Cryptocurrency trading comes with many ways of making profits. Using strategies while trading is one way of making sure that you continuously gain profit or manage to stay in control when you are making losses.
There are two main tools that are used when creating a trading strategy:
- Technical analysis.
- Fundamental analysis.
Each of these tools applies to a different strategy. The strategies discussed in this article may be used in other financial fields such as forex and stocks.
Let us now take a look at what a strategy is.
What Is A Trading Strategy?
A trading strategy refers to a continuous plan for all your trading activities. It outlines how you should behave while trading.
It can also help you prevent financial risks as it helps you to filter out any irrelevant choices. Controlling your emotions, desires, and moves is what a trading strategy does for you.
What are the components of a trading strategy? Let’s find out below:
- The type of assets that one trades.
- The setups that one takes.
- The tools and indicators that one uses.
- The factors that influence the position sizing.
- The stop-loss and take-profit points are on the charts.
- The methods that you use to evaluate your performance.
- Your trading schedules for instance how many times you would want to trade in a week.
Testing the effectiveness of a trading strategy may require you to carry out backtesting and forward testing. You can do rough trades on the Binance Futures testnet to find out what happens.
What type of trading strategies are there? Let us find out below.
Active Trading Strategies
These are strategies that require you to always keep an eye on your portfolio.
The first active trading strategy is:
1. Day trading
The trader opens and closes trades on the same day. Therefore, the major interest is on the final price that the token will have throughout the day.
The word day trading originated from the traditional markets where the trading takes place during a specific time or hours of the day.
In the cryptocurrency markets, day trading means the trader enters and exits the positions set within 24 hours or less.
A technical analysis approach is used in day trading to generate ideas. This strategy is preferred by advanced traders due to the high risks it carries.
2. Swing trading
It involves holding on to the positions set for less than a week or month. The traders try to see where volatility will strike and wait for it to pass. The Swing traders usually use technical and fundamental analysis when generating ideas.
Fundamental changes take a longer time to fade and fundamental analysis is essential here. Technical indicators can still be used.
This strategy favors beginners mostly as they can easily observe the trends for a period of time which is just enough.
Therefore, the decisions are made slowly and reasonably.
3. Trend trading
This involves holding the positions for as long as a few months. They study the patterns and decide at which point they want to enter and exit.
Trend traders mostly make use of fundamental analysis as they observe the patterns that take time to form.
This strategy ensures that the asset will keep moving in the trend direction. To cater to the pattern changes, traders may have to consider using technical indicators and trend lines to maximize their profits.
This trading is also perfect for beginners.
It centres on the tiniest changes in the market trend. Most scalp traders have been known to enter and exit points within minutes and seconds.
If the trader takes note of small changes occurring within the market over a short period of time, then they can easily gain small profits which will sum up to big gains.
This strategy isn’t suitable for beginners and it also requires a great understanding of the dynamics of the market.
The profits are small and therefore investing large amounts seems more reasonable.
Passive Investment Strategies
With these strategies, it’s not a must for one to keep checking the trends and performance on a regular basis. The main aim is to buy and sell the assets while making a profit.
1. Buy and hold
Here, the traders buy an asset and hold it for a long time despite the changes in the market.
The entry point does not matter as the buyer will hold the asset until he or she realizes a profit. Traders rely on technical indicators and don’t check their portfolios all the time.
This technique has been applied to Bitcoin(BTC) mostly and it has been proven not to be suitable with other cryptocurrencies.
2. Index investing
This is the buying of ETFs and indices in the traditional markets. It is also available in the centralized and decentralized finance (DeFi) sector.
The crypto index creates a token using assets that track their performance. The assets may be privacy coins, utility coins or a mixture.
This helps to avoid basing your profits on one token. Experts say that this will become more popular in the future.
Creating and choosing a suitable trading strategy takes time. You should keep track of the strategies that you use every time you trade. Changing them is also important when you realize one is not as effective as the other.
Adding more and more techniques should be done every time as your knowledge increases. Using different strategies on different parts of your portfolio is recommended to reduce financial risks as well.