Introduction
Trading strategies can be used to trade anything in the financial markets. Trading methods assist you in putting those techniques into a logical, followable structure. In this manner, you can keep track of and improve your bitcoin strategy at all times.
Technical analysis (TA) and fundamental analysis (FA) are the two main schools of thought to examine when developing a trading strategies (FA). We’ll distinguish which one applies to which of these tactics, but before we go any further, make sure you understand the differences between these notions.
We’ll go over some of the most frequent trading methods because there are so many. The focus of this article is on cryptocurrency trading tactics. Other financial assets, such as currencies, stocks, options, and precious metals like gold, may also be affected.
So, do you want to come up with your own trading strategies ? This post will teach you the fundamentals of how to approach crypto market speculation. You’re more likely to meet your trading and investment objectives if you have a sound trading plan.
What is the definition of a trading strategy?
Trading strategies can be defined as a comprehensive plan for all of your trading actions. It’s a structure that you build to guide you through all of your trading attempts.
Trading strategies can also help to reduce financial risk by removing many unneeded decisions. While a trading plan isn’t required for trading, it might come in handy at times. If something unexpected happens in the market (which it will), your trading plan, not your emotions, should determine how you react. In other words, having a trading strategy in place prepares you for the worst-case scenario. It keeps you from making rash, impulsive judgments that can cost you a lot of money.
A complete trading plan, for example, might comprise the following:
Which asset classes do you deal in?
What configurations do you use?
Which tools and indicators do you employ?
What causes you to enter and exit? (your stop-loss placement)
What factors influence the size of your position?
This is how you keep track of and evaluate your portfolio’s performance.
Furthermore, your trading plan may include other broad principles, including minor specifics. You can, for example, specify that you will never trade on Fridays or when you are weary or sleepy. Alternatively, you can set up a trading plan so that you only trade on certain days of the week. Do you monitor the Bitcoin price over the weekend? Before the weekend, always close your positions. This type of personalised advice can also be used in your trading strategy.
Backtesting and forward testing may be used in the development of trading strategies.
We’ll look at two sorts of trading methods in this article: active and passive.
As you’ll see momentarily, trading strategy definitions aren’t always strict, and there may be overlap between them. In fact, a hybrid approach integrating different tactics would be worth exploring.
Trading techniques that are active
Active strategies necessitate more time and effort. They’re called “active” since they require continual monitoring and portfolio management on a regular basis.
Day trading
The most well-known active trading approach is probably day trading. It’s a popular misconception that all active traders are day traders by definition, but this isn’t the case.
Day trading is when you open and close positions on the same day. As a result, day traders seek to profit from intraday price swings, or price changes that occur within a single trading day.
The phrase “day trading” comes from traditional markets, which are only open during certain hours of the day. As a result, when trading is halted in certain markets, day traders never stay in positions overnight.
The majority of digital currency trading platforms are available around the clock, 365 days a year. When it comes to the crypto markets, day trading is used in a somewhat different sense. It usually refers to a short-term trading strategy in which traders enter and exit positions in a 24-hour or less time frame.
Price action and technical analysis are commonly used by day traders to generate trade ideas. They may also use a variety of different strategies to identify market inefficiencies.
For some, day trading bitcoin can be extremely rewarding, but it can also be extremely stressful, time-consuming, and risky. Day trading is therefore advised for more experienced traders.
Swing trading
Swing trading is a longer-term trading technique that involves holding positions for more than a day but no more than a few weeks or months. Swing trading is a type of trading that falls somewhere between day trading and trend trading.
They typically try to profit from waves of volatility that last for several days or weeks. Swing traders may generate trade ideas based on a combination of technical and fundamental elements. Fundamental changes, by definition, take longer to manifest, which is where fundamental analysis comes in. Chart patterns and technical indicators, on the other hand, can be quite useful in a swing trading approach.
Swing trading may be the most practical active trading method for novice traders. Swing trades take longer to complete than day transactions, which is a considerable advantage. Even so, they’re short enough that keeping track of the trade isn’t too difficult.
This gives traders additional time to think about their choices. They usually have adequate time to react to how the trade is progressing. Swing trading allows you to make more reasonable selections with less haste. Day trading, on the other hand, frequently necessitates quick judgments and execution, which isn’t ideal for a novice.
