To say trading cryptocurrencies may be profitable could be considered an understatement. With many cryptocurrencies experiencing several fold improvements year on year, cryptocurrencies have outperformed every other asset class in terms of ROI (return on investment).
However, picking and choosing the correct trading opportunities and cryptocurrency trading strategies can be difficult — particularly in the midst of the innumerable indicators that often conflict with each other and make technical analysis a sometimes confusing prospect.
Before you start trading cryptocurrency and getting into the world of overly-complex indicators and advanced technical analysis (TA), it is wise to first learn some of the more basic strategies.
This article will discuss some of the simplest strategies for beginners looking to start trading digital currency in order to help them make their first moves with cryptocurrency trading — using market sentiment, trading volume, price fluctuation, basic indicators, and chart patterns to identify opportunities.
Prior to starting crypto trading, it is important to take a step back and carefully consider the amount of money you are willing to risk in this endeavor. Remember, the cryptocurrency markets are ruthlessly volatile. While that does allow for the possibility of huge gains, it can also lead to gut-wrenching losses — so caution is advised.
Even with an optimal trading strategy, everyone loses trades eventually. The key is to win more often than you lose and avoid some of the common mistakes that new traders often fall victim to.
Easy Strategies for Beginners
- Long-term Holding (The HODL Method)
- Day Trading
- Swing Trading
- RSI Trading Strategy
- Avoid Pump and Dump Groups
If you can’t take a small loss, sooner or later you will take the mother of all losses. – Ed Seykota
Long-term Holding (The HODL Method)
By far the simplest strategy on this list is the long-term holding strategy, also known as simply holding or ‘hodling’ — an intentional misspelling commonly used in the crypto community.
Holding is simple because it often requires very little knowledge in order to be successful — simply due to the fact that almost all major cryptocurrencies have experienced significant growth over the long-term.
The rules are simple: purchase a cryptocurrency you expect to have a promising future and hold onto it for several months or years. For example, you could buy Bitcoin from any number of popular Bitcoin exchanges with fiat currencies (or credit card, though that’s not recommended among payment methods) and simply check the price five years later.
Unlike other strategies, checking the price regularly is absolutely not required, and should actually be avoided to prevent transient price fluctuations spooking you into an early sell. Instead, the price should only be checked after an extended period of time — upon which you can sell if you have achieved the gains you were looking for.
Holding is certainly not the most effective strategy on this list, and nothing guarantees that cryptocurrencies will continue to grow into the future. Furthermore, it is not always optimal to buy at the current time, as cryptocurrencies often see drastic price fluctuations in short periods of time.
Because of this, it is possible to improve the long-term holding strategy somewhat by using ‘cost averaging’ — the practice of buying a fixed dollar amount of a particular investment on a regular schedule. For example, if you were to buy 1 BTC at $7,000, then after several days buy another at $6,400, the average cost paid per BTC is now $6,700.
Cost averaging aims to protect you from a significant crash shortly after you invest by averaging your buy-in price. This can provide some protection against significant market fluctuations, and is particularly useful when investing in a falling market.
In any case, when expecting to invest in a coin, particularly as a beginner, we recommend performing some basic fundamental analysis first. This means checking whether the coin does indeed have a reason for growth — including checking its competitors, community interest, and team competence.
Tip: When it comes to long-term holding, sometimes ignorance is bliss. Over long periods of times, most strong cryptocurrencies will experience both significant losses and gains. Avoid checking the price regularly as this can lead to you exiting a position that is just experiencing a transient dip.
Day trading is essentially the opposite of long-term holding. It is defined as the act of buying and selling a financial instrument within the same day, and often even multiple times over the course of a day, taking advantage of small price movements.
Day trading can potentially yield great profits if performed correctly due to the inherent volatility of cryptocurrencies. However, day trading is certainly riskier than long-term holding, as it is quite easy to lose a significant fraction of your portfolio if you try to day-trade a coin that is due to crash. Because of this, when day trading, it is important to only use amounts you can afford to use and set appropriate stop losses along the way to prevent any drastic losses.
In the world of cryptocurrency, things move fast. Many cryptocurrencies can experience as much as a five percent normal price fluctuation throughout the course of the day, simply due to micro-changes in supply and demand. Remember to always remain calm and stick to the plan. So long as you win more trades than you lose, you’ll be in profit if your stop losses are consistent.
Because the market moves so rapidly, it is quite possible to net a fair profit with just two or three trades per day. Be careful with any more than that, as day-trading can quickly consume more hours of the day than you would like. Once you feel comfortable with tracking and managing a small number of trades, you can gradually work up to a volume you are comfortable with.
There are heaps of helpful indicators you can use to find good entry points for your trades, including exponential moving averages (EMA), the Relative Strength Index (RSI), and the Moving Average Convergence Divergence (MACD) — but you should note that none of these is 100 percent effective. Price action should always be your primary, indicator as it accurately reflects the market at the time.
Tip: The valuations of most cryptocurrencies are heavily influenced by general market sentiment. In this industry the old adage of “buy the rumor, sell the news” frequently holds true.
Looking for a trading strategy that’s fast-paced with the potential to generate reasonable returns quickly? Then scalping might just be for you. However, though scalping is even faster than day trading, it is also much riskier and should only be performed on high volume coins.
Scalping essentially allows traders to capitalize on the microfluctuations a coin sees over short time frames, such as one, three and five minutes. Scalping is far more effective with cryptocurrency than traditional markets — again, due to its substantial volatility.
