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Crypto Trading Strategies Explained for Beginners

By Romeo F.
1 Sept 2023
12 min read

This article covers fundamental strategies like HODLing and swing trading, as well as technical approaches such as day trading and scalping. Advanced techniques like arbitrage and algorithmic trading are also explored. Whether you're a long-term investor or seeking short-term gains, gain insights into each strategy's mechanics, benefits, challenges, and considerations. This guide equips you with the knowledge to navigate the complexities of cryptocurrency trading.






Crypto trading has become a lucrative profession in the finance market over the past few years. While it’s a very profitable business to be in, it has a steep learning curve and a high level of risk.

This article is a fundamental guide for beginners who are just delving into the crypto trading space. Treat it as a resourceful stepping stone on which you’ll build your trading knowledge.

In this article, we’ll cover the three basic trading strategies:

Fundamental
Technical
Advanced

Most of these trading strategies have originated from the TradFi world. Traders have morphed and modified them to be useful in crypto trading.

A person watching the graphs on the screens
Source: Coindesk

Fundamental Trading Strategies

HODLing: Embracing the Long-Term Investment Approach


HODLing means maintaining your cryptocurrency holdings regardless of market fluctuations, with the belief that the long-term potential will outweigh short-term volatility.




Advantages of HODLing


Ride the Waves of Innovation

HODLing is a strategy that aligns with the core ethos of cryptocurrencies – revolutionary technology with the potential to transform industries. By committing to a long-term perspective, you position yourself to benefit from the innovation and adoption that may unfold over time.




Minimize Emotional Trading

Cryptocurrency markets are notorious for their wild price swings. HODLing can shield you from the emotional rollercoaster of trying to time the market. By avoiding knee-jerk reactions to short-term price fluctuations, you can maintain a level-headed approach to your investments.




Tax Efficiency

Depending on your jurisdiction, holding onto your coins for the long term may lead to favorable tax treatment. Long-term capital gains tax rates are often lower than short-term rates, providing potential cost savings over time.




Risks of HODLing


The primary risk of HODLing is betting on the wrong token. If you are HODLing something that doesn’t have fantastic past performance, you’re risking going down with the asset. For example, HODLing Bitcoin or Ethereum makes sense because these tokens have been through multiple bear markets and always survived.

Whereas if you decide to HODL a high-risk microcap token or a memecoin, it can go wrong.




Swing Trading: Capturing Short to Medium-Term Price Swings


Swing trading is a dynamic strategy that aims to benefit from the oscillations between short to medium-term price movements. Unlike long-term HODLing, swing traders seek to profit from both upward and downward market shifts.

The foundation of swing trading lies in identifying trends, understanding support and resistance levels, and strategically entering and exiting positions.

Successful swing trading begins with analyzing price charts and recognizing trends. This can involve the use of technical indicators such as moving averages, MACD (Moving Average Convergence Divergence), and RSI (Relative Strength Index). By identifying trends, traders can anticipate potential price reversals or continuations.

Support and resistance levels are crucial markers that define the range within which a coin's price fluctuates. Support represents a price level where demand is strong enough to prevent further decline, while resistance indicates a level where selling pressure may prevent further upward movement. These levels are instrumental in determining optimal entry and exit points for swing trades.




Setting Entry and Exit Points for Swing Trades


Precision in timing is paramount in swing trading. Traders often enter a position when they anticipate an imminent price movement in a particular direction, either riding a trend or capitalizing on a price reversal. Entry points are typically chosen near support levels when buying and near resistance levels when short-selling.

Exit points are equally critical to lock in profits and manage losses. Profit-taking often occurs when a coin's price reaches a predetermined target, which could be based on technical indicators, Fibonacci retracement levels, or other price patterns.

Likewise, setting stop-loss orders is crucial to limit potential losses in case the trade goes against the anticipated direction.

A chart showing where BTC made the first higher low in January 2019

Risk Management in Swing Trading


While swing trading offers the potential for quicker gains than long-term strategies, it's not without risks. Effective risk management is imperative to safeguard your capital and maintain longevity in the market.




Position Sizing


Determining the appropriate amount of capital to allocate to each trade is a fundamental aspect of risk management. This prevents overexposure to a single trade and balances potential losses.




