Trading strategies are what separate the pros from the beginner traders. Often, people enter the crypto market knowing what they want to buy, for instance, Bitcoin or Ethereum, and they will buy it immediately at the market price. If you do this, you are rolling the dice as to whether a crypto asset is undervalued or overvalued, and many traders lose a lot of money this way. A good trading strategy will allow you to determine the best levels to buy and sell at and ensure that you maximise your profits and minimise your losses. This article outlines a number of powerful trading strategies and details how to set advanced types of orders.
How to create a solid crypto trading strategy
There are many different crypto trading strategies available to you, and there is no one “correct” strategy. Ideally, each trader will develop an approach that works specifically for their goals. Most successful crypto traders understand that a solid strategy consists of different types of analysis and research including technical analysis, fundamental analysis and analysing market cycles.
To put this in perspective, technical analysis is like a house made from good timber; fundamental analysis is the land that the house is built upon, and the market cycle is the weather and environmental factors.
Long-term investment approach
Long-term trading strategies focus on determining the crypto assets with the most potential for future growth over a longer time frame, such as 5 to 10 years. Put simply, every long-term trader wants to invest early in the next Bitcoin or Ethereum. Fundamental analysis is well suited to a long-term approach, but this is often used in conjunction with technical analysis (covered in the next section).
Using fundamental analysis metrics
Fundamental analysis assesses all of the available information about an asset in order to reach a deep understanding about its value and potential for future growth. This style of analysis looks at metrics like use cases or competitors, tokenomics, active addresses, and the development team behind the project.
Most successful cryptocurrencies have a very specific use case, such as providing a fast and cheap payment service (payment coins) or offering privacy and anonymity features (privacy coins). This should be outlined in the project’s white paper, alongside an assessment of competitors, and an analysis of the infrastructure the project seeks to improve upon or replace. In terms of a long-term investment approach, you should only invest your money into projects with realistic use cases, innovative and well-defined solutions, and a clearly defined market.
Tokenomics looks at the supply and demand of a token or cryptocurrency. Successful investors perform thorough research about how the initial tokens were distributed, if or how many tokens are held in reserve for founders or team members, and how many will be available for investors. Tokenomics also looks at the circulating supply versus the max supply, which translates to market cap and fully diluted market cap respectively.
Try to avoid investing in projects where the majority of the tokens are owned by one or two parties because this makes the price more susceptible to pump and dump schemes.
Looking at the number of active addresses on a blockchain network will tell you exactly how many people are using a cryptocurrency. This often speaks directly to real-world adoption, which is what all projects aim for. Projects that maintain stable use over time are good investments, but the best investments are projects whose use and adoption builds at a sustainable rate over a long-term time frame.
Crypto projects should provide details about the development team behind the project. The expertise and track record of each member on the team can offer valuable insight into whether or not a project will be successful. The team should be led by people who have executed successful ventures within a relevant industry before. And the rest of the team should possess the experience needed to achieve project goals.
It is also useful to look at the activity of the development team on platforms such as GitHub (a code platform and repository). There you can check the number of contributors and the frequency of contributions. Projects that are consistently active are much more likely to achieve project goals.
Short-term trading approach
Short-term trading strategies revolve around determining the best times to buy and sell an asset with the intention of turning a profit quickly. This might look like making several trades in a day (day trading) or riding the trends up and down for a few weeks (swing trading).
Using technical analysis indicators to predict price movement
Short-term trading strategies are most commonly based on technical analysis and rely on things like chart patterns and indicators to predict the short-term price movements of an asset. Market cycles can also be very important because the market cycle can override any chart pattern or indicator.
Short-term trading tends to favour a technical analysis approach, but it’s also important to be aware of the potential impact of the market cycle on short-term trades.
Support and resistance levels
Support and resistance levels are the bedrock of technical analysis. A support level indicates a price where an asset has dropped to previously and found support there. So historically at that level, buyers have stepped in to buy more of the asset, meaning that the price has a high chance of bouncing off that level.
A resistance level is the exact opposite. It indicates a price an asset has struggled to break above, therefore finding resistance. Sellers have previously stepped in at that point to take profits or drive the price down.
Experienced traders will often set sell targets just below resistance levels and buy targets just above support levels in the hope of completing the trade without having to hit the exact level. Many professional traders will also layer their buy and sell orders based on multiple levels of support or resistance. For example, Rach wants to buy Ethereum. Its current price is $2,500. Rach has identified that there is strong support at $2,000, $1400, and $360. Rach then layers her buys, placing an order for 1 ETH at $2,000, 2 ETH at $1400, and 5 ETH at $360.
