Basic Crypto Trading Strategy Part 4: Picking An Appropriate Trading Strategy Continued
Part 3 of the trading strategy series covered two basic technical analysis techniques, both of which focus on trends.
Trend trading focuses on identifying trends and then using them as a basis to set risk-reward, along with entry and exit points in trade.
In this part of the series, we will look at other common strategies that focus more on the price action and taking a longer-term view of the market.
Buy the Dip
One of the more popular strategies touted by cryptocurrency traders is the “buy the dip” tactic. This depends on waiting for a steep selloff in a cryptocurrency asset before entering and attempting to “catch the falling knife”. Although much riskier than other beginner strategies, it is commonly employed with a high degree of success by many novices.
Due to the rebounds commonly witnessed in cryptocurrencies thanks to the outsized amount of volatility present in the market, it has been widely practiced in the past. However, 2018 has likely handed these strategies mixed results.
Generally, participants will wait for a downturn that is 10–15% before entering the market, however, some investors will seek even deeper corrections. With bitcoin historically experiencing corrections in excess of 80%, buy the dip may nevertheless exhibit very serious drawbacks.
Just like any cryptocurrency trading strategy, even those that are highly opportunistic, buying the dip should always be accompanied by a game plan that establishes risk and reward alongside entry and exit points. The one aspect that traders should always categorically avoid is hoping, wishing, and praying when a trade is not going in a favorable direction.
The market does not have feelings and does not care about investor losses. Expecting a trade to turn around eventually can result in outsized losses if not cut quickly and methodically. The goal should always be to survive to trade another day. You can’t get hurt taking profits, but you always get hurt when taking big losses.
HODL
An intentional misspelling of the word “hold”, HODL stands for holding a cryptocurrency position for the long-term and is an oft-repeated phrase amongst cryptocurrency diehards. This is more reflective of the “buy and hold” mentality that is most commonly associated with the stock market and retirement planning. For cryptocurrencies and tokens, the main rationale behind this mentality is the finite amount of coins and tokens that are available for circulation.
Due to preprogramed constraints, most cryptocurrencies have a finite number of coins that can be mined or enter circulation. This unique characteristic is an artificial way of incorporating scarcity, meaning that these crypto assets cannot be inflated over time by printing more or putting more into circulation relative to the predetermined amount.
Due to the non-inflationary nature of cryptocurrencies, many investors believe that by holding over the long-term, those cryptocurrencies, tokens, and coins that successfully deliver valuable services will rise in value, owing to their scarcity. Moreover, for cryptocurrency investors that are uninterested in monitoring the daily prices swings and volatility, it presents a more hands-off approach to trading.
Instead of generating quick, smaller returns, this strategy instead seeks to identify the best solutions likely to achieve the greatest adoption over the long-term. The more fungible and usable a cryptocurrency or token solution, the more likely it is to gather acceptance that ultimately drives its value. Without adoption, those solutions that fail to accumulate support might be overlooked and fall in value with the passage of time.
The Best Cryptocurrency Trading Strategy
Ultimately, there is no right or wrong strategy for conquering the cryptocurrency market. At the end of the day, it comes down to personal preference, which is dependent on factors like risk tolerance, trading time horizon, and the investment objectives. Before selecting the appropriate strategy, it is useful to backtest and even paper trade strategies before putting them to use.
By forming a better understanding of the conditions during which a cryptocurrency trading strategy will be successful, investors can form a more pinpointed approach to spotting opportunities with a higher probability of success. This will help give a sense of what is working and what isn’t before a strategy is implemented.
It is also important to remember to remain flexible with the passage of time. Market conditions can change drastically very quickly, making it imperative to constantly be evaluating a strategy’s success and considering other possible strategies to match market forces.
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