If you are interested in investing, you must consider the crypto market. This new market offers a lot of potentials. The news is filled with so-called “crypto millionaires”. Naturally, you want a piece of this action. In this post, I dive deep into the world of crypto trading and the strategies that beginners can use.
With this information, you will be able to start to learn the strategies that are best suited to your personality, your time, and your risk tolerance.
What are Crypto Currencies?
In this section, I don’t want to talk about blockchain technology, or tokens, and all the technical details about cryptocurrencies. I’m sure you heard about these topics and for our purpose, they do not really matter. After all, we don’t want to create the new Ethernum, we want to make money trading with them.
What I want to talk about is what are cryptocurrencies from a financial standpoint. The crypto market and the techniques that can be used to trade profitably do not differ from any other market. The main difference between the crypto market and the Forex market for example is that cryptocurrencies are not centralized. If you look at stock or a currency there is a company or a country behind it. Cryptocurrencies are not like this. Just based on this factor crypto trading could be considered riskier than the usual markets.
What is a Crypto Trading Strategy?
“By failing to prepare you are preparing to fail”
Just like with any activity planning is essential for success. A trading strategy is your plan for your crypto trading venture.
Trading with any asset is very stressful sometimes due to unexpected price movements, your mood, and many other factors. With a trading strategy prepared you can cut the emotions from your decision-making and save yourself from big financial disasters.
When assembling a trading strategy there are some guidelines to think about:
- What cryptos do I want to trade with? – You want to trade with the most popular ones? Do you want to trade with the ones that just start?
- How long do I want to hold my positions? – Do you want to make short-term or long-term investments?
- Active or Passive Strategies? – How much time do you have to trade?
- Fundamental Analysis or Technical analysis?
When answering these questions there are no right or wrong answers. Your trading strategy should suit your needs. Other than these questions you can put in whatever you want. For example, you determine the exact days when you want to trade. Exact time frames each day. You only trade with XRP, ETH, BTC pairs, or their crypto/fiat pairs. In this post, I’m going to try to help you answer these questions.
Wich Cryptos do I Want to Trade With?
When deciding which cryptocurrencies you want to trade with you should examine two parameters first. One is volume and the other is volatility.
The volume shows you the amount that was traded in a given period. This is important because you want to trade on a short-term basis, you want crypto that has great volume. The more has been traded, to more the price changes, and the opportunities to enter are greater. Also because a lot of people trade with it the extreme price movements are less likely to happen.
The volatility shows you how risky is the given crypto. It is a financial statistical measurement that by definition shows the degree of variation of trading price over time. But what does that mean? Simply put, the greater the volatility is the riskier the given crypto. High volatility means high price movements.
Popular Cryptocurrencies or New Ones?
As a beginner, your safest bet would be the popular ones. Popular cryptocurrencies have a greater volume than the ones just starting. Although there can be a trend in price movement, with the top cryptocurrencies extreme jumps in price don’t occur usually. Also, manipulation of the trending cryptocurrencies is less likely to happen, because their price is higher than a crypto that just got public.
How Long Do I Want to Hold My Positions?
The shorter the period of your new trades the more time you have to spend on analyzing charts and news. Short-term trading means your trading positions are open from a few days to a few weeks. Daytrading means that you open and close your trading positions in a day. Long-term trading or investing is when your position is open more than a few weeks even for months and years.
To answer this question it depends on a lot of factors. None is better than the other. There are experts on the side of long-term trading positions and also other experts who are successful in short-term trading. When we dive more into the passive and active strategies part you will see different tactics that use both long and short-term time frames.
Active or Passive Trading Strategies?
As the name suggests active trading strategies involve more management than passive investing strategies. Active trading strategies demand constant managing of your portfolio. It is more “exciting” than passive strategies, but if you have limited time to spend on trading the latter is more advisable.
Active Trading Strategies
Day trading
If you are interested in trading you must hear about day trading. It’s a very popular topic in the investing community but also very controversial. A lot of financial experts are skeptical about day trading. Also because of some internet scams, day trading might seem like a “get-rich-quick” scheme but nothing is further from the truth.
Day trading in its original meaning refers to a trading activity when the trading cycle is closed by the end of the day. Although because in the crypto market the exchanges are open 24/7, it means that the trading cycle is usually shorter than 24 hours.
Daytrading requires a really good understanding of the given market. It requires a well-defined strategy, that might include technical analysis and following and understanding crypto news.
Because it involves very quick decision making I don’t recommend it for beginners. Maybe start with swing trading or trend trading and when you feel confident that you can handle the stress, and have a proven profitable strategy you can start master day trading. Trading signals might also help you as a beginner if you use them to learn from them and that way you can profit while you learn.
Swing Trading
Swing trading is somewhere in the middle of day trading and trend trading. Swing traders usually hold their positions over a day but not longer than a few weeks or a month.
Swing traders just like day traders use technical analysis and because their positions are open long enough they can factor in fundamental analysis. Swing trading is probably the most recommended for beginners because you can take your time to analyze the charts and make decisions.
