Strategies are the key to successful trades, and there’s many different ones to learn. In this article, we’ll be covering:
If you’re new to trading you are probably wondering how it is that traders can make sense of market conditions and actually find reliable ways to make profits. Even if you have learned about basic candle patterns and indicators, this still isn’t enough for most to succeed. Fortunately, these practices are used regularly and have been proven to work more often than not when applied correctly. On that note, always remember that no strategy is always a winner. Successful traders don’t succeed at every single trade, they just employ techniques that have them making a profit more often than not. If you’re looking for a community of like minded individuals who you can learn these strategies with, then maybe check out BeInCrypto’s free signals channel on Telegram. With that in mind, let’s dig into it!
Dollar Cost Averaging
Dollar Cost Averaging (DCA) is the practice of performing regular, usually smaller, purchases of an asset over time. Though this can be applied to buying or selling, with crypto it is usually a form of accumulating and “HODLing” (a popular misspelling of “holding”.) There’s a few different ways to look at this, but let’s start with a situation where you want to buy $1,000 worth of Bitcoin and hodl it for several years as you believe it will continue to appreciate. You could just buy $1,000 today at whatever price, as you believe it has a long way to go up anyway. You could also try to “time the market,” and wait for a significant dip, assuming you believe one is coming.
These are fair options but rely a lot on uncertainty, chance and faith. An alternative to this is DCA. In this scenario you take that same $1,000 and buy, for example, $100 a month for 10 months. By doing this you can significantly offset volatility in the market. This means that while you didn’t probably, on average, buy at the best lows, you also likely didn’t buy all the highs either. The idea is that when applied to a market that is in a long-term uptrend, as Bitcoin is believed to be, you will generally do much better than blindly doing a one-time purchase or trying to buy the bottoms.
Any long term investor who just regularly takes a percentage of their paycheck (that they can afford to lose), and purchases Bitcoin, or any other appreciating asset, with it is enacting a simple form of this strategy. By using a Bitcoin DCA calculator, such as dcaBTC, you can see exactly how much you could have made by performing DCA over various time frames. Say, a $15 purchase weekly over the last 5 years:
You can even compare to other assets, like gold and the stock market. In the case of Bitcoin, the gains that have been possible absolutely dwarf these other investments.
There is a more advanced version of DCA in which it is combined with other strategies, including the ones below, so that you still make regular purchases but only when certain conditions are met. Unlike trying to time the bottom mentioned above, you may simply set purchase orders for certain price levels you find favorable. This can give a higher degree of control over when you buy, but of course you will want to be sure you understand confidently how to read the market first, or else you could actually underperform compared to the slightly more “hands-off” approach.
Fundamental Analysis (FA) traditionally has been used to look for the intrinsic value of the company behind a stock, which would then help determine if the current stock price was above or below this value and buy or sell accordingly. This meant looking at the company’s financial numbers, like sales, profit margins, etc. What does the company make? Is there a market for it? How much competition?
Analyzing cryptocurrencies can be a bit different, but there are parallels. Some coins have companies behind them, offer utilities, and are structured at least similarly to legacy stocks, while others are closer to commodities like gold or fiat currencies. The first step to performing useful FA is determining what kind of asset you’re dealing with. To this end there should be some pretty solid and clear documentation available, presumably from either a team website or community repository. Read the whitepaper, see what people are saying, and ask yourself if you understand what kind of asset this is and if there is a real demand for it.
If there is a team behind the project, who are they? They ideally should be transparent about their credentials and history. If they can show other successful projects they have worked on, all the better. If you cannot determine the main names and faces behind a project, this could potentially be a huge red flag. If you give this team your money and they just disappear, how would you find them? You wouldn’t even know who it is you are looking for. This is why it is generally very important to learn at least a bit about the major players on a team before investing in anything.
Next up, you’ll want to explore the asset’s “tokenomics.” This is getting a little deeper into the nuts and bolts of what the asset actually looks like. You should see how the network is structured, how the ecosystem has different players interacting with each other, and what types of rewards or incentives are there to participate. This is also when you want to be looking at some hard numbers. Generally speaking there won’t be “earnings reports” like there are for a traditional company, and even if there are they may not be as relevant to the validity of the project as they are with stocks. However, it can be important to look at the current price, circulating supply, market capitalization and trading volume before jumping in, so let’s look at these now.
