Cardano, IOTA, NEO, Monero and others.
Types of cryptocurrency trading analysis
Exploring such volatile trading assets as digital currencies requires certain skills. Choosing a strategy, understanding the limitless world of trading, combining technical and fundamental methods of analysis are areas that need to be studied.
As far as technical analysis is concerned, some knowledge can be gleaned from traditional financial markets. Many crypto traders use the same indicators as they use in Forex transactions when trading stocks and commodities.
Tools such as RSI, MACD and Bollinger Bands are aimed at analyzing market behavior regardless of the asset being traded. Thus, these technical analysis tools are extremely popular in the field of cryptocurrencies as well. They work quite effectively in almost any market. The main thing is to learn how to use them correctly.
In the fundamental analysis of cryptocurrencies (despite the fact that the approach is similar to that used in traditional markets), it will not be possible to use proven tools for valuing crypto assets. For an objective analysis of cryptocurrencies, it is necessary to understand how they acquire value.
Basic cryptocurrency analysis involves a deep study of all available information about a financial asset. For example, consider the use cases, the number of people using it, or the team behind the project.
Your goal is to understand whether an asset is overvalued or undervalued. Based on this, you will be able to determine your trading positions.
Fundamental analysis (FA) is a technique used by investors to understand the "real" asset or business. The main objective is to determine, given a large number of internal and external factors, whether an asset or business is overvalued or undervalued. This information is used to make strategic decisions about entering or exiting positions.
Technical analysis also provides valuable trading data, but leads to a different kind of conclusion. Market participants using technical analysis seek to predict future price movements based on information about the past performance of assets. This is achieved by identifying candlestick patterns and studying the main indicators.
To determine the true value of assets, traditional fundamental analysts usually turn to business metrics. The indicators used in this case include earnings per share (how much profit the company makes per share issued) or price-to-book ratio (how investors value the company relative to its book value). They may conduct such analysis for several companies in the same niche, for example, to find out how their own potential investments compare with the investments of other investors.
Cryptocurrency networks cannot be evaluated by traditional business tools. For that matter, more decentralized systems like Bitcoin (BTC) are closer to the commodity sector. But even if we are talking about relatively centralized cryptocurrencies (those issued by organizations), traditional indicators of fundamental analysis can not tell so much.
Therefore, it is necessary to pay attention to other frameworks. First, identify reliable indicators. By "reliable" it means those that are difficult to manipulate. For example, Twitter followers or Telegram/Reddit users are not a good indicator as it is easy to create fake accounts and buy social media activity.
It is important to note that there is no single indicator that would give us a complete picture of the network being evaluated. You can pay attention to the sharply increasing number of active addresses in the blockchain. But by itself, the number of addresses does not mean anything. As you know, the same organization can be behind them, transferring money between new addresses.
List of main technical indicators
Price movements in the electronic money market, as in any other market, are not random, they often follow long-term and short-term trends. Using graphical analysis, crypto traders try to spot these trends and capitalize on them.
Traders who take into account market technical indicators in the process of trading rely more on the price movements of the coin than on news, which also have a significant impact on the price. Despite the fact that a certain list of factors can influence the value of a crypto asset, technicians pay special attention to supply and demand.
History tends to repeat itself, so it's easier to predict market psychology when you understand technical indicators.
The most popular indicators on the crypto-market are indicators that are actively used in trading currency pairs. These are indicators such as:
- Relative Strength Index (RSI).
- Moving Average Convergence/Divergence (MACD) indicator.
- Trend line indicator.
- Support and resistance level indicators.
- Moving averages.
- Volume indicators
All these and other indicators can be used when creating your own cryptocurrency trading strategy.
The main thing is not to forget to test all your developments on a demo account and only after a positive result switch to a real account.
Thanks to the use of technical indicators in cryptocurrency trading, it is not difficult for traders to determine trends and market sentiment. However, it should be borne in mind that technical analysis is just a trading method aimed at determining price trends based on events that have already occurred. Therefore, you should not rely only on technical indicators for evaluating the market. In the cryptocurrency space, fundamental factors have a special influence on price performance.
Technical analysis is not able to predict developments based on, for example, news. Therefore, to achieve a greater return on investment, these types of analyzes should be combined.
A trader who decides to buy a certain coin for fundamental reasons can use technical analysis, thus determining the best entry point and increasing trading profits.
Basic cryptocurrency trading strategies
Electronic money has long ceased to be some kind of exotic. Traders are in full swing discussing the advantages of a particular coin, making forecasts for the bitcoin rate and honing their skills on various exchanges.
Of course, it is impossible to make money in the market without a good trading strategy. The most commonly used strategies in the cryptocurrency market currently are:
- Arbitrage Strategies.
- Strategies based on fundamental analysis (FA).
- Strategies based on technical analysis.
Arbitrage strategies are based on price differences. Traders take advantage of this and, for example, buy a coin on one exchange, where it costs less) and sell it on another exchange (where it costs more).
Arbitrage strategies look so simple only at first glance. In fact, they have many features. For example, it is very difficult for a person to constantly monitor the current rates of many cryptocurrencies in real time to find the most profitable deal. Most often, arbitrage strategies underlie trading robots.
Initially, Benjamin Graham, a well-known American investor, offered fundamental analysis to predict the price of an asset. This method was most developed with the light hand of the legendary Warren Buffett, who greatly popularized it.
Fundamental analysis is applicable to the cryptocurrency market as well. However, more specific parameters are used to estimate the value of a cryptocurrency. For example:
- the ratio of the network cost to the number of transactions carried out
- value proposition of cryptocurrency
- reputation of the development team, etc
Strategies based on fundamental analysis also have their own characteristics. They do not work in the short and even medium term, so the current fluctuations in the cryptocurrency rate do not matter - fundamental analysis strategies are designed for a longer period and are most suitable for investors.
Strategies based on technical analysis - this type of strategy is the most "close and dear" for traders, since it uses the same principle as when trading on the foreign exchange market - making a profit due to asset fluctuations.
Cryptocurrencies are quite volatile - an increase or decrease in the rate of a coin, for example, by 20% within a few hours is not something out of the ordinary for the cryptocurrency market.
As in the foreign exchange market, a trader determines the current trend for the selected coin and buys in an uptrend and sells in a downtrend. The holding time of the transaction depends on the time interval at which the trader determined the current trend.
This is one of the main features of this type of strategy - the difficulty in identifying the trend. Where one trader sees an increase, another trader may see a decrease - it all depends on the knowledge, experience and practical skills. And given the increased volatility, determining the trend in the crypto market is far from an easy task even for experienced traders.
Each of the above types of strategies in the digital asset market has the right to exist, and if their use allows the trader to make a profit, then this is just fine. But if the currency market is called risky, then the cryptocurrency market is simply mega risky. Therefore, no matter how dizzying your success may be, invest in trading only the money that you can afford to lose.
How to create a trading strategy?
First you need to learn the basics of the market. Next, you need to choose a trading style and decide on the technical indicators that will be used in the strategy. Next, you need to decide on the instruments that you will trade and clearly define the rules for entering and exiting a trading position.
What is the best strategy for crypto trading?
Everything is very individual. A successful strategy for one trader may be unprofitable for another and vice versa.
What percentage of the deposit can I risk?
The universal rule says that it is worth risking no more than 1-3% of the deposit.
What lot size should I trade?
This indicator is calculated based on your deposit and risk percentage.