Also, you don’t need to dedicate all your time to trading. You can choose a few days or a few hours every day to see the charts, determine entry points and wait for the results.
Trend trading
Trend traders, as the name suggest, try to define trends in the crypto market. If they find an uptrend they open a long position, if a downtrend is in place they open a short position.
Trend traders hold their positions for longer times than swing traders. To discover trends these traders use technical indicators as well as fundamental indicators. You can read more about these technical indicators in the ‘How to Read Crypto Trading Charts?’ post.
Trend trading is also a great choice for a beginner. As with swing trading, you have time to make your decisions, define trends. With a well-placed take-profit and stop-loss order, you can minimize the risk of the trend moving the wrong way.
Summary on Active Trading Strategies
Active trading strategies are great for a trader who has time to manage their portfolio from time to time. Depending on which you choose from the above it can mean managing your portfolio daily. From this basic introduction to active trading strategies, you can start to learn the one that you find desirable. Whenever your money is on the table always research multiple sources before you spend any of it.
Passive Trading Strategies
Buy and Hold
This is probably the easiest trading strategy from this list. It is exactly what it sounds like. Find a cryptocurrency that is desirable for you and buy it. That’s it. Well of course if this would be a surefire way to make money everyone would do this right?
The problem with buying and holding comes from the nature of the crypto market. In some cases, very extreme price movements can scare the investors to sell their crypto while it’s still worth something. But think about Bitcoin.
If you bought Bitcoin in the early years or even in early 2019 when the price was around 3600$ nowadays you would have 15x that money. But in that way, there were some ups and downs in the price.
How can you counter that? DIVERSIFICATION. Even if you don’t choose index investing with cryptocurrencies, it’s a wise idea that you don’t put all your money on one card. For example, you decide to use this strategy the best tip would be to use the top 2-5 cryptos and spread your money across them.
Index Investing
When you hear the expression “index investing” the first thing that comes to mind is ETFs. ETF stands for Exchange-Traded Founds. This means tens, hundreds, and thousands of stock or bonds grouped. We talked about diversification before but this is really where it starts.
You have the option not to buy only one or two cryptos but a token that has a price that tracks a whole group of cryptos performances. Although it’s very promising especially for a beginner investor this is quite a new thing.
Summary on Passive Trading Strategies
Passive trading strategies are more hands-on than active ones. It is advisable to choose this type of strategy if you don’t have much time to manage your investment portfolio. When deciding which cryptos or index tokens you choose, fundamental indicators will be your best help.
If you plan to build your wealth for your retirement you should consider investing some percent into cryptos. But don’t forget that cryptocurrencies are high-risk assets. Never invest anything more than you can afford to lose.
Fundamental Analysis or Technical analysis?
When you put together your investment strategy, you will need indicators for you to decide when to enter a trade. In the investment community, there are two main schools are fundamental analysis and technical analysis. The goal of the two is the same to predict future price movements, but the approach is different.
That doesn’t mean you have to pick one and stick to it forever. Understanding both and implementing them to your trading strategy will give you the best results.
Technical analysis
The main focus of technical analysis is to inspect trading charts. To do that technical analysts use several indicators, patterns that have been made during the history of technical analysis.
Technical analysis can be used booth in short-term and long-term trading. As a beginner first you should learn the basics of trading charts and the basic indicators. Then examine how pros combine these to make trading resolutions. To understand the basics of crypto trading charts reading I wrote about it in this post.
Fundamental Analysis
At first, it probably sounds foolish. After all fundamental analysis goal is to determine an objective price on a security from publicly available data. But cryptocurrencies are not subject to any international regulations or accounting standards. So traditional metrics fall overboard.
That doesn’t mean there are no factors we can analyze. Every cryptocurrency has its fundamentals. For starters, there are Block-Chain metrics. These include Hash rate, Active addresses, and Transaction Fees and Values.
Hash rates can indicate to an investor that the given crypto is healthy. The higher the hash rate the more miners are committed to mine for-profit and the more secure the given crypto. Because anyone who owns more than 51% of the blockchain can control all transactions.
Active addresses can show how popular a given cryptocurrency is. If you analyze the active receiving and sending addresses over a period of time, you can see a decline or increase in the popularity of the given crypto. Transaction fees can be helpful to understand the demand for given crypto. An increase in transaction fees indicates a higher demand.
There are also financial indicators such as market capitalization, liquidity, or trading volume. We talked about volume before, liquidity means how easily can a crypto be turned into fiat currency. Examining these indicators in the perspective of the price movements can show you how important one is, and then you can implement these into your price estimation.
Summar on Crypto Trading Strategies for Beginners
When using a strategy you plan the fundamentals for your rules when trading with cryptos. Trading without it, it’s like gambling.
With this information, you can start your journey into the crypto trading world. If you consider these factors, trading styles and find the ones that are most suited for you, learning and mastering them wouldn’t be so overwhelming.
As with any investment, it’s needless to say to research multiple sources, and don’t believe in the “get-rich-overnight” guides. Crypto investing especially the active forms are not easy. Following false information can lead to financial disaster! Never invest more than you can afford to lose, nothing is 100% in the investing world.
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