Introduction

There are countless ways to profit from cryptocurrency trading. Trading strategies will help you organize these methods into a single structure that you can follow in the future. This way, you will be able to constantly monitor and optimize your strategy.

When building a trading strategy, you need to conduct a complete analysis of the market using: technical analysis (from the English technical analysis, abbreviated TA), as well as fundamental analysis (from the English technical analysis, abbreviated FA). We'll look at which one applies to each strategy, but before we go any further, make sure you understand the differences between these concepts.

Since the number of different trading strategies is so large that it is not possible to name their exact number, we will consider only some of the most common ones. This article mainly focuses on cryptocurrency trading strategies, but they can also be applied to other financial assets such as forex, stocks, options or precious metals such as gold.

So, would you like to develop your own trading strategy? This article will help you understand the topic and how you should approach cryptocurrency speculation. With a solid trading strategy, the likelihood of achieving your trading and investment goals will increase significantly.


What is a trading strategy?

We can describe a trading strategy as a detailed plan for all your trading activities that you create in order to have a guide for yourself in all your endeavors.

A trading plan can also help reduce financial risk because it itself eliminates a lot of unnecessary steps and impulsive decisions. Although having a trading strategy is not mandatory for trading, sometimes it becomes a vital factor in asset management. In case something unexpected happens in the market (which happens regularly), your trading plan should consider the right reaction, not your emotions. In other words, having a trading plan helps you prepare for different situations, preventing you from making hasty, impulsive decisions that often lead to even greater financial losses.

For example, a comprehensive trading strategy might include the following factors:

  • Asset classes you trade

  • Settings you use

  • Tools and indicators used in trading

  • Triggers facilitating your entries and exits (placing your stop losses)

  • What determines your position size

  • How do you capture and measure the performance of your portfolio?

In addition to this, your trading plan may include other general recommendations, down to the smallest details. For example, you may decide to never trade on Fridays or never trade if you feel tired or sleepy. You can set a trading schedule so that you only trade on certain days of the week. Do you keep checking the price of Bitcoin even on weekends? Always close your positions before the weekend. Such personalized guidance can also be included in your trading strategy.

Development of a trading strategy may also include verification through back and forward testing. For example, before moving on to the real market, you can try trading on the Binance Futures testnet.

In this article we will look at two types of trading strategies: active and passive.

Below we invite you to familiarize yourself with various trading strategies, but remember that each trading plan may have some overlap with others. It is recommended to always consider a hybrid approach to structuring your trades by combining multiple strategies.


Active trading strategies

Active trading strategies require more time and attention. We call them active because they involve constant monitoring and management of the portfolio.


Day trading

Day trading is most likely the most popular and well-known active trading strategy. It is a common misconception to think that all active traders are by definition day traders, because this is absolutely not the case.

Day trading involves entering and exiting positions on the same day. Thus, day traders seek to benefit from intraday price movements, that is, price movements that occur within a single trading day.

The term “day trading” originates from traditional markets, where trading can only be done during certain hours of the day. Thus, in these markets, day traders never remain in positions at night when trading is suspended.

Most digital currency trading platforms operate 24 hours a day, 365 days a year. So day trading is used in a slightly different context when it comes to cryptocurrencies. This term in this environment refers to a short-term trading style where traders enter and exit positions in a period of 24 hours or less.

Day traders primarily use price action and technical analysis to formulate their trading ideas. In addition, they may test a variety of other methods to track their effectiveness in a particular market.

Cryptocurrency day trading can be very profitable, but it is often quite stressful, demanding and involves high risks. Thus, day trading is only recommended for more advanced traders.


Swing trading

Swing trading is a type of long-term trading strategy that involves holding positions over a period of several weeks or a month. In a sense, swing trading is in the middle between day trading and trend trading.

Swing traders generally favor waves of volatility that last several days or weeks. Also, this type of participant uses a combination of technical and fundamental factors to formulate their trading ideas. Of course, fundamental changes take place, but they take much longer, and in this case fundamental analysis comes into force. However, chart charts and technical indicators most likely play one of the most important roles in a swing trading strategy.

Swing trading may be the most suitable trading strategy for beginners. A significant advantage over day trading is that swing trading is longer. However, your trades remain fairly short-term and trading is fairly easy to track.

This allows traders to think about their decisions. In most cases, they have enough time to react to how the trade unfolds. With swing trading, decisions can be made with less haste and more rationality, unlike day trading, which often requires quick execution decisions that can be difficult for a beginner.


