Profitable Crypto Trading Strategies
Having a reliable crypto trading strategy is crucial for any trader.
It helps you make logical decisions, minimize losses, and maximize profits.
Unfortunately, many rookie crypto traders typically open their first position based on recommendations from friends and family, or because they see an asset’s value increase dramatically.
They may make money, but they won’t know why and they won’t recognize the warning signs if the market is about to change direction or crash.
Trading this way is unsustainable and could lead to massive losses.
This article explains:
- What a crypto trading strategy is.
- The different types of crypto trading strategies.
- The pros and cons of trading cryptocurrencies.
- How to choose your trading strategy.
- How to start trading cryptocurrencies.
What is a crypto trading strategy?
Crypto market prices are volatile, but they do tend to follow patterns. This means that you can use certain tools, price indicators, and buy or sell signals to predict the most profitable moment to trade.
The combination of these factors form your trading strategy.
Everyone’s strategy is different but there are some common approaches that are useful to understand if you are a beginner.
Types of Crypto Trading Strategies
This section lists some common trading strategies. There are hundreds of others, so it’s a good idea to do your own research before choosing one. It’s important to note that some of these can be used in combination with each other.
Day trading is a strategy where you take advantage of very short-term increases and decreases in a crypto asset’s value to make a profit.
The aim is to have higher value holdings at the end of the trading day, to those you’ve started with.
The techniques used to execute this, tend to be different from long and medium-term trading.
The volatility of crypto markets means that day traders can find good opportunities to make a profit.
But it also means that they can make big losses which could wipe out their winnings in one go
This is a longer-term investment technique where the trader buys an asset and then holds it for months or even years.
The aim is to seek bigger profits by ignoring daily fluctuations and selling at the height of a bull run. HODL traders usually use fundamental analysis to evaluate potential market price trends.
💡 Fundamental Analysis Explained
Fundamental analysis is when you analyze the crypto asset itself, as well as the organization, people, and technology behind it. This helps you to estimate the future value of the asset.
Technical analysis is when you study the patterns of a crypto asset to spot trends. These trends help you to identify the best times to open and close your positions.
The downside to HODL-ing is that your losses could be greater over a longer period of time.
Crypto futures trading
This is when you buy a contract agreeing that you will buy a certain amount of cryptocurrency at a predetermined price on a certain date.
The idea is to buy a futures contract that predicts a crypto asset’s value will increase, but you aim to undervalue the price it will achieve. This way, you get to keep the higher price difference.
Futures trading is useful because it means you don’t have to own the asset. Some traders buy them to hedge against losses in a currency they own.
💡 Hedging Explained
Hedging is when an investor holds long and short positions on the same asset. This helps reduce risk by covering some of the losses. It is an advanced investment technique that involves weighing up different risk factors. It is usually performed by institutional investors or traders.
Crypto exchanges usually list the same assets at different prices. Arbitrage trading is when you buy crypto from one marketplace and sell it to another for a higher price.
Arbitrage trading can be a good strategy when there is little movement in crypto markets. But it requires lots of research and admin. You also have to act fast when you spot an opportunity, as others are likely to have noticed it too.
To be effective at arbitrage trading, you’ll need to open accounts on several exchanges and check the spread of each before every trade.
High-frequency trading (HFT)
This is a day-trading technique where a trader uses software to place a large number of very fast automated orders.
The software uses data to identify trends and predict the market. It then automatically places orders.
This maximizes profits, minimizes losses, and gives them an edge over other traders.
Unfortunately, the technology required to do this kind of trading is not widely available and it is mainly performed by institutional investors.
Plus, publicly available HFT services are often either poor quality or scams.
Dollar-cost averaging (DCA)
This is a longer-term strategy that involves making lots of small investments at regular intervals over a certain period.
This reduces risk, but there are also a number of downsides to DCA.
Your return will be lower and you’ll pay significantly more in order fees. Plus, there’s no guarantee that you’ll cover the spread or that the value of your asset won’t just go down during the period.
This is a day trading strategy that involves making a large number of small, low-risk trades in one day.
Scalpers need a direct access broker to make trades immediately and have to choose crypto assets with very tight spreads—otherwise, their costs will exceed their return.
Scalping requires a lot of time, effort, and stamina. Because it is a day trading strategy, one big loss could wipe out your earnings for the day.
This is when you use predictable patterns of support and resistance levels as buy or sell signals.
You open a position when it hits support and then sell again when it hits resistance and repeat this pattern. This strategy can be used by day traders or medium-term investors.
Range trading is relatively low risk compared to other strategies. Traders should be wary of breakouts—this is when the range comes to an end and the crypto asset’s price enters a bull or bear run.
An index fund is an investment vehicle that allows traders to buy into a predetermined cryptocurrency portfolio.
They usually consist of exchange-traded funds (ETFs), which means that you do not actually own the underlying asset. Instead, you buy into a share of the profits (and losses).
💡 ETFs Explained
ETFs are pooled investments consisting of a range of assets. A common example of an ETF is one that seeks to mirror a stock market index.
