Tired of sitting back while hearing about yet another cryptocurrency enjoying impressive price increases? Or maybe you’ve dipped your toes into the world of crypto trading already, but now you want to elevate your approach and become a smart prop trader with a more coherent strategy.
This article will guide you through cryptocurrency trading strategies and other tips to boost your chances of success at trading challenges, including key insights on risk management and technical analysis.
Introduction to cryptocurrency trading
If you’re already familiar with the world of crypto, feel free to skip this section. Otherwise, let’s take a moment to cover the basics.
Understanding cryptocurrencies and crypto exchanges
Cryptocurrencies are digital assets built on decentralized networks, meaning they don’t require institutions or middlemen like banks or governments to oversee them. Some are intended to be alternatives to traditional currencies, while others represent assets within games or applications.
These cryptocurrencies are mostly traded on dedicated crypto exchanges, such as Binance, Coinbase, and Gemini.
Market volatility and its impact on trading
The cryptocurrency market is known for its volatility. As cryptocurrencies are such a new asset class, many regulators and traders aren’t sure exactly what to make of them — meaning their value can enjoy a huge surge one day and plummet the next.
This can make cryptocurrency trading a nerve-wracking experience.
Essential crypto trading strategies
Now, let’s turn to a few of the most popular crypto trading strategies.
Hodling: Long-term investment for steadfast believers
When people see the term “HODL” for the first time, they often assume it’s a typo. But it’s the real spelling, with HODL being an acronym for “hold on for dear life.”
This is a strategy that goes counter with the more common form of trading, which involves trading a cryptocurrency over the short term. Instead of HODLers selling a cryptocurrency shortly after it increases in value or selling it when it’s losing too much value, HODLers intend to hold assets over the long run.
It’s a strategy for those who truly believe in the inherent value of a crypto project — meaning that, regardless of the swings in the market, they won’t sell. This is popular among crypto enthusiasts who want to support blockchain developers, and they generally pay keen attention to the technical details behind the project.
Day trading: Chasing quick profits with rapid decisions
Day trading is the kind of short-term trading that HODLing rallies against. These kinds of traders care much less about which crypto projects will take the world by storm, or any specifics of the projects themselves.
Instead, they’re looking for ways to predict market movements and cash in fast, getting ahead of everyone else.
It’s a very intense and fast-paced way to trade, with the need to make fast decisions, so it’s not for everyone. But it can work for confident and decisive traders.
Swing trading: Navigating peaks and valleys for substantial profits
Swing trading takes a similar approach to day trading but over a slightly longer horizon. Instead of buying and selling all assets on the same day, swing traders make their trades over a few days or weeks.
This means it involves a very similar skill set but is less intense.
Scalping: capturing minuscule price shifts rapidly
Scalping is a trading strategy that’s all about small price changes. It involves making various small trades throughout the day when there are small price shifts. While each individual trade might not be highly profitable, the high quantity of trades makes the practice profitable.
You need to be fast, as most scalpers only hold their positions for a few minutes (or even seconds). This means you won’t have a chance to analyze trends or pick apart technical signals — it’s all about entering and exiting the market fast.
Often, people scalp as part of their day trading or swing trading.
Arbitrage: Making gains from price disparities
Since cryptocurrencies are sold on various exchanges, some traders make money by buying digital coins at a lower price on one exchange and selling them for a higher price elsewhere.
This way, you need minimal knowledge of the cryptocurrencies or market trends — you just need to be able to compare the prices on different exchanges.
Technical analysis tools for crypto trading
The better understanding you have of what’s happening in the market, the more likely you are to be a successful trader. Technical analysis of price charts and signals is a major part of this.
Moving average crossovers: Identifying trend changes
Moving averages are lines on a chart showing the average price of an asset over a given period. This makes it easier for traders to identify trends.
Simple moving averages give equal weight to all prices over a period, while exponential moving averages give more weight to recent prices. Also, longer-term moving averages show trends over longer periods.
They give an even better picture of what’s happening when there are multiple types of moving averages on the same chart, allowing you to see where there’s potential for price movement. For instance, if a shorter-term moving average crosses above a longer-term moving average, it shows that prices could decrease.
