Cryptocurrency Trading Strategies
What is a Cryptocurrency Trading Strategy?
Cryptocurrency trading is not a very old practice as the crypto market is relatively new and less than a decade old. Like forex trading, cryptocurrency trading can be unpredictable and not without risks. As with any other asset you decide to trade, it is important that you research well and understand the market and cryptocurrencies. You should also create a clear trading plan and invest the time in extensive and in-depth analysis, so you make the right trading decisions. Crypto currencies are a high-risk investment and trading them without a proper plan in place can often lead to bad investments and loss of capital. While most analysts would agree there is not one trading strategy that works best and all the time, there are a few methods that are well suited to beginner traders.
Day Trading Strategy
With the crypto market being highly unregulated and with cryptocurrencies being so volatile, it is worth remembering, that cryptocurrency trading is particularly risky and requires good knowledge and risk management. Cryptocurrencies can move from dramatically and the price can go higher or lower unexpectedly. For this reason, it is important to have a good strategy, manage risks and avoid holding positions, especially overnight. Market volatility can be a good thing though and you can take advantage of it over a shorter time period such as a few hours, rather than longer periods such as days and weeks. Day traders follow trends and trade the prevailing sentiment until a support or resistance level is met or a predetermined price is hit.
Dollar Cost Averaging (DCA)
Dollar cost averaging is a trading strategy that is ideal for longer periods of time, where traders can invest small amounts and choose a particular time and day of the week to buy. This means they only spend small amounts by dividing their funds into lots and trading specific times, avoiding investing all their funds at once. By trading at regular intervals over a longer period of time, traders can potentially protect themselves from unnecessary market volatility. Dollar cost averaging is a good crypto trading method for beginners as it can be automated via such services as 3Commas, CryptoHopper, and Coinrule. If you choose one of these trading bot services, you can easily deposit funds, tell the bot what you want to trade and when to trade it, and let it do everything else.
RSI Divergence Crypto Trading Strategy
More technical, but equally effective is the Relative Strength Index (RSI) divergence strategy which can be used to time trend reversals before they occur. This is when the price moves in the opposite direction, from a downtrend to an uptrend or the other way around. RSI is a chart indicator that calculates the average number of gains and losses over a 14-day period. The indicator line can be used to point when an asset is “overbought” or “oversold.” While this system can be used as a crypto trading strategy, it can sometimes give incorrect results. It can be used to greater effect when identifying the change of a price trend before it happens. It works by looking for inconsistencies between the price and the RSI indicator. Both the price and the RSI move in the same direction, but sometimes the price could be falling and the RSI rising, and vice versa. Looking for divergences is best done within a four-hour or daily window, as you can find more visible and stronger shifts in the mid-to-long-term trend. Equally, the strategy can be used to find smaller trend changes.