Crypto Trading Strategies; All You Need to Know

by Farheen Shaikh  |  August 9, 2021

The growing popularity of cryptocurrencies has made them a tempting trading asset, especially over the last few years. Trading is buying and selling of financial assets like cryptocurrency to make profits over the short term. The trading period can be as short as a day to a few weeks. 

How Is Trading Different from Investing?

The prime objective of both trading and investing is to buy and sell assets to make profits but the difference is in the approach:

A trader plans to make profits in shorter time frames and makes smaller profits on each trade. Hence their strategy is more active; they buy and sell multiple times a day, weeks or months. They profit from the short term volatility (ups and downs), following more risk because of the uncertain nature of the markets.

An investor, however, desires to make profits over the long term, say 5, 10 or more years. Their approach is passive. Since it is believed that the markets generally go up over the long run, they have a high chance of making considerable gains on each trade. Volatility has a minimum impact on investors.

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Based on whether you are investing or trading, your crypto trading strategy will also differ. 

Fundamental Analysis and Technical Analysis

Fundamental and technical analysis are the two research methods that form the basis for any crypto trading strategy. 

What is Fundamental Analysis?

Fundamental takes into consideration quantitative and qualitative factors to assess a cryptocurrency. Quantitative factors include the number of wallet addresses holding that cryptocurrency, the speed at which the coin is mined etc. Qualitative factors include leadership, technology and competence. 

Fundamental Analysis

Often, investors rely on fundamental analysis to decide which cryptocurrencies to invest in. A cryptocurrency with strong fundamentals is deemed to be investor-friendly. However, it could also be used by traders sometimes.

What is Technical Analysis?

It works on the principle that ‘ History will repeat itself.’ Technical analysis involves studying historical price movements and patterns to predict the future. It assumes that the past patterns will repeat in the future. Traders look at the historical price charts and trading activity to spot the same opportunities in the current market. 

Technical analysis includes analysis of price action, volume and chart patterns using technical indicators. It helps you spot trading opportunities in the market to make profitable trades. Traders primarily depend on technical analysis to discover the best opportunities for their short term trades. 

Technical Analysis

Fundamental analysis of a cryptocurrency helps you identify its intrinsic value (actual value) that may or may not be its current value. In contrast, technical analysis enables you to understand the present value of the cryptocurrency, study its past performance and find opportunities for the near future.

Key Technical Indicators

Since traders mostly use technical analysis, it would help if you know of some key technical indicators. They are metrics used in technical analysis that help traders identify their entry and exit opportunities. They enable traders to forecast the future and study ongoing trends or confirm already occurred events.

Some of the popular indicators used by traders are:

1.Relative Strength Index (RSI) 

RSI can be used to determine whether the cryptocurrency is overbought or oversold. An overbought cryptocurrency may experience a downtrend shortly whereas an oversold might indicate a price bounce.

RSI measures the rate at which the price changes happen in an asset. It usually gives a score between 0 to 100. An RSI value under 30 is considered oversold, and an RSI above 70 is deemed to be overbought.

The intention behind measuring the rate of price movement is: 

  • If the momentum (pace) increases as the asset price increases, the uptrend could be strong.
  • If the speed is decreasing, the uptrend could be considered weak.

RSI helps you forecast the forthcoming trend.

2. Moving Averages

Moving averages calculate the average price of a cryptocurrency over a period of time for easier tracking of trends. It uses past data to interpret an ongoing trend of a cryptocurrency.

There are two commonly used types of moving averages:

1.Simple Moving Average (SMA)

It is measured by using the price data for the ‘X’ period and calculating an average. For example, the 20-day SMA will add the closing price of a cryptocurrency for the last 20 days and divide it by 20 (number of days). 

Once you plot this on a graph, you will see a smooth trend without any random price movements.

In a simple moving average, each data input is given equal weight and slows it in reacting to the recent events. However, most traders believe that new data is more relevant and hence should have more influence. This is how the exponential moving average came into the picture.

2. Exponential Moving Average (EMA)

EMA is similar to SMA, but it assigns more weight to the recent price inputs and reacts quickly to price fluctuations and price trends. Short term traders find EMA to be a better indicator than SMA because it responds instantly to the market.

Unlike SMA, EMA is complicated to calculate.

P.S: Trading View is a great website to check the RSI, SMA and EMA for the cryptocurrency you want to trade-in. They do all the calculations and give you the final numbers.

4 Popular Crypto Trading Strategies 

Moving on, here are some of the best crypto trading strategies. 

Trading indicators hint at the buy and sell opportunities in the market, whereas a crypto trading strategy tells you how to execute the trades. A thorough understanding of the technical indicators could help you execute some of your most profitable crypto trading strategies.

cryptocurrency trading strategies

 1. Day Trading

As the name suggests, day trading involves trading (buying and selling) cryptocurrencies within a day to make profits. They sell off all of their holdings by the end of the day. Day trading is more suitable for pro traders familiar with cryptocurrencies because of the small profit window.

There are multiple approaches that day traders can follow:

  1. Scalping: It is one of the day trading approaches widely used by traders. This approach involves traders to profit from the intraday movement of cryptocurrencies.
  2. Range Trading: This strategy requires you to identify trading ranges with the highest and lowest price points to trade within.

2. Swing Trading 

Swing Traders are traders that try to profit from the market trends. They hold long positions ranging from anywhere between a couple of days to a couple of months.

They find undervalued cryptocurrencies that are likely to go up shortly and invest in them. You can use both technical and fundamental analysis to determine undervalued cryptocurrencies. Because though you are trading, the period is longer and fundamental analysis can come in handy to strengthen your research.

As opposed to day trading, swing trading is an ideal cryptocurrency trading strategy for beginners because they have more time to make profits.

3. Position Trading

Position trading is a long term strategy. A position trader dodges the short term and midterm movements of the market and plans to trade on the long term trend. 

It could be one of the most profitable crypto trading strategies as traders aim for bigger profits from the long term upward movement in the prices. They invest in a cryptocurrency by determining an expected upward trend and sell it for a profit after the trend is complete.

Position traders might also benefit from backing their technical analysis with some fundamental research.

4. Bot Trading 

Bot trading is one of the best strategies for crypto trading. It includes designing and training trading bots to make profitable trades. Mainly, big fund houses use bot trading strategy as it requires a huge investment of time, money and effort.

Bots account for 86% of the total trades in the cryptocurrency market, according to a survey leading Cryptonomist Adam Cochran

Bot trading could be a highly complex strategy for everyday users because it needs experts to create and train such bots.

Bottom Line

Learning how to trade well and finding and improving your trading strategy is a continuous process. Trading is a vast subject consisting of many indicators and techniques that might look tricky as you read and learn about them. However, if you combine learning and reading with actually implementing these strategies, the process will speed up.

Implement what you learn and keep learning newer and effective strategies, watch this space for more trading insights.

P.S: KuberVerse is an educational initiative. Anything expressed here directly or indirectly is not investment advice. And we ask you to do your own research before investing. 

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