Are you new to cryptocurrency trading platforms and looking for a concrete strategy more advanced traders use? You are at the right place.
In this comprehensive guide, we’ll cover everything about developing a strategy to trade crypto. This guide will be beneficial if you’re new to the digital currency market or are losing money rapidly.
In this guide:
- Importance of a margin trading strategy
- Components of a trading strategy
- Fundamental and Technical Analysis
- Best methods to use in a bear and bull market
- Best indicators to day trade crypto
Excited? Let’s get started.
What Is a Best Cryptocurrency Trading Strategy?
A crypto trading strategy is a tried and tested plan or method of trading cryptocurrencies to increase your probability of being profitable.
It’s essentially a framework that comprises various components of trading, from predicting the price to managing the risk and more.
Why Do You Need a Trading Strategy?
A well-devised day trading strategy could make the difference between success and failure in the cryptocurrency market. We are living in a cryptocurrency boom, where more people are entering the cryptosphere every day.
There are more than 50 million active crypto traders worldwide. If we also count occasional traders and investors, the number will cross 100 million. However, if we go by the math, less than 10% of traders are successful.
Trading in any market, whether it is crypto or any other asset class, is an endless battle between traders. When one trader earns a profit, another trader books a loss. Hence, when you’re trading, you’re essentially competing with other traders, and you need a way to outsmart them.
Here’s where a trading strategy comes into the picture. Many new traders act out of intuition or follow the crowd. This gives traders a strategy to outperform less educated traders and earn profits.
Essential Components of All Cryptocurrency Trading Strategies
Now that you have understood the importance of a trading strategy, let’s look at some of its essential components. There are dozens of trading strategies available, each having its pros and cons. However, certain elements are common in every trading strategy. These are:
- Technical/Fundamental Analysis: This part includes analyzing the underlying asset to predict its price movement. It also consists of the setups you trade, time frames you select and indicators you choose.
- Entry and Exit: In this part, you decide when and where to enter and exit a trade.
- Risk Management: What will be your desired risk and reward for each trade? Where will be your stop loss? What will be your position sizing?
There are also a few trading and investing terms you must understand before delving into the strategies of trading cryptocurrency.
- Fundamental Analysis: Analyzing the fundamental aspects of an asset
- Technical Analysis: Analyzing the technical aspects of an asset, such as candlestick patterns, indicators, etc.
- Long and Short: Long means to buy, and short means to sell
- Squaring Off: Squaring off means to exit an open position
- Profit Target: The price at which you will book your profit
- Stop Loss: The price at which you will exit a position in loss
- Risk Reward: The ratio of the profit target and stop-loss
Types of Crypto Trading Strategies
Trading is of different types based on the setups you trade and the time frames you choose. Let’s look at some of the most popular types of trading in crypto markets.
Scalping is the shortest form of trading where you buy and sell assets within a few seconds or minutes. The strategy involves risking a small portion of your capital and taking a trade to make a quick profit while keeping a very tight stop loss.
- Time Frame: 1 min / 15 minutes
- Profit Target: 0.5-1.0%
- Risk/Reward: 1:1
In day trading or intraday trading, you take positions and square them off on the same day before the market closes. In other words, you don’t carry forward your positions to the next day. Day trading also aims at risking a small portion of your capital to generate a quick profit while keeping a tight stop loss.
- Time Frame: 15 minutes / 1 hour
- Profit Target: 1-3%
- Risk Reward: 1:1, 1:1.25, 1:1.5
Swing trading is a type of cryptocurrency trading where you buy an asset and hold it for a few days or weeks. It is a short-form trading strategy but longer than intraday trading. Swing trading aims at buying breakout stocks that could show significant momentum in the upcoming days.
- Time Frame: 1 hour / 4 hours, 4 hours / 1 day
- Profit Target: 10-25%
- Risk Reward: 1:2, 1:3
Positional trading is similar to swing trading; however, the duration is of a few months. It’s a form of medium-form trading where the focus is to buy breakout stocks that also have strong fundamentals.
- Time Frame: 1 day / 1 week, 1 week / 1 month
- Profit Target: 25-50%
- Risk Reward: 1:3, 1:4, 1:5
Investing refers to buying an asset and holding it forever. Investing is the longest form of strategy in cryptocurrency markets. In investing, you rely purely on fundamental analysis to find cryptocurrencies that could flourish in the upcoming years.
- Time Frame: NIL
- Profit Target: NIL
- Risk Reward: NIL
Basics of Fundamental Analysis
Fundamental analysis has been one of the oldest ways of predicting the price movement of an asset. Back in the day, when there were no charts and indicators, people relied on fundamental analysis to choose assets.
However, fundamental analysis for cryptocurrencies is different from other underlying assets, like stocks. For example, you evaluate a company’s balance sheet, profit/loss statement, P/E ratio, etc., to analyze the stock’s potential.
Cryptocurrencies are decentralized, and thus, finding such information can be challenging. That said, here are a few factors to look for in the fundamental analysis of a cryptocurrency:
- Financial Metrics: These include the economics of a cryptocurrency, such as market capitalization, ease of buying and selling, etc.
