Cryptocurrency Trading Strategies: All You Should Know Before You Start Investing
This guide will cover the fundamentals of crypto trading, various trading strategies and tools. You will learn about different trading styles, the components of a trade, and the importance of technical and fundamental analysis in developing a successful trading strategy.
Table of contents:
What is Cryptocurrency Trading?
While stock market trading dates back to the 1600s (the first stock exchange was founded in Amsterdam in 1602), cryptocurrency trading began with Bitcoin in 2009, which remains the most recognized cryptocurrency.
Since then, numerous other digital currencies have emerged and are actively traded every day.
But if we are going to be technical about the definition, cryptocurrency trading refers to the process of buying, selling, and exchanging digital currencies with the aim of generating profit.
With over several thousand cryptocurrencies available for trading today, it is essential to understand how they work, their behavior on the market, as well as the possible risks.
How Cryptocurrency Trading Works
Unlike traditional financial markets, the cryptocurrency market operates 24/7, offering numerous opportunities for traders to engage in a wide range of trading strategies.
To get started, you first need to create an account on a crypto exchange.
This usually involves providing personal information, verifying your identity, and setting up security measures like two-factor authentication (2FA).
Once your account is set up, you can deposit funds into it using fiat currency (like USD, EUR) or another cryptocurrency.
Before you start with any kind of trading at all, you will need to decide how much money you’re willing to invest.
After determining your investment amount, consider whether you want to be an active trader, a passive investor, or a combination of both, depending on your strategy and market conditions.
Why It Is Important to Have Cryptocurrency Trading Strategy
Cryptocurrency trading can be both exciting and profitable, but it’s also followed by volatility, and uncertainty. Without a well-defined trading strategy, you may find yourself dealing with unpredictable emotional decisions, potential losses, and missed opportunities.
To avoid these problems, here’s why having a solid cryptocurrency trading plan is important:
1. You are minimizing the risk of money loss
Cryptocurrencies are known for their high volatility, with prices often changing dramatically in short periods. A trading strategy helps you manage and minimize risk by setting clear guidelines for when to enter and exit trades. This prevents impulsive decisions driven by fear or greed, which are common pitfalls for traders without a plan.
2. Having strategy helps you stay disciplined
A trading strategy helps you stick to your plan rather than making decisions based on market hype or sudden price movements. With a strategy in place, you’re more likely to avoid losses, overtrading, or making emotionally-driven trades.
3. You are likely to avoid emotional trading
Emotions can be a trader’s worst enemy. Fear, greed, and anxiety can lead to irrational decisions that often result in losses. A trading strategy helps remove emotion from the equation by providing clear rules and guidelines to follow.
When you have a plan, you’re less likely to be controlled by the emotions that can arise during trading, leading to more consistent and rational decision-making.
4. It's not about building wealth overnight
Cryptocurrency trading is not just about making quick profits. A trading strategy is good for long-term success because it helps you develop a sustainable approach to trading. Try to focus on consistent, small gains and managing risk effectively and this will increase your chances of achieving steady growth in your portfolio.
What Are The Most Popular Crypto Trading Strategies
HODLing (Long-Term Investing)
Imagine you're planting a tree in your backyard. You carefully select the sapling, water it regularly, and watch as it grows slowly over the years.
You don’t expect it to grow overnight, right? Instead, you trust in the process, knowing that with time, patience, and care, it will eventually provide shade, beauty, and perhaps even some fruit.
HODLing (a playful misspelling of "holding") in the cryptocurrency world is much like planting that tree.
This strategy became popular during the early days of Bitcoin, when a user on a crypto forum famously misspelled "holding" as "HODLing," and the term stuck.
It's a long-term investment strategy where you buy a cryptocurrency and hold onto it, regardless of market fluctuations, with the belief that its value will increase significantly over time.
Rather than getting caught up in the daily ups and downs of the market, HODLers stay focused on the bigger picture.
The idea is simple: rather than trying to time the market, which can be incredibly risky and stressful, you commit to your investment and wait for the potential long-term growth.
HODLing is ideal for investors who have a long-term perspective. It suits those who believe strongly in the future potential of the cryptocurrency they are investing in and are not easily influenced by short-term market changes.
| HODLing Pros | HODLing Cons |
|---|---|
| Doesn't require constant market monitoring | Exposure to potentially significant downturns, sometimes for extended periods |
| Potential for significant gains | Might miss out on short-term opportunities to profit |
| Less stress and anxiety | The long-term future of any cryptocurrency is uncertain |
| Saving on trading fees since there is no frequent buying and selling | The temptation to sell when the market is "bearish" |
Day Trading
In the world of cryptocurrency, day trading involves buying and selling assets within a single trading day.
The goal is to capitalize on small price fluctuations that occur within a 24-hour period.
Unlike long-term strategies like HODLing, where investors hold onto assets for years, day traders focus on making multiple trades each day, aiming to make a profit from the volatility that cryptocurrencies are known for.
Day trading usually looks like this:
- Before making a trade, a day trader looks at the market using different tools to find good opportunities.
- When they spot one, they quickly buy or sell, aiming to profit from the price movement.
