Introduction

There are countless techniques for making profits trading cryptocurrencies. Trading strategies help you organize these techniques through a coherent and simple to apply framework. They also allow you to analyze and optimize your investment choices in cryptocurrencies.

The two main categories to consider if you want to create your own strategy are technical analysis (TA) and fundamental analysis (FA). We will analyze the techniques relating to these two categories separately, but keep in mind the difference between the two before going any further.

Since there are so many trading strategies, we will start with the most common ones. This article mainly focuses on trading strategies related to cryptocurrencies. However, it is also possible to apply them in other financial markets such as forex, options or precious metals like gold.

So, ready to create your own trading strategy? This article will help you understand the basics to master speculation on the crypto markets. With a solid strategy, you will be more likely to achieve your trading and investing goals.

What is a trading strategy?

A trading strategy could be described as a set of rules governing all your trades and investments. This is a framework that you create to guide you in your initiatives.

Following such a strategy can help mitigate financial risks by preventing many unjustified decisions. While it is not essential to have a well-defined strategy to start trading, it sometimes provides vital help. In particular, if something completely unexpected happens at some point (which it will), your strategy – not your emotions – should help you decide how to respond. In other words, having a trading strategy in place allows you to prepare for all possible scenarios. This prevents hasty or impulsive decisions that often result in significant financial losses.

As an example, a complete trading strategy may include:

• the asset class you are trading

• the configurations you follow

• the tools and indicators you use

• When you enter or exit a trade (and where to place stop losses)

• your position size

• how to track and measure the performance of your portfolio

In addition to these elements, your strategy can also encompass other driving guides, going so far as to plan for the smallest details. For example, you can decide in advance that you will never trade on Fridays or when you feel tired. You can also set a trading calendar, so that you only trade on certain days of the week. Do you continually watch the price of Bitcoin during the weekends? So choose to close your positions before each weekend, to keep a healthier rhythm. This type of personal choice can also be included in your trading strategy.

Creating a trading strategy can also involve ex post testing (or backtesting) or in real conditions (forward testing). For example, you can start practicing for fake with paper trading on the Binance Futures testnet.

In this article, we will discuss two types of strategies: active and passive strategies.

As you will quickly see, trading strategies are quite flexible, and nothing prevents them from sharing common methods. It is even possible to combine several strategies to use a hybrid approach.

Active trading strategies

Active trading strategies require more time and attention. They are called “active” because they require you to monitor and manage your portfolio more regularly.

Le day trading

Day trading is probably the most famous trading strategy. It is often thought that all active traders are by definition day traders, but this is not entirely true.

Day trading involves entering and exiting positions on the same day. In this way, day traders seek to profit from intra-day price variations.

The term “day trading” comes from traditional markets, where trading is only open for a limited time each day and only on weekdays. In these markets, day traders never hold positions overnight or on weekends, when the markets are closed.

In the world of cryptocurrencies, however, most exchange platforms are open 24 hours a day, 365 days a year. Therefore, the term day trading does not encompass exactly the same practices for this different context. Rather, we speak of day trading for short-term strategies, where traders enter and exit their positions in less than 24 hours.

Day traders most often rely on price and technical analysis to develop trade ideas. Besides that, they sometimes employ other techniques like arbitrage to take advantage of market inefficiencies.

Day trading cryptocurrencies can be very profitable for some, but it is also quite a stressful and demanding strategy that involves high risks. For this reason, day trading is rather recommended for experienced traders.

Le swing trading

Swing trading is a longer-term strategy that involves holding positions open for more than a day, and usually less than a few weeks. Swing trading falls roughly in the middle of day trading and trend trading.

Swing traders typically seek to profit from volatility by riding waves lasting a few days to a few weeks. They use a mix of technical and fundamental analysis to develop their trade ideas. Logically, the fundamental value of a project takes longer to evolve, and this is where fundamental analysis comes in. However, chart patterns and technical indicators can also play an important role in a trading strategy. swing trading.

Swing trading is probably the most accessible active strategy for beginners. An important advantage of day trading over swing trading is the longer duration of trades. However, we remain on relatively short time horizons, which facilitates active monitoring of our strategy.

This allows swing traders to take more time to develop their choices. In most cases, they have enough time to react to how their trades are moving. With swing trading, decisions can be made more rationally without being rushed. Conversely, day trading often requires making quick decisions and acting as soon as the opportunity presents itself, which is not ideal for beginners.