Currently, almost all cryptocurrencies with significant trade volume are volatile enough to scalp. The only exceptions are stablecoins such as Tether (USDT) and True USD — which tend to be far less volatile.
To make your job easier, we recommend only trying to scalp on a larger cryptocurrency exchange or on popular trading platforms while sticking to coins in the top 30 by market cap — such as Litecoin (LTC), Bitcoin Cash (BCH), and Ethereum (ETH) — since these tend to have the most variance.
Smaller price movements generally happen far more frequently than big ones, with a fluctuation of between 0.5 to 1 percent in a minute being common — even during periods of low volatility. Because of this, it is quite possible to net yourself a healthy profit every day by scalping, regardless if the market is up or down.
Scalping is one of the more exciting methods used to trade. However, it is also one of the riskiest, as one big loss can quickly wipe out all your previous gains. Because of this, tight stop losses are a must.
This method is certainly not for the faint of heart and can require a serious time commitment to execute successfully.
To help out, you can use various volatility indicators for this strategy. The simplest one for beginners will probably be the Bollinger bands, but you can also use the Average True Range (ATR) or the Volatility Index (VIX) to help with trade selection.
Volatility is highest when the upper and lower Bollinger bands are more distant, and lower when they are closer together. For the purpose of this strategy, you should be looking for periods of time where the Bollinger bands are furthest apart to look for entry points.
Tip: Scalping works best on exchanges with the lowest transaction fees and trading fees, though this should not be at the expense of volume. Try to find a happy medium between trade volume and exchange fees, as exchange fees can eat a significant portion of your profit if not considered.
Unlike day trading, in which trades take place over the course of just a day, swing trading is performed over a slightly longer timeframe — usually around a week or two. Swing trading aims to capture larger gains over longer time frames than day trading and scalping, making it an ideal strategy for beginners.
As a swing trader, you will be mostly concerned with the daily and weekly charts, whereas shorter timeframes are less of a concern for you. A good swing trader will use both technical and fundamental analysis to determine whether a cryptocurrency will experience a significant price swing or has enough momentum building to change a trend.
The news is particularly important with cryptocurrencies, as enough negative or positive press can easily change the momentum of a coin — sometimes very quickly. When swing trading, it is important to stay up to date with new developments that may affect the price action of your picks.
Indicators such as the RSI or MACD can be really helpful when used for longer time frames. Chart patterns can also be used for swing trading and can offer a good amount of information about the coin and when to enter or exit a position.
Swing trading is suitable for those with a small to medium amount of capital to invest. It does not require significant investments as it is quite common for cryptocurrencies to experience 10-20 percent growth within one trade cycle.
Unlike scalping (and sometimes day trading), this strategy does not require tight stop losses — though we do still recommend using a relatively close stop loss to protect you against a major dip. As a beginner, we do not recommend swing trading on margin trading or using leverage, as this should be reserved for more advanced traders.
Tip: As a beginner, we do not recommend going against the trend. The cryptocurrency market has been in a downtrend for almost a year, so profiting on long positions can be more difficult. Having access to shorting options can massively improve your opportunities in the crypto market.
RSI Trading Strategy
Trading based on the Relative Strength Index (RSI) is one of the most common beginner strategies and can be a powerful method, under the right conditions.
The RSI is a simple momentum indicator that measures the speed and change of recent price movements to help identify overbought and oversold markets.
Most traders will usually set the RSI between 30-70 range. If the RSI drops below 30, this means the coin is oversold, which means the price may recover shortly after, whereas an RSI over 70 may indicate a digital asset is overbought, potentially leading to a sell-off.
To better understand the RSI, we will take a look at an example of Bitcoin (BTC):
As you can see from the above image above, the RSI (purple line) was overextended at 12:00 and briefly pierced through the 30 mark several times before the price bounced back up. Just hours later, the RSI touched 70 and the price of BTC entered a downtrend.
At first, this might seem like an infallible strategy but do not be fooled. The RSI is not always accurate. It is relatively common for a coin to overextend for long periods of time, staying above or below 30 without the price reacting significantly.
Because of this, it is crucial to set your stop loss right below your entry price, which will allow you to exit your position if the RSI continues to fall. If your stop loss is activated, you may then want to keep a close eye on the RSI and other strength indicators to ascertain whether you should re-enter at a lower RSI in preparation for a spike shortly after.
Tip: Longer time frames like the 4-hour and daily charts are best used to identify oversold or overbought opportunities using the RSI.
Avoid Pump and Dump Groups
As you continue your research into trading strategies, you are almost certain to encounter something known as a ‘pump and dump,’ or just ‘pump,’ group. These are groups that tend to offer their viewers extraordinary profits based on false, or generally misleading, statements.
Typically, pump groups will attempt to organize a large number of buy orders on a particular asset is in order to drive up its price, following which the asset is then dumped on unsuspecting ‘casual’ investors looking to get in on the action.
The truth is, however, the owners of the group tend to be among the few that profit from this market manipulation — buying up large troves of the coin before announcing it to be pumped (giving the ‘signal’) and then dumping it on the pump participants after the ‘signal’ is given.
Though it is technically possible to profit with these groups, it is extremely unlikely and will almost certainly lose you money in the long run. Because of this, we recommend steering well clear of these groups, and anything similar, including so-called ‘signals’ groups.
Tip: In traditional markets, pumping and dumping an asset is illegal, being a form of market manipulation.
Did we miss anything from our list? Which trading strategy do you think is most effective during a bear market? What is your favorite exchange to buy, trade, or sell cryptocurrencies? Drop your thoughts in the comments below!
Images courtesy of Shutterstock, TradingView.
Also published on Medium.