- Since they don’t want to hold onto trades overnight (to avoid surprise market changes), they close all trades by the end of the day, locking in any gains or losses.
| Day Trading Pros | Day Trading Cons |
|---|---|
| Quick profits (if leveraged correctly) | Unpredictable price changes |
| Frequent opportunities for gains | Constant need to monitor the market |
| Liquidity and easy entry | Higher level of stress |
| No overnight risk since all traders are closed by the end of the day | Frequent trading means more transaction |
Scalping Trading
Scalping is an intensive trading strategy that focuses on making numerous trades throughout the day to capture small price movements.
The goal of scalping is not to earn large profits from any single trade but to accumulate a series of small gains that can add up to a substantial profit over time.
Let’s say you're at a farmers' market where every vendor is offering slight price differences for the same goods.
As a scalper, you would quickly buy low from one vendor and sell high to another, repeating this process many times during the day to profit from these small price discrepancies.
Similarly, in the world of trading, scalpers aim to exploit minute price changes, often holding a position for just a few seconds or minutes before closing it.
| Scalping Trading Pros | Scalping Trading Cons |
|---|---|
| Reduced risk exposure | Requires a lot of effort and market monitoring |
| Potential to execute up to a hundred or more trades daily | It takes time to earn profits due to small gains |
| Capacity to manage greed due to small profit targets | Requires ability to make quick decisions |
| Increased number of trading opportunities | Requires a significant investment in the right tools and software to be successful |
Arbitrage Trading
To explain the concept of arbitrage trading, let’s say you’re shopping for a product online.
Then you notice that it’s listed at different prices on two websites.
If you buy the product from the cheaper site and sell it at a higher price on the other, you can make a quick profit.
Arbitrage trading works in pretty much the same way.
In the cryptocurrency market, prices can vary between exchanges due to differences in liquidity, trading volumes, and market participants.
For example, Bitcoin might be priced at $50,000 on one exchange and $50,200 on another.
An arbitrage trader would buy Bitcoin on the cheaper exchange and sell it on the more expensive one, pocketing the difference as profit.
There are three types of arbitrage trading:
- Simple Arbitrage: The easiest type of arbitrage, where a trader buys an asset on one exchange and sells it on another to profit from the price difference.
- Triangular Arbitrage: This involves trading between three different cryptocurrencies on the same exchange. The trader moves from one cryptocurrency to another, then a third, and finally back to the original, making a profit from the price differences.
- Statistical Arbitrage: This method uses math and algorithms to find and take advantage of price differences based on past data and market trends.
| Arbitrage Trading Pros | Arbitrage Trading Cons |
|---|---|
| Often considered a low-risk strategy | Frequent buying and selling leads to high transaction fees |
| Offers predictable returns | Arbitrage trading usually requires having a capital to start with |
| Exploits inefficiencies in the market | Different exchanges operate under different regulatory frameworks |
| Does not require market prediction | Potential delays in the transfers between exchanges |
Tools Needed for Cryptocurrency Trading
Each trading digital currencies method comes with a set of tools that will help you trade more effectively. Here are some tools to assist you in identifying how and when to trade:
Charts and Chart Patterns
Chart patterns are essential tools in technical analysis that help traders predict future price movements based on historical market data. These patterns are visual representations of price action that, when recognized, can give traders insights into potential trends.
The most commonly used chart pattern is called “head and shoulders”. It consists of three peaks - the middle one called the “head” and two smaller ones called the “shoulders”.
When the price breaks below the "neckline" (the line linking the two low points of the shoulders), it usually signals that the market is about to fall.
Cryptocurrency Price Alerts in Real-Time
Cryptocurrency price alerts are tools that notify traders when a cryptocurrency reaches a specific price level, allowing them to take immediate action based on market movements.
These alerts are invaluable for both short-term traders and long-term investors as they help keep track of multiple assets without needing to constantly monitor the market.
When trading on the Bitcoin Store platform, you can turn on the “Add price alert” option by clicking the bell icon next to the cryptocurrency name.
Security Tools
With the rise of hacking attempts and phishing scams, securing your trading accounts and digital assets is crucial.
One of the ways to protect your account is with apps like Google Authenticator for an extra layer of security.
Another option is to use VPN to encrypt your internet connection, especially when trading on public networks.
News and Research Platforms
It is important to stay informed about crypto news, regulations, and trends for making informed trading decisions.
Some of the websites that can be a good source of information for you include:
- CoinDesk: A leading source for cryptocurrency news, offering insights into market movements, regulations, and trends.
- Crypto News: Provides in-depth analyses, market data and insights as well as regulatory news and weekly newsletters
Building a Strong Foundation for Crypto Trading Success Takes Time
Each strategy has its pros and cons, but the common thread is the need for a clear, well-researched plan.
By taking the time to develop a thoughtful strategy, you can avoid emotional decisions, minimize risks, and make more informed trades.
As you begin or continue your journey in cryptocurrency trading, remember that responsible investing is key to long-term success.
Whether you're aiming for short-term gains or planning for the future, patience, discipline, and risk management will be your most valuable tools.
Note: Bitcoin Store is not a financial advisory firm and is not authorized to offer investment or financial advice. The opinions, analysis, and other content on our website are provided solely for informational purposes and should not be considered as a basis for making investment decisions. Cryptocurrency trading involves speculation, and prices can fluctuate rapidly, potentially resulting in a loss of investment. Before investing in cryptocurrencies, make sure to find independent advice and thoroughly understand the risks associated with this type of financial instrument.