Risk-Reward Ratio


Calculating the risk-reward ratio helps assess whether a trade is worth pursuing. It involves comparing the potential profit against the potential loss. A favorable risk-reward ratio can justify entering a trade even if the success rate is not exceedingly high.




Trend Following: Riding Market Trends and Hype-Trains


Trend following is a popular trading strategy that capitalizes on the momentum of established market trends. Instead of predicting future prices, trend followers aim to ride the wave of existing price movements, whether they're upward (bullish) or downward (bearish).

Technical indicators are the bread and butter of trend following. Moving averages are among the most widely used indicators for identifying and confirming trends. A moving average smoothes out price data over a specified period, highlighting the overall direction of a trend.

Two common types are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA). When a coin's price crosses above a moving average, it can signal the start of an uptrend, while a cross below may indicate a downtrend.




Recognizing Trend Reversals and Avoiding False Signals


While trend following can be highly profitable, it's not immune to risks, particularly when trends begin to reverse. Recognizing trend reversals early is crucial to avoiding losses. Traders often turn to additional technical tools, such as oscillators like the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD), to validate the strength of a trend.

However, the challenge lies in avoiding false signals that can arise from erratic price movements. False signals can lead to entering trades that ultimately result in losses.

To mitigate this risk, traders may use multiple indicators in combination to confirm a trend. For instance, if the price crosses above a moving average and the RSI indicates an overbought condition, it may be wise to exercise caution.

Furthermore, understanding chart patterns, such as head and shoulders, double tops, and triangles, can provide additional insights into potential trend reversals. These patterns, combined with technical indicators, offer a more comprehensive view of the market's sentiment and direction.

Trading chart patterns
Trading chart patterns. Source: Challengly

Technical Trading Strategies

Day Trading: Seizing Intraday Price Movements


Day trading is a fast-paced strategy where traders open and close positions within the same trading day, capitalizing on intraday price fluctuations. This approach requires a keen understanding of technical analysis and a willingness to make swift decisions. Chart patterns, which form due to the repetitive behavior of market participants, play a central role in day trading.

Traders often utilize short-term chart intervals, such as one-minute, five-minute, or fifteen-minute charts, to closely monitor price movements.

Candlestick patterns, such as doji, hammer, and engulfing patterns, can provide insights into potential reversals or continuations. Recognizing patterns in real-time helps traders anticipate price movements and execute trades accordingly.

Candlestick cheat sheet
Source: Quadency

Risks in Day Trading


Day trading offers the potential for quick profits, but it comes with inherent risks. High volatility is a double-edged sword – while it can lead to substantial gains, it can also result in significant losses within minutes.

Day traders must be comfortable with the possibility of large price swings and have risk management strategies in place.

The emotional pressure of day trading can be intense. The need to make swift decisions and handle rapid price movements can induce stress and anxiety. Emotional discipline is essential to prevent impulsive actions that can lead to losses.

Additionally, day traders may face challenges associated with slippage – a situation where a trade is executed at a different price than expected due to market volatility. This can impact profitability, especially when trading highly liquid but fast-moving coins




Scalping: Profiting from Minor Price Fluctuations


Scalping is a high-frequency trading strategy focused on profiting from minor price movements over extremely short timeframes. Scalpers aim to capitalize on market inefficiencies and liquidity imbalances that lead to fleeting price fluctuations.

Unlike other strategies, scalping doesn't seek to predict long-term trends but instead aims to exploit the market's micro-oscillations.

Scalping trades typically last for just a few seconds to a few minutes, making rapid execution essential. Scalpers rely heavily on real-time data feeds, direct market access, and advanced trading platforms to execute their orders swiftly.




Scalping Techniques and Risk-Reward Dynamics


Scalping requires a deep understanding of market dynamics and the ability to react swiftly to changing conditions. There are several techniques that scalpers employ to identify potential trading opportunities.

Market Making

Scalpers act as intermediaries between buyers and sellers, capturing the spread – the difference between the bid and ask prices. They profit from the constant flow of small price changes.

Arbitrage

Scalpers exploit price discrepancies between different markets or exchanges. By buying from the lower-priced market and selling on the higher-priced one, scalpers can secure quick profits.

Time and Sales Analysis

Scalpers closely monitor the time and sales data, which displays real-time order executions. Sudden spikes in volume or price movements can indicate potential scalping opportunities.




