The five most popular strategies for trading cryptocurrencies

Before you start trading cryptocurrencies, it’s important to decide on your strategy. This can be a tough decision, but it’s arguably the most important one a trader will make. You’ll need to ask yourself several questions related to the level of risk you’re prepared to handle, how much time you have to trade, and how quickly you’re looking for gains.

If you’re just starting out trading cryptocurrencies, it’s a good idea to put in some research first. The way you trade has a lot to do with your personality, but also your life circumstances. For example, you can’t be a day trader spending almost all your time studying the markets if you have a full-time job. Similarly, you can’t start out by trend trading if you don’t understand technical analysis.

Five strategies for trading cryptocurrencies

1) Day trading

Day traders open and close their positions within the same day. Since cryptocurrency markets are 24/7, day trading varies somewhat from traditional markets like stocks, bonds, and commodities that close their markets at the end of each day.

Day trading cryptocurrencies means you’ll need to study the price action of the coins you decide to trade. There may be more movement during the Asian daytime, for example, and it may make more sense for you to adjust your times.

Day traders can also automate their trading by using trading bots and setting up stop and limit orders. This allows them to get a good night’s sleep knowing that their positions will be closed automatically to prevent major losses or to maximise gains.

Keeping a position open with no mechanism in place to close it can incur high levels of risk if you’re going to be away from your keyboard. So, you’ll need to set up trading rules to ensure that you don’t lose more than you’re willing to in any given day.

When it comes to day trading cryptocurrencies, day traders can hold many positions in one day. They can carry out multiple trades if they keep a close eye on the market. This means that even with small price movements, they can be quite successful. However, day trading involves constantly studying the market. As mentioned before, this style of trading cryptocurrencies is not for you if you’re simply a hobbyist trader.

2) Position trading

Position trading is completely different from day trading in that traders may take up a position for a long period of time. It’s a long game that isn’t time-intensive like day trading and in which traders don’t worry about short-term market fluctuations, drops, or rises. In fact, in position trading, some traders may keep their positions open for years waiting for the markets to go their way.

The good thing about this type of trading is that it isn’t a full-time job. However, it isn’t for the novice trader either since position trades are higher value and, of course, higher risk. Position traders on all exchanges must maintain a maintenance margin otherwise their positions will be liquidated.

In highly volatile markets like cryptocurrency, traders must be on their guard. When the price of ETH tanked in July 2019 due to a flash crash on the Bitstamp exchange, liquidations on BitMEX reached over $164 million from traders with long positions.

Moreover, position traders should understand technical market analysis and tools such as the True Range Breakout Indicator (TRABOS) or Fibonacci analysis so that they can try to gauge support and resistance levels.

3) Trend trading

Pretty much as the name suggests, trend trading is all about identifying a particular pattern or trend in the market and capitalising on it either by taking a short or long position. Trend traders need to know how to read the markets well, as well as understand when the best time to open and close positions is.

It’s not completely unlike position trading in that trend traders also rely on deep technical analysis. It’s also very risky. Even in established markets, trend trading can be challenging – when it comes to trading cryptocurrencies, the volatility can be brutal.

4) Swing trading

Swing trading is a strategy that is particularly suitable for trading cryptocurrencies. Why? Because it is especially susceptible to markets that register massive highs and lows in a short time period (swings).

Just like all strategies, swing trading takes some time to master, but the basic premise is this: When the market swings low and the price drops, that’s the time to buy more of the underlying asset. When the prices trend upwards, that’s when swing traders sell.

There is no fixed time period for swing trading, but it usually follows a time frame of a couple of days to one week or whenever the trader believes they can capitalise most on the price movements of the crypto asset.

5) Scalping

Scalping, or scalp trading, is a very time-intensive style of trading that takes place over a day. It requires a lot of discipline and practice. Scapers often don’t know anything about the underlying asset that they are trading – they simply buy and sell and take advantage of price movements. Scalpers will often hold their positions for just seconds.

This type of trading involves less risk than position or trend trading, but it does require more time. Scalpers aim to build up small profits every day over time and are attracted to the most liquid markets with higher activity.

If this style of trading sounds appealing to you, you’ll need to look at the fee structure on the exchange you’re trading on, as often small profits can be wiped out by commission fees.

The takeaway

Trading cryptocurrencies is not for the faint-hearted. But it may make sense for you if you want to do more than just HODL. Each of the above strategies has its pros and cons. You’ll need to figure out which one is most suited to you, research it in greater detail, and never trade with more money than you can afford to lose.