Cryptocurrency trading strategy
What is cryptocurrency trading?
The digital currency market is now attracting more and more people who want to make money. On the one hand, traders are interested in testing new trading strategy and tools, on the other hand, they believe they can make a profit in a short period.
The main feature of bitcoin and altcoins (so-called alternative cryptocurrencies) is decentralization. This money is not controlled by any central bank, financial institution or international organization. This money is created by special protocols for encryption and data transmission technologies known as blockchain. The legal status of cryptocurrency varies from state to state. Someone - like the Chinese government - completely bans transactions with crypto assets. Others - like the Japanese and German authorities – legalize and make cryptocurrencies as a means of payment.
In order to start trading cryptocurrency, you need to decide where you will do it. It is possible to use specialized exchanges or trade CFD contracts for top cryptocurrencies available in the trading platform of forex brokers.
21 million is the maximum amount of bitcoin that will ever be mined. For today about 12 million have already been extracted. The mining algorithm reduces the number of coins twice every few years.
The most popular digital currency is Bitcoin (BTC). It was created in 2008 by Satoshi Nakamoto. It is an undisclosed anonymous developer, perhaps even a group of people united under this pseudonym. BTC is the most liquid coin. In 2020, its level of capitalization reached $ 226 billion. BTC is often used as a means of payment for goods and services, but it is also an investment instrument. Fluctuations in the exchange rate of this cryptocurrency are associated with the activity of miners in Asian countries. The exchange history of BTC has seen several ups and downs. In 2010-2013, its price changed from $ 0.1 to $ 1 thousand. In 2014, the cryptocurrency fell to $ 200. Since 2016, growth has resumed. Now the exchange rate fluctuates at $ 12 thousand for 1 bitcoin. The largest exchanges operating in this currency were Gdax, Kraken, Bitfinex, bitFlyer and Kuna.
What other cryptocurrencies operate in world markets?
In total, there are over 6,000 cryptocurrencies in the world.
- Ether. It is the second popular coin and takes 20% of the market.
- Ripple takes third place with a 5% share. Ripple coins are not mined. They belong to a company that makes payments in this currency.
- Bitcoin Cash (BCH). This cryptocurrency was formed as a result of the hard fork of classic Bitcoin. It appeared only in the summer of 2017 but has already reached the 4th step in terms of capitalization - $ 5.3 billion. The value of BCH is not growing as fast as BTC.
- Litecoin (LTC). It is one of the oldest altcoins created in 2011. The growth of litecoins began after BitGo (one of the leading multi-signature companies) began to support this cryptocurrency in exchange transactions. This digital coin is good for short-term speculative transactions.
- Monero (XMR). This currency was created in 2014. Due to its complete anonymity, it is considered more anonymous than Zcash and Dash due to the so-called mixing of transactions. High payment speed is achieved due to unlimited block sizes.
- NEO. It was created in 2016. Neo was earlier known as Antshares. During the name change, the blockchain of this network was updated and new aspects of mining were introduced. Besides, it is the second cryptocurrency network that allows you to sign smart contracts.
- IOTA. This coin was created in 2017 for the Internet of Things. Thanks to it, transactions in the IOTA network occur much faster than in other cryptocurrencies. The absence of commissions makes it convenient for micropayments. Its main advantage is limitless scaling.
Cryptocurrency can help e-commerce reach more of the population. There are still many countries in the world where opening a bank account can be cumbersome. Perhaps, when satellite Internet becomes available to everyone, the cryptocurrency will acquire an even more significant status in the world.
Types of cryptocurrency trading analysis
There are two approaches - fundamental and technical analysis. Many people seriously believe they cannot be applied to the cryptocurrency market. With regard to technical analysis (TA), critics usually back up their arguments with statements about the "extremely high volatility" of digital assets. Criticism of fundamental analysis comes down to statements about its insufficiently developed methodology, as well as about legal uncertainty in the cryptocurrency market.
However, these both types of analysis are quite applicable to any market, including cryptocurrencies. It is true that this market still has some specifics. So, since the total capitalization of digital currencies is still relatively small, and the analysis methodology is just beginning to be developed, the conjuncture of this market is dependent on top news, reports on the achievements of developers and resonant statements of prominent economic and political figures.
List of main technical indicators
Indicators are technical analysis tools that help traders predict the price and direction of movement with varying degrees of accuracy. Indicators are created using mathematical methods. Data from formulas is turned into graphical images that are displayed next to price charts to help traders make decisions. There are several popular indicators:
Moving Average (MA)
It is a trend indicator, which is a curved line that is calculated based on price changes. Accordingly, the moving average is the trader's assistant that confirms the trend. On the chart, it looks like a curving line that repeats the price movement, but more smoothly.
Exponential Moving Average (EMA)
It calculates and plots an exponentially weighted moving average of the prices specified by the Price parameter for the period specified by the Length parameter. This method of calculating a moving average gives more weight to the most recent data and less weight to older data.
It shows the position of the current price in % against the past price range. In other words, it demonstrates the ability of the bull market and bear market to set the closing price at the edge of the recent interval. If the bulls can raise prices during the day, but can no longer fix the closing price near the high, then the Stochastic begins to fall, this shows that the bulls are becoming weaker. If the closing price after new lows rises to the upper border of the range, it means that the bears were able to push prices down, but cannot keep them there. The rise of the Stochastic shows that the bears are no longer as strong as they look.
