Happenings in the cryptocurrency markets aren’t random but rather a mix of several factors and developments. As such, traders attempting to trade cryptocurrencies based on their gut feeling or intuition alone should consider a proven strategy to consistently perform in the crypto market.
Before entering the cryptocurrency market, it is prudent to design a strategy that suits your risk profile and investment appetite. While random chance trades may grant you gains once in a blue moon, a proper crypto trading strategy is essential to decide your course of action and ensure profits from your trades.
Let’s discuss five of the most useful crypto trading strategies (Yes, we say useful and not popular because, after all, the feasibility of any crypto trading strategy will depend on its usability to wade through the market):
When crypto traders opt to ignore day-to-day price fluctuations and go for a long-term trading strategy, a simple moving averages (SMA) trading strategy can be their go-to option. An SMA trading strategy can help traders track the price movements of the cryptocurrencies they are holding or want to trade. Simple moving averages can help recognize trends and patterns in price movements and compare them in the short, medium or long term.
Moving averages can be calculated for a period as short as 10 days and as long as 200 days and even weeks. For instance, traders considered 200-week moving averages as a crucial level for Bitcoin trading while Bitcoin was undergoing a bear phase. A short-term strategy can be planned using a 50-day moving average.
The moving averages strategy is used in multiple trading patterns, such as a death cross signaling a bear market and a golden cross signaling a bull market. A death cross occurs when the 50-day moving average falls below the 200-day moving average, and when the 50-day moving average rises above the 200-day moving average, we consider it to be a golden cross. An SMA trading strategy can be used to complement both fundamental and technical analysis.
Contrary to moving averages, range trading is an active trading strategy. The crypto markets are known to be volatile, and traders’ cash on this volatility while they range trade. In this kind of trading, a crypto trader identifies a range to sell and buy over a period of time. The upper range is the exit point, while the lower range acts as the entry point for the trader.
For example, if a cryptocurrency is trading at $40 and a trader thinks it will jump to $50, $40-$50 is the trading range for the trader over the next few days or weeks. A trader may try and buy the crypto at $40 and sell it when it reaches $50 to earn a profit.
Range trading requires the traders to have precise knowledge about when the cryptocurrency would trade between a particular range. If the trader misjudges, his strategy might backfire, and they may suffer losses.
Scalping is another short-term trading strategy crypto traders may use to align their day trades. Scalping as a trading strategy involves small and frequent trades made with the aim of making a good profit at the end of the day.
It is a popular day trading strategy in cryptocurrency, as there are days when the market may see double-digit movements either way. Scalp traders aim to gather profits from small price movements over a short period of time. Scalping is accompanied by leverage and tight stop-losses to temper uncertainties or unfavorable price movements.
Scalp traders need to have a good knowledge of technical analysis and charting tools and quick decision-making capabilities. Scalp traders stack profits and compound gains into a significant amount over a short period of time. Mostly, cryptocurrencies with good liquidity and high trading volumes are a preferred choice for scalp traders.
This kind of trading strategy involves trade attempts to take advantage of the price changes before or after development or event takes place with regard to a particular cryptocurrency. The best and most recent example of this kind of strategy is the traders rushing in to buy Ethereum before the Merge upgrade.
The ‘Buy the rumor, Sell the news’ is a popular strategy that concerns significant developments and news that may impact cryptocurrency prices in the short term. Examples of such types of events that impact cryptocurrency prices may include:
- Mergers and acquisitions
- Launch of new projects
- Spin-offs, etc.
A trader should have a keen eye to mark the mundane events from the significant events that will make the crypto prices fluctuate during the period of change. The trader then attempts to trade based on their assumptions about where the price will move after the event occurs.
RSI, or relative strength index, is a very beneficial tool for crypto traders to analyze the trends for a particular cryptocurrency. RSI is an indicator that depicts whether a cryptocurrency is overvalued or undervalued, overbought or oversold, or whether a trend reversal is going to happen. RSI above 70 indicates overbought conditions and below 30 means oversold conditions. However, RSI is more suitable for markets that are trading in range and not trending.
RSI can be used in combination with other tools for technical analysis of a cryptocurrency and to identify highs and lows to decide the entry/exit prices. When the RSI shows overbought conditions, traders should wait for it to fall below 50 before going long. A value of 30 or below indicates a good buying opportunity, whereas a higher value near 70 or above indicates a good selling opportunity.
However, it is necessary that we realize that RSI isn’t a determiner of a trend reversal or a trend continuation. It is simply a measure. So, the crypto trader should use a combination of tools to come to a conclusive strategy.
There are many other strategies for traders to opt for while treading in the crypto waters. While it is prudent to choose an appropriate trading strategy, it is equally prudent to match it with the greater macro tailwinds like regulatory moves, stock markets, dollar index etc.
Disclaimer: Cryptos are unregulated virtual assets, not a legal tender and subject to market risks. The views and opinions expressed in the article are those of the author(s) and don’t represent any investment advice or WazirX’s official position.
Also Read | How to start trading in Crypto?
- Promise Day 2023: Messages and wishes to send your loved ones
- Assam: Guwahati’s air quality slips into ‘poor’ category
- Surrogate mother may not be genetically related to child born: Centre to SC
- World’s first environmental clean-up happened 400 million years ago
- JAC seeks clarity on ‘Sikkimese’ definition after SC’s revised order
- 10 Indians stuck in remote areas of quake-hit Turkey, but safe: MEA