Six Crypto Trading Strategies For Success - Reading time: about 5 minutes
To think that crypto trading is random and based mainly on instincts alone could be misleading. While this may sometimes work, a carefully crafted approach that is systematic and likely to yield expected results consistently, is far more favorable. This practice, which entails following a given method to buy and sell digital assets over a trusted platform, calls for strategies that a trader can employ to make profit from trading these assets.
What is a crypto trading strategy?
As suggested above, a crypto trading strategy is the established method that a trader follows to plan and execute trades, including related decisions like what assets to trade, when to open and close a trade, and how much capital to trade with. The chosen method is aimed at improving a trader’s chances of making profit when they trade with market conditions and price levels in mind.
Generally, crypto trading entails speculating on price movements. This, among several other factors, makes conducting thorough research essential—especially as external factors, such as strong media presence around a crypto project or a newsy development about an exchange, may have a marked price impact—before a strategy is implemented or adopted. The ensuing findings, and well-understood patterns that emerge from it, will help the trader to craft and adopt a strategy in line with their trading goal, budget and experience, among other preferences.
Why have a crypto trading strategy?
Particularly for a newbie crypto trader, a strategy is important as it gives the trader a framework upon which their trades are hinged. This is crucial as it helps the trader to avoid making unnecessary decisions in an unpredictable market. That is, it helps to tackle the issue of making hasty decisions and to maintain focus in the face of various external factors that affect the market. e.g. news, economic data releases, hacks, etc.
This structure and focus enable a trader to take less risks with trades, as they have clarity on what to allocate, and are less likely to overshoot their budget, or record fewer losses in the event of an unexpected fluctuation in a volatile market. Otherwise, the trader will continuously make money if the predictable pattern(s) of the strategy remains relevant to a particular asset.
Types of crypto trading strategies
Each strategy depends on the trader's preferences, and they all have their strengths and weaknesses. There are various crypto trading strategies out there, but below are a few that stick out as easy to apply, even for a beginner:
1. Position trading
This is a long-term cryptocurrency trading strategy which involves purchasing assets and holding them for long periods, with the aim to make profits by selling them when the price increases in the future. It is quite straightforward and easy to follow.
When a trader adopts the scalping trading strategy, it means they seek to add up small profits each day to generate a substantial amount over time, based on market movements and volatile bear and bull market activities. Those interested in this trading strategy need to work with various time frames between a second, a minute, 15 minutes, 30 minutes, or typically less than one hour to complete their trades. They aim to profit off small price changes after a resell, and are always mindful that a large loss could completely wipe out their small gains combined.
Scalping is different from day trading, in which traders follow price movements over a full trading day. This strategy is time-consuming and risky.
3. Day trading
To day-trade is to—as mentioned earlier—open and close trades within a day. That is, the trader skims across several markets or assets seeking minimal profits in a short period. Considering the extended time frame, applying a day trading strategy enables the trader to stand a chance to rake in more profits compared to scalping, although the risks are similar.
4. Crowd sales
Hunting for crowd-sales through Initial Coin Offerings (ICOs) or Initial Exchange Offerings (IEO) in which crypto projects offer their idea to the public in exchange for investment in the form of token sales at a lower price is another useful trading strategy.
A careful study of a project’s potential to be successful could translate to a higher profit for the trader when the token is listed on exchanges or other third-party platforms, where it stands to gain exposure to institutional investors. Depending on the level of the token’s success—usually tied to the project’s use case(s), tokenomics, and marketing efforts amongst others—, the return on such projects could far exceed expectations.
5. Dollar Cost Averaging (DCA)
This strategy entails making divided investments in an asset, instead of a trader putting in all their money at once. Making these investments in smaller amounts helps the trader to spread out their trades over a predetermined period. The regular buying of an asset over a period of time will eventually help to reduce the impact of market volatility on the token’s price, hence granting the trader greater asset yields from their investment than they would have had if they had invested all their money at once. A DCA trade requires no indicators to execute it, and trades are usually set for a fixed day and time.
6. Arbitrage trading
This is when a trader buys a digital asset from one crypto platform to sell it on another based on price differences. The trader profits from the price difference between the given assets across two or more exchanges. With hundreds of crypto exchanges now in the market, the arbitrage strategy presents traders with limitless opportunities to capitalize on price differentials. Buying and selling assets across multiple exchanges based on the difference in price between them tends to generate small profits, which could add up over time.
Constant monitoring of happenings on the platforms and a good understanding of how each work is essential for success with this strategy.
There is no one-size-fits-all trading strategy for every crypto trader. Every individual trader has to determine what works best for them. Traders that take note of the results of their trades will find it easier to identify which strategy is successful and should be adopted.
How to trade crypto depends on various factors. Top among them is the knowledge a trader develops in a particular aspect of crypto (DeFi, NFTs, Metaverse, etc). Gaining a good understanding of how this area works helps them know what to expect in future—although there will, of course, be instances where things don’t go as planned—and how to position themselves.
A specialized trading approach works better for those with expertise in a single focus area of crypto, compared to generalists, who tend to be conversant with happenings in almost every area associated with the industry. The deep knowledge in a niche area makes up for the wider (albeit shallower) knowledge base of the crypto generalist. Adopting a specialist approach is a key part of identifying an appropriate trading strategy.
A trader may have to first forget all the unstructured methods they have heard about crypto trading, in order to develop a trading strategy of their own. Being armed with a strategy can help traders overcome the confusion and FOMO when it comes to trading this emerging asset class.