Cryptocurrency market is a great example of a highly-volatile market with massive price swings that can either benefit you, or possess losses. Therefore, before diving into it, we highly recommend you develop your own trading strategy. This article will act as your starting point to creating your own trading strategy that fits your goals.
First of all, before building your trading strategy, decide whether you are a trader or an investor. It’s an essential issue, as trading and investing are quite different methods to earn in the financial markets, even though they both are aimed at getting profits. So, let’s focus how trading and investing differ in general to reveal what can be better personally for you.
The key differences between trading (also called speculation) and investing are related mostly to time commitments, risk level, returns on profits, decision-making process and a strategy to operate in the market.
Let’s start with time commitments. Traders take advantage of short and middle term fluctuations of the asset’s price. The positions can be opened and closed within one month, week, day, hour and even a single minute! As for investors, they are focused rather on the long run, holding the positions for years and decades. Note, that this is a definition applied mostly to traditional markets, in a crypto market one year is a relatively long-run investment as industry is boiling up and changing rapidly.
It brings us to the next difference — risk level. There’s no doubt both trading and investing involve risks. However, traders work on smaller time frames, catching mostly small and mid-term movements. Thus, they are aimed at more frequent trades that bear higher risks and at the same time higher potential returns. It means that sometimes even a tiny price fluctuation can significantly influence their profitability. On the flip side, investors would hardly ever pay attention to short-term market fluctuations. They mostly use “buy-and-hold” strategy. Therefore, investors are considered to be a kind of passive market players in comparison to active traders.
It also means that traders and investors in the majority of cases tend to have different risk tolerance levels. While traders that play on huge volatility are quite risk-averse, in general, investors are considered to be rather conservative market players with lower risk tolerance. However, it’s worth mentioning that trading and investing strategies vary a lot. Therefore, each case is unique, and sometimes investors may take even more risks than traders. Also, in terms of high volatility typical of the crypto market, plenty of investors bear the same risk as traders. Thus, it depends.
Obviously, lower risk often results in lower potential returns. To illustrate, a common return on capital for conservative investors on a traditional market can account for about 6% annually, while traders are aimed at higher returns — for example, 10% monthly. Undoubtedly, these numbers are not the benchmarks, and the returns depend on the asset type, trading strategy, and many other factors. For example, on cryptocurrency markets with high volatility, the expected returns on investment would be notably higher than the ones on the traditional market (for example, 50% annually).
However, an overall idea stays the same: trading is associated with possibly higher returns and higher risks.
One more considerable difference is the strategies applied in trading and investing. Typically, traders are more concentrated on current market movements to catch them and get profits. They often rely on technical analysis tools (for example, indicators and trading patterns) to anticipate market movements and develop an effective trading setup. Investors, on the other hand, interpret the market dynamics in terms of fundamental analysis, often paying attention to the underlying technology, looking for its prospects on a much longer timeline. After precise research of an asset investors make informed decisions and include an asset into an investment portfolio. Composing a balanced crypto portfolio turned to be an art and tricky issue nowadays with a wide range of evolving digital assets.
Thus, obviously, we cannot give you a straightforward answer to what would be better for you — trading or investing. Nevertheless, it is possible to identify what would fit you most by carefully researching your goals, personal trials, and opportunities.
So, are you an investor? Great! Get tips on how to compose a balanced crypto portfolio here.
Is trading your cup of tea? Awesome! So, let’s break the common trading strategies down.
Trend trading is a widely used trading strategy that is a bit similar to investing, as it implies holding assets in the long term, for instance, for several weeks and months (but not as long as investing). Trend traders determine trends and their reversal points (to enter or quit the market) with the help of technical analysis: trend lines, patterns, and indicators. Furthermore, they are also likely to include fundamental analysis into their strategy, studying economic, and political forces, social sentiment, news and events that could influence the price dynamics. For example, Donald Trump is believed to considerably affect the Bitcoin price by his speeches and Tweets. Trend traders would, supposedly, take this fact into account. Typically, this strategy is about riding the “waves” of the market and earning on huge up and downside movements of the price. Just remember the 2017 bull rally with the price soaring to $20,000! Thus, trend traders are interested, obviously, in trending markets and promising assets, being in many aspects similar to investors. The key aim is to catch the early trend formation and enter/quit the market at the right time.
Didn’t manage to catch a trend from the very beginning? So, try swing trading! It is a mid-term trading strategy, with the positions held for days or weeks. Swing traders, generally, identify a rollback of a trend to enter the market. They also rely on technical and fundamental analysis to anticipate the trend reversals that act as signals to open and close positions. Changing market is a profitable period for swing traders, in contrast to the sideways market (with no significant price movements in a certain direction), where they simply won’t find entry/exit points, according to their trading setup.
However, the flat market can also bring you profits. So, did you get stuck in a sideways market? Cheer up and apply countertrend trading strategy. It is a middle-term strategy used mostly in trading range formed in the market. The strategy helps traders find trading opportunities in the sideways market (it is also called diapason trading). Countertrend trading systems often include reversal chart patterns, oscillating indicators, and other signals that determine the price direction inside a channel. However, it’s worth mentioning that countertrend traders would hardly ever survive in a strongly trending market without significant adjustments in their strategies.
Furthermore, keeping talking about trading in various market states, it’s important to mention that often traders operate on smaller time frames. Generally, they conduct trades more frequently than trend, swing and countertrend traders. In this case, it’s difficult to apply one of the strategy types, specifically in the markets changing at a swift pace. Therefore, traders combine the setups of different trading strategies within one day. Hence, day trading deals with a broad variety of setups and approaches applied within one day (imagine it as a mix of several strategies).
Last but not least, scalping strategies are also widely applied in crypto markets, when it comes to short-term strategies. Scalping can be described as one of the quickest strategies with the positions opened and closed within a matter of minutes. It differs from the majority of the strategies, as scalpers are generally benefiting from frequent trades with small profits. Therefore, working in the short run, scalpers would not pay considerable attention to fundamental analysis. They identify tiny movements with the help of technical analysis instruments, precise order book analysis with special attention to bid-ask spreads. Obviously, to stay profitable, scalpers are looking for liquid markets that make it possible to swiftly buy or sell a certain amount of an asset.
Thus, the cryptocurrency market provides you with a broad choice of assets and the ways you trade them. Each market movement can be viewed and analyzed at different angles. That is why, if you are new to crypto trading, it is recommended to consider the major trading strategies and decide what would better fit you personally to use its full potential. Depending on this decision, you’ll be able to make a meaningful choice of a trading platform.
It’s also essential to note that the trading strategies discussed in this article are the key ones and if you deepen into them, you’ll discover a wonderful world with a variety of other strategies and trading tools. However, please keep in mind that neither investing, nor trading strategies provide you with any guarantee at eventual success. Your trading success depends on you only.
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