Relative strength index (RSI): Identifying overbought and oversold conditions
The RSI indicates the size of recent price changes, using a number from 0 to 100.
A number closer to 100 suggests an asset is overvalued, while a number closer to zero suggests undervaluation. This lets traders know when to buy or sell cryptocurrencies for a profit.
Also, divergence between price and RSI can signal buying or selling pressure.
Risk management and diversification
Crypto trading has a reputation for being risky for good reason. But there are ways to mitigate those risks, as we’ll get into now.
Importance of diversification in a volatile market
Since cryptocurrencies are such a volatile asset, it’s generally recommended to avoid putting all your money into crypto. Instead, diversify by also trading in more established markets, such as bonds or index funds for stocks.
At the very least, you may want to trade some more established cryptocurrencies, like ethereum and bitcoin, instead of sticking to riskier small coins.
Developing a risk management plan
The first step is to acknowledge the risks you face. Some of the big ones include:
- Regulatory uncertainty as regulations evolve.
- Risks associated with blockchain technology itself, such as a crypto platform being hacked or facing technical issues.
- Emotional decision-making and fear of missing out as a trader.
- Extreme price swings and speculative bubbles.
Once you know what you’re up against, you can start to assess your own risk tolerance. Ask yourself how much you’re prepared to lose and what your goals are as a trader. Are you prepared to risk it all because you’re a true believer in the power of cryptocurrencies? Or do you want to take a low-risk approach to reap some of the benefits of the new market while placing most of your money elsewhere?
Some of the strategies you can take to reduce your risks include:
- Dollar-cost averaging: Investing a fixed amount of money at regular intervals and committing to keeping your money invested. This limits emotional decision-making and exposes you to prices at different points in time.
- Diversification: Invest in various cryptocurrencies (as well as other asset classes) instead of putting all your eggs in one or two baskets.
- Stop-loss orders: These are a feature many trading platforms offer that automatically sells assets on your behalf if the price drops to a certain level, allowing you to limit how much you lose.
Applying crypto trading strategies
Finally, let’s tie things together by looking at how to apply crypto trading strategies.
Creating a trading plan
A trading plan is your personal roadmap for navigating the crypto markets, and it helps you stay disciplined and objective — regardless of what the graphs are doing.
Follow these steps to keep you on track:
- Decide your goals, risk tolerance, and how much time you’re willing to commit to trading.
- Choose a trading strategy (such as swing trading or day trading).
- Select which cryptocurrencies you will invest in based on your goals and risk tolerance. You may want to consider their market capitalization or project fundamentals.
- Define entry and exit rules, which indicators and chart patterns you will lose, and how you will manage risks.
- Monitor the market and keep track of your trades and performance.
Choosing the right crypto exchange
To be able to trade cryptocurrencies, you need to choose a platform to trade on. Making the right decision influences how smooth your trading experience is.
Here are some factors to consider:
- Trading fees (including withdrawal fees and trading fees)
- Reputation
- Security measures (such as cold storage of crypto funds, two-factor authentication, and insurance)
- Available cryptocurrencies
- Trading volume
- Customer support
- Features like chartering tools, order types, and demo accounts
Practicing with demo accounts
No matter how prepared you think you are to start trading cryptocurrencies, it’s easy for everything to go out the window once you see yourself losing (or earning) real money. This can lead some people to make poor decisions or to be too impulsive.
Using a demo account is one of the best solutions to this issue. This allows you to experience a real trading environment without using real money, giving you a taste of what it’s like to trade. Once you’re more familiar with a platform (and your own emotions as you trade), you can graduate to using your own funds.
Final thoughts on crypto trading strategies
Navigating the exciting world of crypto trading requires a delicate balance of strategy, technical skills, and emotional control. But by understanding different trading styles, using the right tools, and prioritizing risk management, you can maximize your chances of success.
On Challenge4Trading, we share various learning resources about how to trade and offer a platform for beginners to start trading by participating in prop firm challenges with a funded account. Find out whether crypto trading is right for you and if you have what it takes!
