Trading strategies, explained

What is a trading strategy and why do you need one?

Cryptocurrency buyers who want to do more than buy and hodl have many trading options available, but in a highly volatile market with more than a few questionable players, a defined strategy is key to success

There are many loud proponents of hodling — or holding — in crypto and particularly in Bitcoin. Buy and do not sell, as Bitcoin will always go up over the long term, the argument goes. But for traders who want to stay ahead of the curve, there are strategies. Otherwise, you’ll be buying based on FOMO — fear of missing out. And if you’re following the herd, you’re generally buying high and selling low.

While a strategy is necessary in any type of smart investing, it’s doubly so in the extremely volatile cryptocurrency industry, where prices rising or falling 10% in minutes is common and more than 50% in a few hours is not exactly rare. Beyond that, available leverage for margin trading can be dangerously high — as much as 100x at some exchanges — and there is very little regulatory infrastructure to protect investors from bad actors. Then there are factors that simply cannot be accounted for, like a whale suddenly dumping a huge amount of Bitcoin on the market and driving down prices.

What will help is having a strategy that you follow consistently, sources of data you can rely on,  and an exchange with the reliability, speed, and liquidity to execute your orders in a timely fashion.

What is day trading?

Day traders invest based on complex strategies in a timeframe of minutes to hours, but at the end of their day, they’re out of the market, forgoing potential gains to avoid losses.

At first glance, day trading is pretty simple: You buy and sell cryptocurrencies many times over the course of a day, seeking to make a profit on the (usually) small minute-to-minute, hour-to-hour price fluctuations. It is, essentially, the opposite of hodling.

The reality is day trading is very complex because so many things affect the price — too many to factor them all in. So, you need strategies within it, relying on specific indicators, technical analyses, research sources, risk management strategies, and profit and loss tolerance. Which means access to good information and speed is vital. You also need to take fees into account if you’re making a high volume of trades.

Day trading is high-stress, but also comes with a cut-off. Day traders generally set a defined “day” in the 24-hour crypto market, and close out their positions by that time. So while it does come with high risks, wild overnight swings are not among them. While that means missing out on big gains, it also means avoiding big losses.

What is trend trading?

Trend trading is just that: Analyzing data to find mid-to long-term trends that suggest a cryptocurrency’s price is heading up or down, and when the direction is about to change.

Trend trading is a longer-term strategy that uses various analytical tools to predict if a cryptocurrency’s price is heading up or down over a matter of months at least. It seeks to ignore short-term price movements by focusing on technical analyses like indicators (patterns in historical data such as price, volume, and open interest) and price action (the up and down movement over time). 

That said, what matters isn’t whether a cryptocurrency’s trend is up (time to buy) or down (time to short) so much as spotting the reversals, which tell you when to reverse tactics or just get out. It’s for more advanced beginners who spend the time doing analysis and managing risk, and have the stomach to ride out downward swings.

What is swing trading?

Swing trading is a beginner-friendly strategy that focuses on finding medium-term patterns in the days-to-weeks range.

One way to think of swing trading is that it focuses on timeframes that are longer than those used by day traders and shorter than trend traders — a matter of days to weeks. Swing traders look at technical indicators like historical data and candlestick charts of the daily high and low range of a cryptocurrency over time, as well as fundamental indicators.

It’s a good place for beginners to start, as it does not require the constant attention of day trading, nor the discipline to hold a position as long as trend trading. That said, it still offers plenty of profit potential without the need to act immediately.

What is scalping?

Scalping is a high-intensity, high-frequency, and complex trading strategy that involves making many small profits off of market inefficiencies rather than asset performance.

Scalping is one of the quickest and most demanding trading strategies as it requires extremely quick moves — between minutes and seconds, or with sophisticated high-frequency trading tools even small fractions of a second — designed to take advantage of market inefficiencies to make very small profits over and over. One of the most common is taking advantage of the bid-ask spread, which is the difference in price between the highest buy order (bid price) and the lowest sell order (asking price).

The risks and profits are somewhat smaller, but for experienced traders willing to make quick decisions, lots of little wins add up. As it involves many small trades, low exchange fees are a big benefit.

What are some simple strategies?

Strategies like buy-and-hold and index investing are perfect for passive investors who are true crypto believers looking for long-term growth.

First up is buy-and-hold trading — “hodling” with a touch of strategy added. Instead of putting down all your money at once, hodlers make scheduled buys — say weekly or monthly — to even out the impact of volatility. Sounds simple, but this does require patience and faith.

Next is index investing, which is simply buying all of the cryptocurrencies in a market index — like buying the Nasdaq or S&P 500 in the stock market — on the theory that very few investors beat the market long term.

How do you choose a trading strategy?

Choose a strategy that plays to your strengths, ranging from your experience with cryptocurrency markets to your tolerance for risk.

There are a lot of factors, but it boils down to an honest assessment of your skill and experience level. Do you understand how cryptocurrencies work, are you familiar enough with the analytical tools that let you accurately predict the market, and do you know your real tolerance for risk?

Once you are clear on those factors, you need an experienced exchange partner that offers an intuitive interface, is reliable in times of market stress, offers strong liquidity, provides access to plenty of market data, and has strong security.

A custodial, full-featured and user-friendly exchange platform, Changelly Pro is aimed at both beginner traders who want to start with the simpler long-term strategies like swing and trend trading, and traders who want to move to shorter-term day trading and scalping strategies.

It offers competitive trading and withdrawal fees, 24-hour customer support, margin trading leverage up to 12x, and more than 100 trading pairs.