Cryptocurrency trading strategy
What is cryptocurrency trading
Cryptocurrencies are virtual payment systems with their own monetary units, all transactions in which are protected by a cryptographic (encrypted) method.
Cryptocurrency exchange takes place in much the same way as the exchange of emails, hence the much shorter transaction processing time than through a bank, minimal commissions and the absence of an intermediary.
Accounting for a digital currency is called a blockchain, and it is conducted collectively by all network participants who have this currency. Each currency is programmed and identified by a complex code.
Cryptocurrency trading is the buying or selling of digital currencies in order to profit from changes in the price.
The process of trading digital assets is not much different from trading conventional assets (currencies, commodities, stocks, etc.). Therefore, the strategies used in this market are basically identical to the trading strategies used to trade conventional assets.
The main features of cryptocurrencies:
- This is virtual money that is usually not backed by physical assets. They are used only on the Internet.
- Electronic money is not controlled by the state and protected from inflation.
- Digital currency is mined through mining. Used for investment, trading, buying and selling goods.
Cryptocurrencies are also amenable to technical and fundamental analysis. Yes, cryptocurrencies are more volatile, which imposes some features on the trading process, but in a global sense, the trading process remains the same. The same laws of supply and demand operate in the market, which move the price of an asset both up and down.
Now almost everyone can trade electronic currencies, since they are available not only on exchanges. Derivatives of the instrument for cryptocurrency can also be traded in brokerage companies.
It is easy to try your hand at cryptocurrency trading by opening a demo account.
At the moment, it is very difficult to say how many cryptocurrencies exist in the world, since new ones appear almost daily. According to rough estimates, there are now more than 2,000 digital coins in the world.
Obviously, most of these coins belong to startup projects and are not known to the general public.
By far the most popular currency remains bitcoin as it is the first digital currency in the world. Despite the active development of the market, so far no other electronic asset can compete with it.
Even Ethereum, which remains the leading smart contract platform, has yet to overtake Bitcoin in terms of total capitalization.
The most popular and promising cryptocurrencies at the moment are Polygon, Cardano, Polkadot, Avalanche, Litecoin, Ripple, Bitcoin Cash, Stellar, IOTA, NEO and others.
Types of cryptocurrency trading analysis
We have previously noted the great similarities between trading cryptocurrencies and trading standard digital assets. Cryptocurrency trading strategy is practically the same as trading strategies for standard assets.
Obviously, in this situation, both fundamental and technical analysis are quite applicable to any market, and cryptocurrencies are no exception. On the other hand, this market still has some specifics. So, since the total capitalization of digital currencies is still relatively small, and the analysis methodology is just beginning to be developed, the conjuncture of this market is very dependent on high-profile news, reports on the achievements of developers and high-profile statements by prominent economic and political figures. But in general, both of these types of analysis can be successfully applied in the crypto-market and by and large remain the most popular.
Fundamental analysis of cryptocurrencies is in many ways similar to macroeconomic analysis. The base currency for trading cryptocurrencies is the US dollar (with its own nuances), and in cases of trading on the futures or spot market, operations are carried out on the BTCUSD pair. Consequently, changes in the position of the US dollar in the international financial arena entail changes in the bitcoin rate. But there are also specific features that relate directly to cryptocurrencies. Their knowledge helps to choose the tools with the greatest return.
Fundamental analysis of cryptocurrencies involves a deep and comprehensive study of the available information about any asset. For example, you can see the use cases for it, the number of active users, and also find out which team is responsible for its development.
All this is necessary in order to establish whether the asset is overvalued or undervalued. And you can use, especially at the initial stage of the analysis, information about your trading positions. But, of course, there is a certain specificity in the application of fundamental analysis in the electronic currency market.
Most crypto-currency projects simply cannot be evaluated by the same indicators as traditional companies. As for Bitcoin, in this respect it is closer to raw materials, and not to currencies. With stablecoins, everything is a little simpler, but even here, traditional fundamental analysis can do little to help.
But that doesn't mean it's not effective at all. You just need to choose reliable indicators. The ones that are extremely difficult to manipulate. The number of subscribers in the social network of the project, for example, is not such an indicator, since the accounts can be fake or purchased.
It is also important to remember that no indicator gives us a complete and exhaustive picture of what is happening. If, for example, the number of unique active addresses in the blockchain suddenly increases, then this does not specifically mean anything. After all, it can be one user who creates new addresses and actively transfers assets between them.
In the case of technical analysis, experience gained in traditional financial markets can be used. Crypto traders use the same indicators as those who trade, for example, in Forex. Because such tools as RSI, MACD and Bollinger Bands help to predict the situation on the market, regardless of what assets are being traded. Therefore, it is not surprising that they have found their application in the field of virtual currencies. Accordingly, a trading strategy with certain adjustments can successfully work on the crypto market as well.