A crypto ETF usually consists of assets connected to a cryptocurrency. This could include futures contracts or stocks in businesses that provide crypto services. This allows the investor to invest in a cryptocurrency without actually owning it. They are only usually available on stock market trading platforms.
Crypto indexes allow traders to spread their risk by buying into a wider range of different crypto assets.
The downside is that the returns are usually more modest, since you have almost no control over what is in the portfolio and a minimum investment is usually required.
These factors mean that index investing is more suitable for medium and long-term investors and not day traders.
This is a medium-term strategy that involves using fundamental and technical indicators to make trading decisions.
While day traders monitor the market all day, swing traders usually only check in on their investments and the market once or twice per day.
Automated tools like stop losses and trading bots are useful tools for swing trading.
These tools can automatically close your position if a currency’s value suddenly plunges and you aren’t online—helping you avoid massive losses.
Sometimes known as position trading, this is when you buy an asset based on a trend signal and hold it for a few months.
Trend traders tend to be more advanced investors and will take a mixture of long and short positions depending on the movement of the market.
Trend traders usually monitor indicator charts on a daily basis, so they spot exit signals as soon as possible.
This strategy involves a lot of research and is risky, as trading signals aren’t always reliable.
Pros and Cons of Trading Cryptocurrencies
✅ Pro: High volatility
Cryptocurrency markets tend to fluctuate more than other financial assets. This means that you can make excellent profits if you know what you are doing.
✅ Pro: 24-hour market
Unlike the stock market, crypto exchanges are open 24-hours a day. This means that you can trade an asset whenever you want and there is always someone trading somewhere in the world.
✅ Pro: Low transaction costs
Crypto markets don’t involve large financial institutions, which means fewer fees and cheaper trading.
❌ Con: Lack of regulation
Crypto markets are almost completely unregulated. This means that if something goes wrong, like you lose your assets due to a technical failure or a mistake, you have no recourse.
❌ Con: High volatility
That’s right, market volatility is a pro and a con. As much as you can make a lot of money, you can also lose a lot of money—even if you know what you are doing. No trading strategy is foolproof and there is no guarantee that you will make any money at all.
❌ Con: Security issues
Even though most trading platforms use a series of pin codes and two-stage authentication—and all your assets are encrypted and can be stored in your own offline safe—crypto is still vulnerable to hackers who could steal all of your assets.
How to Select the Best Crypto Trading Strategy
No crypto trading strategy is better or worse than the rest. When choosing a strategy consider the following points:
Take your personality into account
Do you have a short attention span and hate spending long hours in front of a computer screen? If so, then day trading may not be suitable for you.
Or perhaps you’re risk averse and want to minimize losses? Then consider choosing a lower-risk strategy like scalping.
How much time do you have?
If you’re trading full time then you can choose from any of these strategies. But if you juggle your trading with a full-time job and family, then you’ll have to select a strategy that accommodates this.
Swing trading or HODL-ing are good options for traders who are unable to commit much time.
The crypto market
Certain trading strategies will lend themselves to certain market conditions. For example, HODL-ing and swing trading will be profitable during prolonged bull runs, while an arbitrage strategy is more suitable during a crypto winter.
How to Get Started with Crypto Trading
Getting started with crypto trading is easy. Here is a step-by-step guide to opening your first position:
- Open an account on a crypto trading platform. This will allow you to access different assets, funds, and exchanges.
- Choose an asset to focus on. Research the coins available to you and decide which one suits you best. The best crypto assets:
- Have good volume and liquidity
- Are secure
- Are run by experienced people
- Have future growth plans
- Have good technology behind them
- Choose your trading strategy. Now that you have a platform and a currency, it’s time to use this article to choose your trading strategy.
- Open, monitor, manage and adjust. Open your first position. Keep record of each trade you make, as well as the value of your holdings at the end of each trading period.
If you are not making money, then perhaps you need to try a different strategy, invest in another asset, or learn more about trading crypto.
- A crypto trading strategy is the combination of tools, price indicators, and buy or sell signals you use to predict the most profitable moments to trade.
- Day trading, HODL-ing, futures trading, arbitrage, high-frequency trading, dollar-cost averaging, scalping, range trading, index trading, swing trading, and trend trading are all common crypto trading strategies—but there are many others.
- The pros of crypto trading include high volatility, a 24-hour market, and low transaction costs.
- The cons of trading cryptocurrencies include a lack of regulation, high volatility, and security issues.
- Choosing the right crypto strategy for you depends on your personality, the amount of time you have to commit, and current market conditions.
Discover Your Ideal Crypto Trading Strategy with the Birb Nest
Developing a crypto trading strategy isn’t easy, especially if you are a beginner. If you want to find a strategy to make sustainable profits, minimize losses, and quit that 9-5 existence, then you need to educate yourself on how to trade crypto.
That’s where The Birb Nest comes in. Our experienced analysts and traders provide professional mentoring and education to budding traders.
To find out more, sign up today.