Risk management in Scalping


Risk management is critical in scalping due to the high frequency of trades and the slim profit margins. Scalpers often use tight stop-loss orders to limit potential losses on each trade.

The goal is to ensure that a single losing trade doesn't wipe out the gains from multiple successful scalping attempts.

Given the nature of scalping, brokerage fees and execution costs play a significant role. Traders must consider these expenses when calculating potential profits.

Moreover, the psychological pressure of executing numerous rapid trades and dealing with the possibility of frequent small losses can be challenging.




Arbitrage: Exploiting Price Differences Across Exchanges


Arbitrage is an advanced trading strategy that leverages price disparities of the same coin across different exchanges. By capitalizing on these price differences, arbitrageurs aim to secure risk-free profits. There are several types of arbitrage strategies, each with its own nuances.

Triangular Arbitrage

Involves exploiting exchange rate differences within an asset pair involving three assets or tokens. This often occurs in the foreign exchange market, where arbitrageurs can profit from inconsistencies in cross-currency rates.

Triangular arbitrage
Source: Yield App

Spatial Arbitrage

Focuses on the price differences of the same coin on different exchanges. Traders buy the coin on the exchange where it's priced lower and sell it on the exchange where it's priced higher, thus pocketing the difference.

Statistical Arbitrage

Involves identifying and exploiting statistically significant price relationships between multiple coins. This strategy requires advanced quantitative analysis to determine when to buy or sell. This is a widely popular strategy used in crypto bots.




Technological Challenges in Arbitrage Trading


While arbitrage sounds straightforward, executing it profitably can be complex due to various challenges:

Latency

Speed is crucial in arbitrage trading, as price disparities can vanish in milliseconds. Arbitrageurs need low-latency transactions to execute trades as quickly as possible.

Market Depth and Liquidity

Arbitrage opportunities are more abundant in tokens with high liquidity and sufficient trading volume. In microcap tokens, it’s useless as executing large trades will significantly move the price.

Risk Management

While arbitrage is often considered low-risk, unforeseen events can disrupt trading plans. Flash crashes, security breaches, or other sudden macro changes can lead to losses.

Transaction Costs

While arbitrage seeks to exploit price differences, transaction costs such as trading fees, spreads, or slippage can eat into profits. You must carefully calculate potential gains against these costs.




Algorithmic Trading: Leveraging Automated Systems


Algorithmic trading, also known as algo trading or automated trading, revolutionizes the way traders interact with financial markets. This strategy involves the use of pre-programmed algorithms to execute trades automatically, removing the need for manual intervention.

The primary role of algorithms in algorithmic trading is to analyze market data, identify trading opportunities, and execute orders with incredible speed and precision.

Algorithms are designed to perform a range of functions, including:

Market Analysis

Algorithms can process vast amounts of market data, such as price movements, trading volumes, and technical indicators, to identify patterns and trends.

Decision Making

Based on predefined rules and criteria, algorithms determine when to initiate or close a trade. These rules could be related to price thresholds, technical patterns, or fundamental indicators.

Risk Management

Algorithms can automatically apply risk management techniques, such as setting stop-loss and take-profit orders, to control potential losses and secure profits.

High-Frequency Trading

Some algorithms are optimized for ultra-high-speed trading, enabling them to execute trades in fractions of a second, capitalizing on minute price discrepancies.




Building, Testing, and Optimizing Trading Algorithms


Creating a successful algorithmic trading strategy involves several stages:

Idea Generation

Traders formulate a trading idea or hypothesis based on market analysis and their understanding of trading dynamics.

Coding

The trading idea is translated into code, creating an algorithm that can execute trades based on predefined conditions.

Backtesting

Historical market data of tokens is used to test the algorithm's performance over time. Backtesting helps assess how the algorithm would have performed under different market conditions.

Optimization

Algorithms can be fine-tuned by adjusting parameters, rules, and indicators to enhance performance. However, excessive optimization can lead to overfitting – a scenario where the algorithm performs well on historical data but poorly in live markets.

Forward Testing

Algorithms are tested in real-time on historical data not used during backtesting to validate their performance and effectiveness.

Risk Management

Effective algorithms incorporate risk management protocols to protect against unexpected market movements or technical glitches.

Summing Up

Crypto trading strategies are just tools that increase the likelihood of making profitable trades. How you utilize these tools will determine your success or failure. As always, DYOR before you invest.

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