How to earn money with crypto? Here are 5 important trading strategies
Although the industry has only been around for a little over a decade, there are countless ways to profit from cryptocurrency trading.
With good strategies, you can organize techniques into a coherent framework to follow and get results. These techniques will give you insight that will let you know how to continuously monitor and optimize your cryptocurrency strategy.
The two most important parameters for building strategies are technical and fundamental analysis. The difference between the two will be differentiated throughout this article.
However, it is important to understand the differences between these concepts before going further as there are many different trading strategies.
Different types of analysis
Fundamental Analysis: this method helps determine the real or “fair market value” of a stock. Here analysts are looking for stocks that are currently trading at prices that are higher or lower than their actual value.
Technical Analysis: This is where analysts evaluate investments and identify trading opportunities in price trends and patterns as displayed in charts.
The decision of technical analysts is usually based on the past trading activity and price changes of the security. They see this as valuable indicators of the future price movements of the security.
Now back to cryptocurrency trading strategies, I am here to dish out the basic things you need to know or do to speculate in the crypto markets. You are more likely to reach your financial goal with a solid trading strategy.
Before we get into strategies, let’s look at what trading strategy means. It can be referred to as a comprehensive plan for all your trading activities.
Simply put, it is a framework that is created to guide you in all your trading endeavors.
Having a plan will help you minimize financial risk as it eliminates many unnecessary decisions, making it a life-saving process.
All you need to know is that the cryptocurrency industry comes with a volatile market as no central bank regulates it. So, pulling such a high risk means that something unexpected might happen. But your trading plan will determine how you react and not your emotions.
So, with a trading plan, you are prepared for the possible outcomes. This saves you from making rash, impulsive decisions that often lead to big financial losses.
Different factors to keep in mind
Factors that determine a comprehensive trading strategy include:
- Types of assets traded
- Steps taken
- Tools and indicators to use
- Size of the position
- Documentation and measurement of portfolio performance
Sometimes you might add some smaller parameters to your trading plan to include the days when you will never trade based on convictions or impulses. Other small things might include checking digital currency prices during the weekend.
After you have defined a trading strategy, the only thing to keep in mind is that the methods and applications are not necessarily strict, as there is likely to be overlap between them. So, you could consider a hybrid approach by combining several strategies.
Below are some strategies that can be used when trading cryptocurrencies.
This is a well-known active trading strategy as most traders enter and exit positions on the same day. In this way, day traders benefit from intraday price movements.
Although most digital currency trading platforms are open 24 hours a day, 365 days a year, day trading is used in a slightly different context in the crypto markets as it refers to a short-term trading style. In this market, traders enter and exit positions in a span of 24 hours or less.
The decision to participate in day trading comes from price action and technical analysis. Here, traders formulate trading ideas by using many other techniques to find inefficiencies in the market.
Although it is exhausting, day trading cryptocurrencies is very profitable for some. For this reason, day trading is recommended for advanced traders.
This is a long-term trading strategy that traders use by holding positions for longer than a day. They cannot hold the positions for more than a few weeks or a month.
The traders here are called swing traders who sit in the middle between day trading and trend trading. They intend to profit from waves of volatility that last for several days or weeks.
They use a combination of technical and fundamental factors to formulate their trading ideas.
This type of trading strategy involves holding positions for an extended period of time, typically at least a few months.
Here, trend traders aim to profit from directional trends, usually using fundamental analysis.
Scalping is one of the fastest trading strategies that focuses on taking advantage of small prices at any given time. It usually takes advantage of bid-ask spreads, liquidity gaps or other inefficiencies in the market.
The traders here are called scalpers, and they do not hold their positions for a long time. They usually open and close their positions within seconds.
It is a lucrative strategy when a trader finds a market inefficiency that keeps occurring to exploit it. This way, they can make small profits that add up over time.
This strategy is ideal in markets with high liquidity. Entering and exiting positions in this type of market is relatively smooth and predictable.
Note that this strategy is not recommended for beginners due to its complexity, as it requires a deep understanding of the mechanics of the markets.
Buy and Hold
This is a passive investment strategy where assets are bought and held for a long time, regardless of market fluctuations.
It is a suitable strategy for long-term investment. Those who bought Bitcoin at the price of $1 back then are already millionaires because they held on to their coin without paying attention to the volatility of the market.
Keep in mind that all that matters is developing a crypto trading strategy that fits your financial goals and personal style. Although this might not be easy, you can figure out the one that suits you from the strategy highlighted in this article.
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