With numerous cryptocurrencies continuing to emerge in the market today, interest in trading this asset remains at an all-time high. Explore our list of strategies below to discover the right cryptocurrency trading approach for you.
Crypto trading: what you need to know
Cryptocurrencies are traded on decentralized markets, meaning they are not issued or backed by a central authority such as a government. Instead, they operate on a network of computers known as a blockchain. Because of their decentralized nature, cryptocurrencies are not subject to many of the political and economic factors that impact traditional currencies.
However, this doesn’t mean that cryptocurrencies are immune to external influences. On the contrary, they are highly volatile and influenced by factors such as supply and demand, media coverage, the adoption of e-commerce payment systems, and significant global events.
These factors highlight the importance of developing cryptocurrency trading strategies that not only address market volatility but also emphasize portfolio diversification. Trading across various asset classes, including cryptocurrencies, helps diversify your portfolio. Relying solely on one asset class or market limits you to the conditions of just one market among many.
By diversifying the types of trades you make, you can hedge against the risk of a market moving against you, as well as gaining the benefits of positive movements.
Trader’s maze: crypto trading strategies
When we speak about crypto trading, we’re referring to the act of speculating on crypto price movements through a CFD trading. These are leveraged derivatives, which enable you to speculate on price movements without having to own the underlying asset.
Find out more about trading CFDs
Alternatively, you can buy cryptocurrencies via an exchange – meaning you’ll purchase the coins yourself. You’ll need to create an exchange account, fund the full value of the position and store the cryptocurrency tokens in your own wallet until you’re ready to sell. Buying cryptocurrencies directly can be complex and isn’t advised for beginner traders.
Moving Average Crossovers
Trading moving average (MA) crossovers involves understanding both MAs and the strategies surrounding crossover trading. To begin, a moving average is a lagging technical indicator that averages the price points of a financial instrument over a set period and divides by the number of data points to create a single trend line.
This trend line helps identify the direction of the current trend while reducing the impact of random price fluctuations. It also allows traders to analyze support and resistance levels by examining past price movements.
So, how can you integrate this indicator into your cryptocurrency trading strategy? One of the most common methods is through ‘crossovers.’ A price crossover occurs when the asset’s price moves above or below the MA, signaling a potential trend reversal.
To trade a moving average crossover in cryptocurrency markets, you should wait for the price to cross the MA before taking a long or short position on the asset, using financial instruments like CFDs.
Another common approach is to apply two moving averages on a chart: one short-term and one long-term. When the short-term MA crosses above the long-term MA, it indicates an upward trend, known as a golden cross, which is often seen as a buy signal. Conversely, when the short-term MA crosses below the long-term MA, it suggests a downward trend, referred to as a death cross, signaling a potential sell.
Relative Strength Index (RSI)
The relative strength index (RSI) is a technical indicator, which is used to identify momentum, overbought and oversold market conditions. It can also be used to highlight signals of divergence and hidden divergence in the financial markets. This type of trading is also known as trend trading.
The RSI is a calculation of the profitable price closes relative to unprofitable price closes – reflected as a percentage. It is calculated using the formula:
RSI = 100 – (100 / [1+RS])
The indicator is depicted as a percentage out of 100, with a lower percentage typically indicating an oversold position and a higher percentage reflecting and overbought position.
So, what’s the best crypto strategy for trading RSI? Well, that depends on your risk appetite and trading style. The RSI can be used for trading both short and long signals when the price is rangebound in nature as well.
However, as markets regularly move in trends, using an RSI indicator to highlight trends for entry and trends for exit will give you an idea of when to engage.
Event-driven trading
A strong media presence of a specific coin or crypto exchange can impact cryptocurrency markets. This cryptocurrency trading strategy focuses solely on taking advantage of these ‘events’. It’s a popular trading strategy for those new to trading.
News coverage of current events can influence the prices of many things like forex pairs, stock, indices and commodities – not just cryptocurrencies. This influence is not just speculation – many experienced traders will take advantage of this.
You’d normally wait until the market shows a consolidation pattern before an expected news release (like an earnings report) and then act as soon as a market breakout occurs. Yet, due to the volatile and unpredictable nature of cryptocurrencies, you may have to wait until after such a news release is published before engaging in the trade.
Simply put, you’d buy your chosen cryptocurrency when positive news is announced and short it when negative news comes out.
Scalping
Scalping is the practice of opening positions in line with a trend, often entering and exiting the market multiple times in a short period as it develops. Individual trades are held for just a few seconds – minutes at the most – so it is one of the most short-term strategies.
This trading strategy works very well for active day traders. Scalping focuses on minute-to-minute price changes, which are driven by quantity. As soon as the trade becomes profitable, you’d exit the trade.
There’s no ‘waiting for the market to depict trends’ as you’ll have to be quick, and close trades that are losing money instantly. The more volatile the market, the better it is to employ scalping.
You may want to use tear-off tickets when you’re scalping. With them, you can set up a position in the opposite direction so that you’re ready to exit, either taking your profits or limiting your losses.
Bear in mind that scalping can be risky if you’re placing multiple trades on a very short-term basis. It’s essential to manage your risk carefully.
DCA (Dollar Cost Averaging)
If you’re looking for a crypto trading strategy that doesn’t involve indicators, then dollar cost averaging (DCA) might interest you. DCA is a popular strategy for both beginner traders and experts alike.
Instead of investing all your money into a specific asset at once, you divide your investments into smaller amounts. These amounts are then spread out over a predetermined timeline and are regularly invested on a particular time and day of the week – and only on that day and time.
What does this look like in execution? Let’s say you decide you’d like to invest in bitcoin. You’ve set aside CHF 15,000 for this purpose, and decide a DCA strategy will be the best way forward. So, you’d then divide your initial amount by the number of weeks you’d like the strategy to run for.
For the purpose of this example, we’ll say that you’d like to invest your CHF 15,000 over six months. You’d then divide the initial amount by 24 (the number of weeks in six months), giving you CHF 625 per week. For the next six months, every Tuesday at 2pm you invest your CHF 625 into bitcoin – until your initial amount is depleted.
Why invest like this? Buying an asset in regular intervals helps alleviate the impact of market volatility, meaning you’ll typically receive more of the currency from your final investment than if you’d invested all your money at once.
It’s important to note, to fully make use of this strategy you’d need to trade the specific coin through an exchange – and not through a broker like us.
How to apply strategies in your crypto trading
Now you know the basics of cryptocurrency trading strategies, how do you get started? Well, you can follow our easy guide to placing your first cryptocurrency trade:
- Open an account with us or log into your existing account. From there, you’ll be able to access the cryptocurrency market through our platform
- Learn how the cryptocurrency market works and choose a coin to focus on. With so many options, remember the importance of diversifying your crypto portfolio
- Build a trading plan from the above strategies. Choose one which aligns with your personality and risk appetite
- Choose your cryptocurrency trading platform. We offer an award-winning* and cutting-edge platform with round-the-clock support
- Open, monitor and close your first position. Or open a demo account to practice your cryptocurrency trading strategies with virtual funds.
* Best trading platform as awarded at the ADVFN International Financial Awards 2021 and Professional Trader Awards 2019. Best trading app as awarded at the ADVFN International Financial Awards 2021.
