Basic Crypto Trading Strategy Part 3: Picking An Appropriate Trading strategy
There are hundreds if not thousands of investment strategies available to investors of all shapes and sizes. However, it is imperative to determine the appropriate strategy after defining all the characteristics concerning the risk profile and trading time horizon.
Here are several strategies commonly employed by both professional and novice traders alike:
Trend Trading
Known for its simplicity, trend trading is a process that involves following the prevailing trend higher or lower when trading cryptocurrency instruments. The oft-repeated phrase “the trend is your friend” forms the basis for this tactic. Before trading the trend, ideally an investor will attach a trendline to the price chart to understand the trend during their preferred trading time horizon.
Traders with a shorter view should pick shorter-term charts with candlesticks focusing on the 5, 15, and 60-minute charts. Longer-term trader seeking to capitalize on broader market trends would be wiser to consult 4-hour, 1-day, and 1-week candlestick charts. After selecting the appropriate time horizon, the next step to fit a trendline to the price action.
Generally speaking, good practice for the trend-trading strategy means drawing an upward trendline beneath the price action and a downward trendline above the price action. Three points of contact and a bounce off the trendline itself in resumption of the prevailing trend is viewed as a strong indication that the trend is set to endure.
From there, it is considered wise to enter near the trendline itself, establishing a target for taking profit and exiting when a trendline is broken, generating reversal-like conditions in the price action.
Moving Averages
Another straightforward indicator, the idea of averaging the change in price over time has been an established technical strategy for decades, even finding notable embrace amongst the cryptocurrency investing community for several reasons. Used in both short and long-term strategies, the number of periods during which prices are measured and averaged can be adjusted depending on a cryptocurrency investor’s trading time horizon.
There are many types of moving averages, but the simple moving average is the most basic form. It is calculated by dividing the sum of prices over a set number of periods by the number of periods measured. For instance, a 50-SMA implies a 50-period simple moving average, or the 50 prior candlestick’s closing prices summed and then divided by 50.
The simple moving average (SMA) is popular mainly because its such a straightforward visual tool. A simple moving average is helpful when attempting to identify the prevailing trend, spotting potential reversals, and also assessing possible support and resistance levels. Helping spot support and resistance is among the most popular applications.
For instance, a simple moving average trending above the price action signifies a potential level of resistance if it remains unbroken to the upside, indicating a potential selling opportunity if the SMA holds. Therefore, if the SMA is broken to the upside, it suggests a good place to exit from a short position.
A SMA moving below the price action can similarly be viewed as a level of support, with multiple tests of the SMA without being broken indicating a potential entry point for a buy position. Any cross below the SMA means that support has been broken, suggesting an exit point for buyers.
There are many types of moving averages, and combinations of averages that form the basis for popular strategies. However, at its core, the use of moving averages alone or in conjunction with other indicators can be helpful, primarily when it comes to identifying the trend.
Generating buy and sell signals is also possible with more advanced strategies like moving average crossovers. Furthermore, weighted moving averages and exponential moving averages are also valuable tools that may accompany more advanced cryptocurrency trading strategies.
We will continue our exploration of commonly employed strategies and indicators in Part 4 of our series.
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