Trend trading

Trend trading (sometimes referred to as position trading) is a strategy that involves holding positions for a longer period of time, usually at least several months. As the name suggests, trend traders attempt to take advantage of market trend directions. This type of trading is implemented by entering a long position in an uptrend and a short position in a downtrend.

Trend traders usually use fundamental analysis, but this type of potential assessment is not always used. However, fundamental analysis involves a series of events that can take a long time to develop, with a similarly large impact on price, and it is these factors that trend traders try to use when forming their trades.

A trend trading strategy assumes that the target asset will continue to move in the direction of the trend. However, such traders should also consider the possibility of a reversal and incorporate moving averages, trend lines and other technical indicators into their strategy to maximize their success rate and reduce financial risk.

Trend trading can be ideal for new traders, especially if they do their due diligence and implement sound risk management.


Scalping

Scalping is one of the fastest styles of building trading operations. Scalpers do not try to exploit large movements or extended trends. This strategy focuses on high-frequency trades with small changes in the asset price. This kind of trading involves forming trades based on bid-ask spreads, liquidity gaps or other imperfections in the market.

Scalpers are not aimed at holding their positions for a long time. Basically, such traders, so to speak, take a scalp from the intermediate difference in the price of an asset by opening and closing positions literally within a few seconds. This is why scalping is often associated with high-frequency trading (HFT).

Scalping can be a particularly profitable strategy if a trader finds regular success with his approach in the market. Each time the market takes a certain position, the trader can make a small profit, which can increase over time. Scalping is generally ideal for markets with high liquidity, where incoming and outgoing positions are relatively smooth and predictable.

Scalping is a strategy for quickly building trades, which is not recommended for novice traders due to its high complexity. This approach requires a deep understanding of the mechanics of markets. In addition, scalping is more suitable for large traders (whales), this is due to the small profit margins from such short-term transactions, for this reason trading large positions makes more sense.


Do you want to start using cryptocurrency? Buy Bitcoin on Binance!


Passive Investment Strategies

Passive investing strategies provide a more relaxed approach that does not involve active portfolio management, reducing the investment of time and attention. While there are differences between trading and investing strategies, trading ultimately means buying and selling assets in hopes of making a profit.


Buy and hold

Buy and hold is one of the passive investing strategies in which traders buy assets and hold them for a long time, regardless of market fluctuations.

This strategy is used in long-term investment portfolios, where the idea is to simply enter the market without considering the holding period of the assets. The idea behind this strategy is that over a long enough holding period, timing and entry price won't matter much.

A buy and hold strategy is almost always based on fundamental analysis and generally does not involve technical indicators and periodic monitoring of portfolio performance, except from time to time.

While Bitcoin and other cryptocurrencies have been around for just over a decade, the HODL phenomenon can be compared to a buy and hold strategy. However, cryptocurrencies are an extremely risky and volatile asset class, and while holding Bitcoin is a well-known strategy, the same cannot be said for other cryptocurrencies.


Index Investments

Typically, index investing involves purchasing indices and ETFs in traditional markets. However, this type of product is also available in cryptocurrency markets, both on centralized cryptocurrency exchanges and as part of the decentralized finance (DeFi) movement.

The idea of ​​a crypto index is to take a collection of different crypto assets and create a token out of them that tracks their collective performance in real time. Such a set may consist of assets from a similar sector, for example, utility tokens, privacy coins, and similar digital currencies with a reliable price flow. Also, importantly, most of these tokens will rely heavily on blockchain oracles.

How can investors use crypto indices? For example, instead of choosing a single privacy coin, you can simply invest in an index that includes all privacy coins. Thanks to this solution, investors can bet on the entire private coin sector, while eliminating the risks associated with one similar project.

Investing in tokenized indices is likely to become the most popular solution in the coming years. This allows for a more cautious approach to investing in blockchain as an industry, as well as in the cryptocurrency markets.


Conclusion

Developing a cryptocurrency trading strategy that suits your financial goals and style is no easy task. We've looked at some of the most common strategies that can help you choose the right one.

To know what really works and what doesn't, you must follow and track each trading strategy without breaking the rules you set. It is also useful to create your trading journal or activity sheet so that you can analyze the effectiveness of each individual strategy.

But it's worth noting that you don't have to always follow the same strategies. With enough data and trading records, you can customize and adapt your methods to different markets. In other words, your trading strategies should continually evolve as your trading experience improves.

It can also be helpful to spread the assets in your portfolio across different trading strategies. This way, you can track the individual performance of each while maintaining proper risk management.

If you want to learn more about managing your portfolio, we recommend that you read our material on diversification and asset allocation.