3 months ago
Popular Crypto Trading Strategies: Which One Is for You?
Trying to trade cryptocurrencies without a trading strategy in place is likely to lead to failure and a loss of capital. In this article, we’ll explain what a crypto strategy is, basic types of trading strategies, and how they can help you optimize your trading for maximum profits.
What is a crypto trading strategy?
A crypto trading strategy is a set of guidelines used to buy and sell cryptocurrencies depending on a trader's goals, personal characteristics, and timing. As you can see, the definition of a strategy in crypto trading doesn’t really differ from the definition of a trading strategy in general. In fact, all markets, be they stocks or crypto, work in a similar way. They even may have all the same trends, fluctuations, flats, and reversals. Still, there are some conceptual differences in the crypto market, such as the usage of blockchain technology and its severe volatility factor.
Every trader, no matter their outlook and timeframe would benefit from a trading strategy. Without a strategy, trading is no more than gambling or blindly copying the trading strategy of others. At the same time, having a strategy itself doesn’t guarantee anything. There will always be trading risks with any strategy a trader employs. Still, a trading strategy will help traders more easily endure the periods of drawdowns as well as lock in their profits in a timely manner.
There are three basic categories of crypto trading strategies (or strategies in general):
- Short-term strategies
- Medium-term strategies
- Long-term strategies
In short-term trading, the trading time frame ranges from a few minutes to several days. Short-term traders can make dozens of trades per day, so they expose themselves to more profits or losses along the way.
Among short-term strategies, two of the most common are scalping and day trading. Let’s have a closer look at each of them.
Scalping is a strategy in which traders enter and exit the market multiple times, generating a small profit of a few pips (percentage in point, the smallest price move) on each trade. Most scalpers trade within a time frame of several seconds to 15 minutes, making this the most fast-paced strategy.
Because of the rapid nature of scalping, scalpers usually trade just one or two currency pairs with which they are deeply familiar. They need to know in detail how these currencies behave and what the best time for trading is, including when the market is most volatile, and when it’s quiet.
Another challenge of scalping is that traders can’t wait for the perfect timing to enter the market or cherry-pick their trading setup. Scalpers need to be able to adjust their trades to the current market situation and do so quickly. This includes trading breakouts, making counter-trend trades, making trend continuation trades, and so on.
Being a high-frequency trading strategy, scalping also requires using purpose-built software. In crypto, there are a few platforms for scalpers. One of the most popular is CScalp. Also, scalpers are among the traders who benefit most from algo trading.
Although scalping is applicable to the crypto market, many traders believe it’s not the best crypto trading strategy. In fact, it’s one of the most difficult approaches to trading, especially for beginners.
Day trading is also referred to as intraday trading. Historically, this method of trading came from the stock market, which has limited working hours. Unlike stock markets, crypto markets work non-stop, so day trading in crypto simply points at a short trading span, which is usually up to 24 hours. Day traders trade within a single day without holding positions to the next day.
What you should know about day trading is that it’s an active strategy that requires a lot of time investment. It wouldn’t be an exaggeration to say that it’s suitable only for full-time traders: making several trades per day without leaving open positions overnight takes up hours of time each day.
Another thing that makes day trading especially challenging is its ongoing decision-making process. It puts a lot of emotional and cognitive pressure on traders who need to maintain a high level of concentration. Of course, there are people who thrive in such conditions, but still, day traders must maintain a level-head and not get emotional about their trades.
Also, don’t forget about exchange fees. Since many trades are placed in a single day, fees can significantly reduce profitability. If you want to become a day trader, you need to find an exchange with the lowest fees possible (e.g., Binance or FTX).
Medium- and long-term strategies
Medium and long-term trading refers to trading that takes place over a couple of days or weeks. With these strategies, traders can patiently watch and wait until they see the right moment to act on a given trade. In fact, this is more advisable for beginners and occasional traders because there are not as many time constraints as in short-term strategies. The longer time frame allows you to consider trends calmly and make more confident decisions.
Swing trading is an active trading strategy, although its time frame is wider than that of a day trader. In swing trading, traders usually hold their positions for anywhere from a couple of days to a month. The goal is to capture short-to-medium-term profits as trends change in a market. This trend change is also called a leg or a swing.
