There are many ways to make money from digital currency trading, and trading strategies can help you integrate various skills into a systematic framework to make operations more organized. This method allows you to continuously monitor and optimize your personal digital currency trading strategy.
When developing a trading strategy, there are two main areas to focus on: technical analysis (TA) and fundamental analysis (FA). We will distinguish between the types of strategies that are applicable in different trading scenarios, but before we go into detail, it is important to understand the difference between the two.
There are many trading strategies, and it is difficult to describe them all. We will introduce several common strategies. This article focuses on trading strategies for digital currencies, but these strategies are also applicable to other financial assets, such as foreign exchange, stocks, options, and precious metals such as gold.
Want to build a trading strategy that works for you? This article will help you understand the basics of speculating in the cryptocurrency market. With a solid trading strategy, you will be more likely to achieve your trading and investment goals.
What is a trading strategy?
A trading strategy is a comprehensive plan covering all trading activities, which aims to provide traders with a clear framework to guide their every move. Through this framework, traders can trade in an orderly manner in complex and volatile markets.
A well-thought-out trading strategy can effectively reduce unnecessary decisions and thus reduce financial risk. Although a trading strategy is not necessary for all traders, it can help avoid major losses in some cases. If there are unexpected fluctuations in the market, a trading plan can provide traders with a response plan to prevent emotions from affecting decision-making. In other words, developing a trading strategy is to prepare for possible future situations, help traders stay calm in the face of market fluctuations, and avoid unnecessary losses caused by impulse.
A comprehensive trading strategy may include the following:
- Asset class traded
- Required settings
- Tools and technical indicators used
- Trigger points for buying and selling (stop loss points)
- Criteria for determining position size
- How portfolio performance is recorded and measured
In addition, a trading plan can also include some basic guidelines and personalized rules. For example, a trader can decide to avoid trading on Fridays or when he is in a bad mental state, or even set a specific trading schedule to limit operations to certain days of the week. If you don't want to closely monitor the price of Bitcoin on weekends, the strategy can also stipulate that you close your positions before the weekend. These personalized settings can all be incorporated into the trading strategy.
In this article, we focus on two types of trading strategies: active trading and passive trading.
You will quickly realize that trading strategies are not strictly defined and that there can be overlap between different strategies. In fact, a hybrid approach that incorporates a variety of strategies is a wise investment approach.
Active trading strategies
Active trading strategies require more time and effort. They are called “active” because they require constant monitoring of market dynamics and frequent portfolio management.
Day Trading
Day trading is probably the most well-known active trading strategy. It is a common misconception that all active traders are necessarily day traders.
Day trading involves buying and selling within the same day. Therefore, the goal of a day trader is to profit from intraday price movements (i.e. price movements within a single trading day).
The term "day trading" originates from traditional markets, where trading activities are only open during certain hours of the day. Therefore, day traders in traditional markets never hold positions overnight, so trading is suspended during these times.
In contrast, most cryptocurrency exchanges are open 24/7. Therefore, in the cryptocurrency market, day trading strategies are used in a slightly different context, and generally refer to a short-term trading method where traders can buy and sell in 24 hours or less.
Day traders often use price action and technical analysis to build trading ideas. In addition, they can use a variety of other techniques to find inefficiencies in the market.
Day trading of digital currencies can significantly increase profits for some people, but is often stressful, very demanding and can involve extremely high risks. Therefore, day trading is more suitable for experienced and advanced traders.
Swing Trading
Swing trading is a long-term trading strategy, meaning positions are held for more than a day, but usually no longer than a few weeks or a month. In some ways, swing trading is somewhere between day trading and trend trading.
Swing traders typically actively exploit swings in volatility that take days or weeks to show results. In the process of building trading ideas, swing traders may combine technical and fundamental analysis. Changes in fundamentals usually take a long time to manifest, which is where fundamental analysis comes into play. Even so, chart patterns and technical indicators can still play an important role in swing trading strategies.
For beginners, swing trading is probably the most convenient active trading strategy. A significant advantage of swing trading compared to day trading is that it takes longer to show results. But this process is not so long that it makes it difficult to track swing trading.
This gives traders more time to think about whether their decisions are wise. In most cases, they have ample time to respond to changes in trading. In swing trading, decisions do not have to be rushed and are more rational. Day trading usually requires investors to make decisive decisions and execute quickly, and beginners may find it difficult to adapt to this fast-paced trading activity.