- Project Metrics: These include analyzing the development aspects of a cryptocurrency, such as the team behind the project and its future potential.
- Blockchain Metrics: These include analyzing the blockchain on which the cryptocurrency runs, such as security, transaction count, hash rate, transaction value, fees, etc.
By combining all these metrics, you can get an idea of how fundamentally strong a cryptocurrency is. Cryptocurrencies with solid fundamentals are an ideal pick for the long run.
Basics of Technical Analysis
While fundamental analysis is ideal for finding cryptocurrencies to invest in, technical analysis will help you find short-term trading opportunities for scalping intraday trading, swing trading, and positional trading.
- Reading Candlesticks and Candlesticks Charts
Candlesticks are the core of the technical analysis for not only cryptocurrency but any market asset. If you open a cryptocurrency chart, it will most probably be in a line form. Most cryptocurrency exchanges offer candlesticks charts. If not, you can use a free tool like TradingView to view candlesticks charts of any asset in the world for free.
Candlesticks provide a lot more information than line charts. A candlestick can be red or green based on how the price moved during the time frame of that candlestick.
You can follow this detailed guide to learn how to read candlesticks.
- Identifying Trends
At any given time, a cryptocurrency will be in one of the following trends:
- Up Trend: The price is consistently increasing, creating higher highs and higher lows.
- Downtrend: The price is constantly declining, making lower highs and lower lows.
- Sideways: The price is moving in a range, making neither new highs nor new lows.
Note: Here’s an easy trick to identify an uptrend and downtrend. An uptrend will look like upward stairs on the chart, and a downtrend will look like downward stairs.
Identifying trends is crucial to making informed trading decisions. For example, if the market is in an uptrend, you should look to buy (also known as being bullish). If the market is in a downtrend, look to short (also known as being bearish). If the market is sideways, it’s better to stay on the sidelines and wait for the market to enter a trend.
- Spotting Breakouts and Pullbacks
The price of any asset never goes up or down at a stretch. It makes a big move, then shows a minor correction, then makes another big move, then shows another correction, and so on. These corrections are known as pullbacks, whereas a big move after a pullback is known as a breakout.
Enter at the point of breakout is a high-probability setup. Keep looking for these setups to increase your chances of having profitable trades.
- Using Indicators for Confirmation
Finally, you can use technical indicators to get confirmation signals. There are a common misconception that day trading cryptocurrencies is all about using indicators and acting on signals. Most new traders take that approach, and hence, lose money.
Always monitor the candlesticks chart and look for trends, breakouts, and patterns. Once you spot an opportunity, confirm it with an indicator.
Some best indicators for cryptocurrency trading are:
- Bollinger Bands
- Moving Averages (MA)
- MYC Trading Indicator
- Fibonacci Retracement
- Relative Strength Index (RSI)
- Stochastic Oscillator
- Moving Average Convergence/Divergence (MACD)
- Ichimoku Cloud
Follow this guide to learn more about these indicators and how to use them.
Top 6 Crypto Trading Strategies
Having discussed in-depth technical analysis, let’s delve into the best cryptocurrency trading strategies. Here are the six best systems for beginners to get started.
- Support and Resistance Trading
Support and resistance are the most basic yet powerful concepts of technical analysis. Both support and resistance are price ranges from where the market tends to receive rejection and reverses. When that rejection comes during an up move, it’s called resistance. When the rejection comes during a down move, it’s considered support.
If a price has been acting as strong support or resistance for some time, it’s likely that it will behave the same way once again. If the price receives some rejection at a support or resistance, you can go for a trade in the opposite direction.
Support and resistance are also the building blocks of price action trading strategy.
- Break Out Trading
Break out trading is of two types. The first type is when a price decisively breaks a support or resistance. According to price action trading rules, when support breaks, it turns into resistance. Similarly, when resistance breaks, it turns into support.
When a support or resistance breaks, it’s known as a breakout. It’s an ideal time to enter a trade because the broken support or resistance will act as an important level and reject the price from coming back.
- Trend Reversal Trading
Trend reversal trading is a type of support and resistance trading; however, it comprises large-scale trend reversals. For example, if a cryptocurrency has been in an uptrend for a few weeks or months and shows signs of reversal, you buy or short it there. If you capture a cryptocurrency at the start of a trend reversal, you can catch a massive move.
- Momentum Trading
Momentum trading is one of the simpler forms of trading, and it’s ideal for swing and positional traders. In momentum trading, you look for a decisive trend and enter the position in the direction of the trend. For instance, if you see a cryptocurrency’s price increasing continuously, you can trade with the trend and buy it.
- Trading Against the Trend
The best advice for new traders is to always trade with the trend. However, some experienced traders tend to trade against the trend. This strategy is suitable for scalping and day trading.
In this strategy, the focus is to wait for a correction or pullback after a trendy move. Once the price starts to correct, you take a position against the trend and set a small stop loss and target.