Moving Average Convergence/Divergence (MACD)
It is a so-called trend oscillator that combines the properties of both a trend indicator and an oscillator. The MACD is calculated based on moving averages. It simplifies the visual perception of signals given by moving averages, reduces the lag and removes a number of disadvantages inherent in conventional trend indicators.
This indicator measures market volatility and provides a lot of useful information:
- Continuation or reversal of the trend;
- Periods of market consolidation;
- Areas that can be broken through with increased market volatility;
- Potential levels of maximum and minimum values.
Relative Strength Index (RSI)
It is a typical oscillator, which differs from others in that it does not carry an averaging model in its calculation base, and therefore it is forecasting, and not lagging, like many others. The RSI measures the strength of the market by correlating the average closing prices of the periods during which there has been an increase to the average closing prices of the periods during the decline.
This indicator is used to predict the future movement of the asset price. It gives guidance on the tendency of the movement: what price level the price is likely to reach, where it will reverse, etc. Based on this date, traders set pending orders to enter the market, as well as activate stop loss and take profit options.
It determines the direction and reversal points of the market trend. Besides, it can also act as an oscillator and measure the rate of price change for a given asset.
This tool measures market volatility. It characterizes the size of price jumps according to the moving average.
Average Directional Index
With this indicator, you can determine the strength of a trend, but it does not determine the direction of the trend.
Basic cryptocurrency trading strategies
The rate of cryptocurrencies is unstable, accompanied by ups and downs. So for successful trading, you need to adhere to certain trading patterns.
Common active trading strategies:
This is a classic short term strategy. For the first time, it was applied on the Forex exchange and it was quickly adopted by both amateurs and professionals. This cryptocurrency trading strategy demands a trader enter into a large number of transactions for a short period and then closes them after a few minutes (in some cases, even seconds). This strategy is very simple, but it is not recommended to invest too much, since the crypto can collapse and bring losses. It is best to do scalping on currencies of the second or even third tier, as they can grow by several percent in a few minutes and bring very good profit in the short term.
Swing trading is trading within the upward trend of support levels. The use of levels makes it a technical type of trading. This strategy requires to identify the trend. After that, you need to determine the lines of support and resistance.
- If the rate increases, it is buy stop deal.
- If the rate falls, it is sell stop deal.
In other words, trading is conducted in the direction of the trend.
These are short-term transactions. The very name of this strategy means that it uses deals carried out within one day without postponing them to the next day. This strategy allows you to save time and make a profit as soon as possible.
It is a long term trading. Traders use technical analysis and follow the news background to find the right entry point in any markets; calculate the risk according to their trading strategy and wait for a favorable moment.
This trading scheme is even simpler. You buy a cryptocurrency on one exchange at a low price and sell it on another crypto exchange for a higher price. This strategy requires regular monitoring of exchange rates. But, when calculating the possible earnings, you need to take into account the commission charged by the exchange. To make a profit, the difference in rates of one currency should be 2% or more.
Technically, the strategy is a bit more difficult than the previous two. First, you exchange cryptocurrency x for cryptocurrency y and withdrawn from the exchange. Then, on another exchange, virtual money y is exchanged for coin x and sold for fiat currency.
Formation of crypto portfolio
This strategy is completely based on the analysis of the state of affairs in the cryptocurrency market. A trader forms a portfolio of several currencies, including both top and undervalued coins. It is ideally to form a package of cryptocurrencies, that do not have excessive ups and downs. It is better to consult specialists to avoid financial risk.
Buy and hold
It is a long term trading strategy and is often referred to as a passive investment strategy. The rule is extremely simple. You just buy your chosen crypto and keep it in your wallet until it becomes expensive.
Creating a cryptocurrency trading strategy
The main task of the trading strategy is to analyze the state of the market at the current moment, and if the conditions are met, give a signal to make a deal. That is, a trader must create a technique that will rake reasoned and cold-blooded decisions on his behalf. It is an automated approach to trading and disciplined execution of signals. You can develop your own strategy following this simple action plan:
- Choose a trading style. It can be long term or short term trading, or day trading.
- Select technical indicators.
- Choose a currency pair.
- Define ways of fixing losses and profits.
Creating your own trading strategy is a difficult process. It is unlikely that you will be able to create a sufficiently effective strategy the first time. So you should start with very simple strategies, improving them during testing.
South Africa is the leader in the world in terms of the number of Internet users who own cryptocurrencies. The report showed that 10.7% of South African Internet users own a cryptocurrency. This is two times higher than the average value (5.5%) worldwide.
How to create a cryptocurrency trading strategy?
To develop your own system of trading, you need to answer the following questions:
- What trading you choose;
- What technical indicators you will apply;
- What coins you will trade;
- How will you manage your deposit and risks?
The best assistant in this matter will be your personal trader's diary. Start with the simplest strategy and keep improving it based on your notes.
What is the best strategy for crypto trading?
Statistical arbitrage is one of the most popular strategies. At first, it may seem very complicated, but regular trading will help you master it well enough to apply during trading.
What percentage of the deposit can I risk?
Whatever amount you are going to invest, you should always remember that trading is associated with high risk of losing the whole amount.
What lot size should I trade?
You can start with as little as $1 deals.
How to determine a measurement objective target (potential profit)?
Use risk-oriented metrics to predict your theoretical loss or profit.