Basic cryptocurrency trading strategies
In trading, you cannot rely on chance. To effectively open positions and earn income in the future, you need to have a clear trading strategy. Now let's analyze three strategies for trading crypto assets that can be applied in the market. These are not strategies with clear rules and market entry points. These are the three main areas of trade that can be successfully applied.
The first tactic is Trend Trading
Asset quotes always move according to the trend, which can be up or down. A trader can open positions in the direction of the trend, i.e. buy when the trend is up and sell if the trend is down. As a rule, trend trading is the most effective and brings more profit with less risk.
The most difficult moment for novice investors is the definition of a trend, for this it is necessary to at least determine the key local lows and highs.
For an uptrend, each next point must be higher than the previous one, and for a downtrend, local highs and lows must be lower than the previous ones. Then we can safely talk about the presence of any trend.
Accordingly, entering the market should be carried out from resistance levels in a downtrend and from support levels in a bullish trend. This cryptocurrency trading strategy or tactic can give very good results in the crypto-market, which is very volatile.
The second tactic is Trading on a trend change
This method is more complex and requires basic knowledge in technical analysis. A trend reversal can be used to open new trades, but the difficulty of such a strategy lies in correctly identifying a possible reversal. To do this, many traders use technical indicators.
The first tools are the moving average (MA - Moving Average) and the exponential moving average (EMA - Exponential Moving Average). These indicators determine the current trend based on previous values.
It is highly likely that the price will sharply change the local trend when approaching this line, and the larger the “timeframe” (the time interval enclosed in one candle on the chart), the more significant the resistance at these levels.
The next tool is the Relative Strength Index (RSI), which shows the strength of the current trend. In this case, the main signals are the intersection of lines with overbought and oversold zones, i.e. values close to the upper (100) or lower (0) limit. The closer the RSI line is to 0, the more the downtrend weakens, and the closer it is to 100, the less the price growth strength.
One of the most common among novice traders is the MACD moving average convergence/divergence indicator. The main thing to know about this indicator is that it tells you where the market is likely to go next.
To correctly recognize the convergence / divergence of moving averages, you need to open two lines on the chart of a trading pair - a signal line and a MACD line. When the MACD crosses the signal line from below, a bullish crossover is formed, and when it crosses above, a bearish crossover is formed.
That is, when the MACD line is higher, it is a signal of an uptrend; when it is lower, it is a signal of a downtrend. The indicator is very simple, quite visual, not cluttered with unnecessary data.
At the same time, your cryptocurrency trading strategy does not have to consist of these indicators. Other indicators can be used quite successfully.
The easiest and safest way to try your trading strategy on the market is to open a demo account. In this case, you will be able to test the cryptocurrency trading strategy on the real market without the risk of losing your money.
The third tactic - Buying in equal parts
The easiest way to start investing in crypto money is long-term savings with regular purchases in equal installments. For example, you can invest a fixed amount in a currency every month.
The advantage of this strategy is that you can buy an asset regardless of the market situation. If the price starts to fall, then subsequent purchases at a lower cost can average out the entry point.
This strategy works for those investors who have a long-term vision for the growth of the asset and also see big growth in the future. Many traders successfully apply this particular trading strategy in the electronic asset market.
The cryptocurrency market does not tolerate gambling. Traders compete here: retail and large. Some take the winnings, others leave the market empty-handed, and sometimes with debts. Therefore, trading in digital assets should be taken seriously, every step should be calculated and the possible negative consequences should be considered.
A novice user should first decide on a strategy: investing or trading. Allocate for this the amount that you feel sorry for him to lose.
How to create a cryptocurrency trading strategy?
In fact, trading virtual assets is not much different from regular trading. Therefore, you can use the same strategies when trading cryptocurrency or create a new trading strategy based on basic indicators and technical analysis patterns.
What is the best strategy for crypto trading?
Each trader has his own characteristics, so there is no universal strategy that will bring the same profit to all traders. By trading one strategy, one trader can make a profit, and another trader a loss. Therefore, you must determine for yourself which strategy brings you the best result.
What percentage of the deposit can I risk?
There are different money management rules. They may depend both on the trading strategy and on the size of your deposit and other factors. As a rule, the risk per trade should not exceed 1-3% of your deposit.
What lot size should I trade?
The position size is determined based on your risks and the size of the deposit. You must multiply the amount of the deposit by the percentage of risk that you take as a base, and based on the amount received, determine the size of the position in each transaction.
How to determine measurement objective target (potential profit)?
All these indicators depend on your trading strategy. There are no generic options.