- Buy the Dips
Buy the dips is another popular cryptocurrency trading strategy that has gained significant popularity in recent times. Since cryptos are very volatile, their prices tend to increase significantly and then crash, and then increase again and then crash again, and so on.
You leverage this volatility by buying a cryptocurrency when it falls after a long-up move. Once it drops significantly, you can buy it and sell it after it rises again.
Using Indicators for Increasing Trading Accuracy
As discussed, relying solely on indicators isn’t the best approach, especially for new traders who are learning to trade. However, once you have gotten familiar with the concepts of price action, you can incorporate indicators in your strategy to increase accuracy.
Here are some indicators to use and how to use them.
- Relative Strength Index (RSI)
RSI is a momentum indicator, which means it indicates how strong a move is. The highest value on the RSI graph is 70, and the lowest value is 30. When the RSI graph shows a value over 70, the condition is known as an”overbought market.”
If the RSI is above 70, i.e., it is overbought, it’s likely to fall quickly. Similarly, if the RSI is below 30, i.e., it’s oversold, it’s expected to rise quickly. So, if you’re looking to go long and the RSI is below 30, it’s a good confirmation. You can also use other indicators that show momentum.
- Moving Averages
Moving Average is one of the most popular indicators in the cryptocurrency space. This indicator plots a line, which is the average of previous candles. So, a 9 MA means it’ll plot the average price of the last nine candles.
The best way to use Moving Averages is to plot two MAs — 12 MA and 26 EMA — simultaneously. This strategy helps you confirm trends. If the market seems to be in an uptrend, and the 12 EMA crosses over 26 EMA, it can be a buying confirmation.
- Moving Average Convergence Divergence (MACD)
MACD is a blend of RSI and Moving Averages. It plots MAs on the chart and, at the same time, shows a histogram with an RSI chart. Hence, you can get double confirmation. If the RSI is below 30 and the 12 EMA has crossed over 26 EMA, it can be considered a buying signal.
- Bollinger Bands
Bollinger Bands comprise one Moving Average, along with an upper and lower band. Ideally, when the price comes close to the lower band and then moves upward and crosses the Moving Average, it’s a buy signal. You can use this for both long and short strategies.
- Parabolic SAR
Parabolic Stop and Reverse (SAR) places dots across the price action of the chart. When the price touches a dot, a signal is issued. This indicator is best used for trading reversals. If crypto is in an up move, touches a dot, and starts reversing, it’s a sell signal.
Similarly, if the price goes down, touches a dot, and starts reversing, it’s a buy signal.
Is There a Best Strategy?
New-day traders are always in search of the best strategy. But here’s the catch. No method is 100% accurate. Forget about 100%; there’s hardly any strategy that has an accuracy of more than 65-70%. And that’s all you need.
Here’s a secret from advanced traders. You don’t need a strategy that’s very accurate. You can be profitable even if you are right 50% of the time. All you need to do is maintain a positive risk-reward.
Let’s do some math to understand this. You take ten trades in a month, of which you win five and lose five. You set a profit target of $100 per trade and a stop-loss of $100 per trade. Hence, your risk-reward is 1:1. Here, your net profit will be 0.
Now, you improve your risk-reward to 1:2, which means you set a profit target of $100 per trade and a stop-loss of $50 per trade. If your accuracy is 50%, your net profit will be $250.
So, the golden rule of trading is you should focus on risk-reward instead of finding a highly accurate strategy.
Frequently Asked Questions
- Is trading crypto profitable?
A lot of people have become rich trading cryptos, but there is no guarantee.
Your success depends on various factors, like your strategy, risk management, position-sizing, etc. But if you follow a good system, you can be a profitable trader.
- What is the best crypto to day trade?
There is no single best crypto to trade. You should make a list of cryptocurrencies and keep monitoring them. If crypto presents an opportunity to trade, go for it.
However, it’s essential to trade cryptos with high volume and market cap, as they have better liquidity.
- Which strategy is best for trading?
No strategy is the best for trading. Instead of finding the best strategy, trades should find an average strategy that has an accuracy of over 50%. When paired with adequate risk-reward management, it can become a highly profitable setup.
- Which timeframe is best for crypto trading?
The timeframe you choose for crypto trading will depend on your style of trading. If you are a scalper, 1 minute / 15 minutes time frame will be best. For cryptocurrency day trading, 15 minutes / 1 hour will be the best.
Having a good trading strategy is crucial if you want to become a profitable trader. A proven system helps you take advantage of all market conditions and make informed decisions that reduce your trading costs and improve profitability.
However, it’s critical to focus more on risk-reward and less on accuracy when formulating a strategy. Always remember that an average strategy with good risk-reward can make you profitable.
- What Is a Best Cryptocurrency Trading Strategy?
- Essential Components of All Cryptocurrency Trading Strategies
- Types of Crypto Trading Strategies
- Basics of Fundamental Analysis
- Basics of Technical Analysis
- Top 6 Crypto Trading Strategies
- Using Indicators for Increasing Trading Accuracy
- Is There a Best Strategy?