Trend Trading
Trend trading is sometimes also referred to as "position trading". This strategy involves holding a position for an extended period of time, usually not less than a few months. As the name implies, trend traders attempt to take advantage of directional trends to gain profits. Trend traders may enter long positions in an uptrend and short positions in a downtrend.
Trend traders often use fundamental analysis, but not always. Even so, fundamental analysis takes into account events that may take a long time to play out, and this is the change that trend traders try to take advantage of.
Trend trading strategies assume that the underlying asset will continue to move in the direction of the trend. However, trend traders must be alert to the possibility of a trend reversal. Therefore, they may also incorporate moving averages, trend lines, and other technical indicators into their trading strategies in an effort to increase their trading success rate and mitigate financial risk.
Trend trading is also ideal for beginners if they perform due diligence and risk management properly.
Ultra short-term trading
Scalping, also known as scalping, is one of the fastest trading strategies available. Scalping does not take advantage of large or long-lasting trends. The strategy focuses on repeatedly taking advantage of small changes in the market. For example, profiting from bid-ask spreads, liquidity gaps, or other inefficiencies in the market.
The core idea of scalping is to avoid holding positions for long periods of time. It is common for scalpers to open and close positions in just a few seconds. For this reason, scalping is often associated with high-frequency trading (HFT).
If a trader finds that market inefficiencies occur repeatedly and are profitable, scalping is a very lucrative strategy. Each time an inefficiency occurs, a small profit can be made. These profits accumulate over time and eventually become a substantial return. In liquid markets, where buy and sell transactions are relatively smooth and predictable, scalping can often achieve good returns.
Scalping is an advanced trading strategy that is complex and not recommended for beginners. This trading strategy also requires a deep understanding of market mechanisms. In addition, scalping is more suitable for large traders (whales). Since their target profit margins are usually small, trading large positions is more valuable.
Passive investment strategy
Passive investing strategies reduce the difficulty factor, and the time and energy involved in managing a portfolio are significantly reduced. While there are differences between trading strategies and investing strategies, the ultimate goal of trading is to make a profit by buying and selling assets.
Buy and hold
Buy and hold is a passive investment strategy where traders buy assets that they plan to hold for the long term, regardless of market fluctuations.
This strategy is usually used for long-term investment portfolios. The approach is to enter the market directly without considering the timing. The core idea of this strategy is that as long as the investment cycle is long enough, the timing or price of entering the market is irrelevant.
Buy and hold strategies almost always use fundamental analysis and generally do not focus on technical indicators. When implementing this strategy, you do not need to monitor the performance of your portfolio frequently, but only occasionally.
Although Bitcoin and cryptocurrencies have only been around for a decade, the “HODL” mentality they have created is very comparable to the “buy and hold” strategy. However, cryptocurrencies are a very risky and volatile asset class. While buy and hold Bitcoin is a well-known strategy in the crypto space, this strategy may not be applicable to other cryptocurrencies.
Conclusion
It is not easy to design a digital currency trading strategy that fits your financial goals and highlights your personal style. We have just introduced some of the most commonly used digital currency trading strategies. I hope you can be inspired and find the solution that suits you best.
In order to determine which strategies work for you and which don't, you should try each trading strategy and track its returns, but don't break the rules you set. You can also create a trading log or worksheet to help you comprehensively evaluate the effectiveness of various strategies.
It is worth noting that traders do not have to follow the same trading strategy all the time. As long as you have sufficient data and trading records, you should be able to flexibly adjust and modify your trading methods. In other words, personal trading strategies should be constantly modified and developed as trading experience continues to accumulate.
It is also beneficial for traders to split their portfolio into different parts and apply different trading strategies to each part. This way, traders can keep track of the performance of each strategy while implementing appropriate risk management.
About Megabit
Megabit is committed to providing secure and efficient digital asset trading services to users around the world. As an exchange that has only been established for a few years, Megabit has established a good reputation in the industry and has been widely recognized. Megabit holds multiple financial regulatory licenses to ensure compliance operations and protect user interests. Megabit's technical team comes from well-known companies in the industry and the financial securities industry, and has industry-leading technical capabilities.