Did You Know?
Support levels are commonly drawn by connecting multiple lows at roughly the same price. But the strongest support is actually former resistance that has turned into support. The same applies to resistance levels, the strongest resistance is previous support that has been flipped.
There is a range of different candlestick chart patterns that traders use to determine trends in the cryptocurrency market. Bullish patterns such as a pennant or a falling wedge suggest that once the pattern is complete (and the local resistance is broken), a surge in price will occur. Whereas bearish patterns, such as a rising wedge or a head and shoulders indicate that once the pattern is complete (and the local support is broken), the price will crash.
Chart patterns are best used along with other indicators, such as RSI, MACD, or trading volume, in order to identify the strongest market trends.
A relative strength index (RSI) is an indicator that applies mathematical formulas to pricing data in order to produce a reading between 0 and 100. Using an RSI, it’s possible to gain insight into whether a coin is overbought or oversold. Generally, an asset can be considered overbought if the RSI is above 70 and can be considered oversold if the RSI falls below 30.
If a chart pattern looks bullish, but the RSI (or other indicators) is bearish, that might be a signal to stay out of that trade or do some more thorough research on the fundamentals of the asset and any associated news. Whereas if the chart pattern and RSI are in alignment, that could be a strong indication to enter that trade.
Trading volume is an important metric that indicates the amount of buying or selling during a specific period. Volume can provide traders and investors with insight into the momentum of price movements. For instance, high volume paired with an increase in price may indicate significant momentum in a price swing and the continuation of an upward trend.
On the other hand, low trade volume may indicate that the current price trend, either upward or downward, is unlikely to continue. Sudden large spikes in volume may coincide with major project announcements or news updates that precede major price changes.
Simple moving averages
Moving averages (MAs) depict the average price of a market over longer time frames, such as days or weeks. If used correctly, they can function as reliable signals to buy or sell. The 100-day MA (on the daily chart) is probably the most popular configuration, as it generates consistently reliable signals. In an uptrend, the MA 100 will often function as a moving support line (and level to buy at), which adjusts to the market momentum. But if the MA 100 is broken, that can signal that it’s time to sell, as the price has fallen below the average price over the last 100 days, meaning the asset has lost its all-important momentum.
The Bollinger Bands consist of two lateral bands that surround a moving average. They measure market momentum as well as volatility. They are a popular indicator, particularly with those who are day trading crypto, because, if used correctly, they can help predict momentum shifts.
Generally, if the price breaks above the upper band and then the next two candles close significantly below that level, that is a signal that the trend direction is about to change. If this is confirmed by their other indicators, those who are day trading cryptocurrency will use this as a sell signal. The price will then often bounce off the middle line (the moving average), but if the market is adequately volatile it could fall to the lower band. If the price breaks the lower band and the next two candles close substantially above that level, this is a signal that the trend direction is about to change again. If the indicators align, this can be used as a buy signal. This can be a valuable crypto day trade strategy.
You will often see the Bollinger Bands expand or contract over time. This represents shifts in market volatility. The further apart the Bollinger Bands are the more volatile the market is at that point in time. If the bands are close together for a long period of time, this is known as a squeeze (a period of low volatility), and there is often an explosive movement up or down after it breaks.
How to use advanced order types
Once you’ve been trading cryptocurrency for a while you may need to start using some advanced order types, such as limit buys and stop losses. Swyftx is a cryptocurrency exchange that allows users to buy crypto in Australia and New Zealand using many advanced order types.
Setting a limit order
A limit order is an advanced type of order that allows you to buy automatically if an asset hits a certain price. Experienced traders will set limit buys at key levels, such as support or MA levels.
Setting a stop loss
A stop loss is similar, but it allows you to sell automatically if an asset hits a certain price. This is a great way of protecting your profits in volatile markets. As a form of risk management, advanced traders use stop losses in combination with key levels, such as broken support levels or the confirmed breakdown of a chart pattern.
Anyone can trade crypto, but not everyone can do it well. Having a solid trading strategy will set you up for long-term success as a trader or investor. It will also make you less susceptible to unsound investment advice from potentially biased third parties. This article has looked at a number of powerful trading strategies and provided a guide on how to set advanced types of orders. If you would like to learn more about fundamental or technical analysis, there are plenty more resources on the Swyftx Learn.