While still being an active trading strategy, swing trading is less stressful than day trading. Many traders find it comforting that they don’t have to make decisions every minute or jump at every little move in the market. Swings unfold over days and weeks, so it leaves some time to make analyses and plan a trade.
Swing trading could also be a more attractive strategy for you, because it allows you to sit through periods of drawdown. If you’re trading over a couple of weeks’ time frame, chances are there will be days when the chart is drifting lower and a reversal pattern is unclear. With the swing trading strategy, you’ll be able to ride it out, while a day trader might be out of their trade after waiting just 15 minutes.
Trend trading is a strategy where traders take action after a trend has started to unfold. For example, they buy when they see the unfolding upward trend and sell after a pattern indicates the trend is over.
In the image above, typical entry and exit points of a trend trader are noted on the chart. Even though the trader would miss a bit of profit at the bottom and top of the trend, they still earn a hefty sum on a successful trade. The key idea of trend trading is to take advantage of a trend once it has already started. That way, the results are more predictable. Take a look at the screenshot below.
By following the classic idea of buying low and selling high, it’d be better to buy the asset when it’s at its bottom. However, it’s easy to be smart when looking back at the chart. When you’re actually at the moment and the trend is going lower, you don’t know what will happen and how low the price will fall. There is a chance this is the beginning of the end for the downward trend, or, the price could continue to fall. Trend trading allows you to wait for the trend to become more clear, making it a safer option for traders even though they likely won’t be maximizing their profits.
It’s much easier to predict that the market is going to keep going up than to predict the top and bottom of a move. Does this mean that trend trading is always a winning strategy? No. It often happens that a trend doesn’t occur in the way you had anticipated. Promising trends sometimes reverse just after you enter a trading position, but more often than not, they persist. As long as the trader is accurately predicting trends more often than not, their win ratio will be good enough to profit from this trading strategy.
A win ratio is the ratio of all your winning trades to your total number of trades.
If the trend isn’t going as you expected, it’s time to apply the “cut your losses” rule. That means it’s better to get out while there’s still only a small loss as opposed to holding on as your losses grow. Still, in the case of trend trading, a few good trades per year can cover some small losses. To some degree, trend trading resembles poker: you need to patiently wait for a really good hand while remaining disciplined and folding the weak ones.
HODL, a misspelled variation of “hold,” means keeping crypto asset positions for a long time, whatever the situation in the market. This strategy is more of an investment rather than trading. It’s mostly related to holding a blue-chip crypto (i.e. Bitcoin or Ether) that is proven and will continue to grow over time.
Another variation of HODLing, specific to the crypto market, is to try to find a high-quality currency at the very beginning of its growth and buy it at a very low price. Since it’s super affordable at that time, you can buy a higher quantity of that cryptocurrency and then hold it for weeks, months, or even longer. For example, those who believed in DeFi coins a couple of years ago and have held through their growth have turned huge profits along the way.
Whatever option you take, HODLing requires great patience and nerves of steel.
To sum up
In this article, we’ve covered the five most common trading strategies for the crypto market:
- Scalping, the most active strategy, with a 15-minute time frame. It requires lightning-fast thinking as well as special software.
- Day trading, or making multiple trades within one day. This takes a lot of time investment, so this strategy is really only for full-time traders.
- Swing trading, a medium-term strategy with a timeframe from a couple of days to weeks. If you like active trading but can’t spend every day behind a monitor, this strategy is probably for you.
- Trend trading, a cautious strategy where you try to avoid unnecessary risks by making deals only when there’s an obvious trend.
- HODLing, a passive strategy where you keep your carefully selected assets as long as possible.
Now, you’ll be able to choose the trading strategy that aligns with your financial goals and your personality, which is of utmost importance.
What is a trading strategy in the crypto market?
A crypto trading strategy is a set of guidelines used to buy and sell cryptocurrencies, based on a trader's goals, personal characteristics, and timing.
What are the most popular crypto trading strategies?
All crypto trading strategies can be divided into three categories: short-term, medium-term, and long-term. Among the short-term strategies are scalping and day trading. Swing trading and trend trading have pretty flexible timeframes, so they can be both medium and long-term. HODLing is the most common long-term strategy, where you don’t actively trade at all, but only accumulate proven assets.
Which crypto trading strategy is good for retail traders?
We’d suggest taking a closer look at swing and trend trading. They both allow you to actively trade if you wish, but don’t require you to become a full-time trader.