Trend Trading
Trend trading, which is also known as position trading, is a strategy that entails holding positions over a longer period of time, usually at least a few months. Trend traders, as the name implies, strive to profit from directional trends. In an uptrend, trend traders can take a long position, while in a downtrend, they can take a short one.
Fundamental analysis is generally used by trend traders, but this is not always the case. Nonetheless, fundamental analysis takes into account events that may take a long time to unfold, and these are the moves that trend traders seek to profit from.
A trend trading strategy assumes the underlying asset will continue to move in the trend’s direction. On the other hand, trend traders must consider the probability of a trend reversal. As a result, they may use moving averages, trend lines, and other technical indicators in their plans to improve their success rate and reduce financial risk.
Trend trading can be a good fit for new traders if they do their homework and manage their risk.
Scalping
One of the quickest trading tactics available is scalping. Scalpers do not try to profit from large moves or long-term trends. It’s a strategy that focuses on repeatedly exploiting tiny movements. Profiting from bid-ask spreads, liquidity gaps, or other market inefficiencies, for example,
Scalpers do not intend to keep their positions for an extended period of time. They are notorious for opening and closing positions in a matter of seconds. Scalping is commonly associated with high-frequency trading because of this (HFT).
Scalping can be a particularly profitable approach if a trader discovers a market inefficiency that occurs frequently and that they can profit from. They might generate little gains each time it happens, which mount up over time. Scalping works best in markets with more liquidity when entering and exiting positions is reasonably easy and predictable.
Due to its intricacy, scaling is a more advanced trading strategy that is not suggested for novice traders. It also necessitates a thorough understanding of market mechanics. Scalping, on the other hand, is often more suitable for major traders (whales). Trading larger holdings makes more sense because the profit targets are smaller.
Investing techniques that are passive
Passive investment strategies provide a more hands-off approach to portfolio management, requiring less time and attention. While there are some distinctions between trading and investment techniques, trading is essentially the act of purchasing and selling assets in the hopes of profiting.
Invest and hold
“Buy and hold” is a passive investment strategy in which traders purchase an asset with the intention of holding it for an extended period of time, regardless of market movements.
This method is most commonly used in long-term investing portfolios, where the goal is to just get in the market and not worry about timing. The concept behind this method is that, over a long enough time frame, timing and entry price are irrelevant.
The purchase and hold approach is virtually always focused on fundamental analysis, while technical indicators are rarely used. This method is also unlikely to include assessing the portfolio’s performance on a regular basis—only once in a while.
The HODL phenomenon can be linked to the buy and hold approach, despite the fact that Bitcoin and cryptocurrencies have only been around for a little more than a decade. On the other hand, cryptocurrency is a dangerous and volatile asset class. While buying and keeping Bitcoin is a well-known cryptocurrency strategy, the purchase and hold strategy may not be appropriate for other cryptocurrencies as well.
Investing in indexes
In most cases, index investing entails purchasing ETFs and indices on regular stock exchanges. However, in the cryptocurrency marketplaces, this type of merchandise is also available. Both within the Decentralized Finance (DeFi) movement and on controlled bitcoin exchanges,
The aim behind a crypto index is to construct a token that measures the performance of a group of cryptoassets. This basket could contain coins from the same industry, such as privacy coins or utility tokens. It might even be something completely different, as long as it provides a consistent pricing feed. As you may expect, the majority of these tokens rely largely on blockchain oracles.
How might crypto indexes benefit investors? Instead of purchasing a specific privacy coin, users might invest in a privacy coin index. They can bet on privacy coins as a sector, avoiding the risk of betting on a particular coin in this way.
Over the next few years, tokenized index investing will certainly become increasingly popular. It makes it possible to take a more hands-off approach to investing in the blockchain and cryptocurrency markets.
Conclusions
It’s not easy to come up with a crypto trading plan that fits your financial goals and personality. We went over some of the most common cryptocurrency trading techniques so you can find out which one is right for you.
You should follow and track each trading strategy to see what works and what doesn’t, while adhering to the rules you set. It’s also a good idea to keep a trading log or sheet so you can track the results of each approach.
It’s worth mentioning, though, that you don’t have to stick to the same strategies indefinitely. If you have enough data and trading records, you should be able to change and adapt your strategies. To put it another way, as you gain trading expertise, your trading tactics should evolve as well.
It may also be advantageous to devote different portions of your portfolio to various techniques. In this manner, you can keep track of each strategy’s individual performance while maintaining proper risk management.