Trend Trading

Sometimes also called Position Trading, Trend Trading is a strategy that involves holding positions for long periods of time, typically several months. As the name suggests (“trend” meaning trend in English), trend traders are mainly interested in long-term trends. They can remain in an upward position throughout a bull market, and in a downward position throughout a bear market.

Trend traders primarily use fundamental analysis, while monitoring long-term technical indicators. However, fundamental analysis focuses on the prospects and developments of a project over the long term - which fits perfectly with the expectations of a trend trader.

The trend trading strategy assumes that an asset will continue to move in the direction of the trend. But trend traders must still take into account the possibility that the trend will reverse. To do this, they often incorporate moving averages, trend lines and other technical indicators into their strategy to increase their chances of success and limit their risks.

Trend trading can be ideal for beginners if they properly perform their due diligence and manage their risk.

Scalping

Scalping is one of the shortest time frame trading strategies. Scalpers do not seek to profit from large movements or endless trends. It is a strategy that aims to exploit small price movements on numerous occasions. For example, taking advantage of the price spread between sell and buy orders, liquidity gaps, and other market weaknesses.

Scalpers do not seek to keep their positions open for long. It is quite common to see scalpers opening and closing their positions within seconds. This is why scalping is often associated with High Frequency Trading (HFT).

Scalping can be particularly profitable for traders who identify a market weakness and exploit it again and again. Each time this happens, they make small profits that add up over time. Scalping is generally ideal in markets with high liquidity, where it is easy to enter and exit positions without much difficulty.

Scalping is an advanced trading strategy that is not recommended for beginners due to its complexity. It also requires a deep understanding of market mechanisms. More generally, scalping is more suitable for big traders (whales). As the winning percentage on each successful trade is low, it is more suitable for trading larger positions.

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Passive investment strategies

Passive investment strategies require less time and attention to portfolio management. Although there is a difference between trading and investment strategies, trading is ultimately about buying and selling assets in the hope of making a profit.

Le « Buy and hold »

The “Buy and hold” technique is a passive investment strategy where traders buy an asset with the intention of holding it for a long time, regardless of market fluctuations.

This strategy is typically used for long-term investment portfolios, where the goal is primarily to be positioned in a market beyond a question of timing. The idea behind this strategy is that if you zoom out to look at a sufficiently long time horizon, the timing and entry price have little importance.

The “buy and hold” strategy is most of the time based on fundamental analysis and is not concerned with technical indicators. This strategy also does not require frequent monitoring of the performance of your portfolio – monitoring them once in a while is enough.

Although Bitcoin and other cryptocurrencies have only been around for a little over a decade, the HODL phenomenon could be associated with the “buy and hold” strategy. However, cryptocurrencies constitute a risky and volatile asset class. If buying and holding Bitcoin is a well-known strategy in the world of cryptocurrencies, it is not necessarily suitable for other cryptocurrencies.

L'index Investing

Typically, index investing involves purchasing ETFs and indices in traditional financial markets. However, this type of product is also found in crypto markets. They can be found both on centralized cryptocurrency exchange platforms and via Decentralized Finance (DeFi) platforms.

The idea behind a crypto index is to bring together a basket of cryptoassets and create a token that tracks and combines their performance. This basket can be made up of cryptocurrencies relating to the same sector, such as privacy coins or utility tokens. They can also represent something completely different, as long as it is possible to derive a price from them at any given moment. As you might imagine, most of these tokens rely heavily on oracles.

How can investors use crypto indices? For example, they can invest in an index based on privacy coins rather than having to choose an industry-specific cryptocurrency to invest in. In this way, they are betting that the privacy coin sector will see its value grow, while eliminating the risk of investing in a single cryptocurrency.

Tokenized indices will likely become more and more popular over the coming years. They enable a more passive approach to investing in blockchain technology and cryptocurrency markets.

To conclude

Developing a crypto trading strategy that fits your financial goals, personality, and style is no easy task. We've looked at some of the most common trading strategies, so with any luck you can find at least one that suits you.

To find out what really works and what doesn't, you should follow and analyze each of these strategies – carefully adhering to the rules you set for yourself. It can also be helpful to create a trading journal or Excel spreadsheet so that you can analyze the performance of each strategy.

It's worth noting, however, that you don't need to follow the same strategy forever. With enough data and notes on winning and losing trades made, you should be able to adapt and adjust your techniques. In other words, your trading strategies should be constantly evolving as you gain experience.

It can also be beneficial to allocate different portions of your capital to test different strategies. This way, you can monitor the individual performance of each strategy while exercising true risk management.

If you would like to find out more about portfolio management issues, we invite you to consult the Explanations on asset allocation and diversification.