- Current price is pretty straightforward, it is what the asset trades for currently. While this can vary slightly from exchange to exchange, checking a website like coinmarketcap.com will give an average across a variety of exchanges. This is also a great place to check out these other metrics.
- Circulating supply is how many coins are out there being traded, though there can be some contention around this. Sometimes this is represented as the absolute total supply of a coin that exists, though other times it is just the amount actually circulating. So if a team were to say, create a project that has a total supply of 100,000,000 coins ever, all generated at inception, then you could say the supply is 100,000,000. However, what if 50% are secured away by the team, to be released over the coming years? Well then there is really only 50,000,000 of the coin being traded. Being aware of this distinction is key, as sometimes these numbers are thrown around interchangeably.
- One more important thing to learn related to this is how the asset is created and whether there is a hard cap on supply now or in the future. Bitcoin, for example, will only ever have 21,000,000 coins created, however as of this writing only about 18,300,000 have been mined, and the schedule for new coin creation is pretty much fixed. This puts a very specific type of growth in control of the supply, which proponents feel is positive. Other projects have completely open-ended supply caps, meaning that new coins can be created indefinitely. While this is not necessarily a negative, some worry that this is too similar to how fiat currency currently works.
- It’s not that one model is just better than another, the important takeaway here is that you should be aware of which type of scenario you are dealing with, as it varies from asset to asset. Part of why this is also important is that it plays into how the market capitalization is calculated.
- The market cap is simply the current price multiplied by total supply, so a 100,000,000 supply trading at $0.05 is $5,000,000 for example. You should always look at the size of the market cap in light of the price and supply because often traders want “cheap” coins because they see this as room for growth, and it can be. However if a coin is cheap because there are a whole lot of them, say 10,000,000,000,000 with new ones being generated all the time, then there may not be as much upside possible as you think.
- It’s better to look at the market cap, as smaller market caps really do have more room for growth, but this is still assuming there is increasing want for this asset. One other way to help gauge demand is daily trading volume. This will usually be an average across exchanges, but will show if people are actually engaging with this currency versus just a handful of people hodling and promoting it.
- If you feel that a project has massive potential and great talent, but still has small market cap, then you may be onto something. Just watch out for the pump and dump scams out there which generally push coins with little intrinsic value. This is basically your risk:reward ratio, meaning that smaller projects are unproven and may not make it, but offer huge potential upside for returns. On the other hand, a larger market cap plausibly means there is already a lot more interest, but that it has already seen some impressive gains and there may be a little less room for extreme growth. Think of it as the difference in investing in Apple now vs 1990. It’s unlikely the company is going to go away anytime soon, and it will likely still grow, but you will never see the same returns (probably) because already so much money has flowed into it.
The Relative Strength Index (RSI) is an indicator that basically charts buy and sell-side momentum in the market. It looks at recent price action (default is the 14 previous candles) and normalizes the price movements on a scale of 0 to 100. Generally, when the value is low (below 30) the market is seen as “oversold,” and when it is high (above 70) it is considered “overbought.” While this can point to an imminent price shift, it is important to note that the RSI can stay on the high or low end for some time before a real shift in momentum comes, so it can be hard to correctly time your strategy with the RSI alone.
RSI Divergences, however, give us a little bit more information. See, in a strong ongoing trend, the RSI trendline should roughly match the direction of the price action’s trendline. Price goes up, RSI goes up and vice versa. However, when a trend is losing momentum divergences can occur between the price and the RSI trendlines. This can be an early warning that pressure has shifted, and price is about to start moving because of it. Again, this isn’t a guarantee, but is a more precise indication than the RSI level taken on its own.
To correctly spot this, first identify if your trend is to the upside or downside. If the trend is sideways, this strategy is generally less effective as sideways action doesn’t have a lot of clear momentum to begin with. If the trend is to the upside, make your trendline along the highs of the price action and RSI values, and if it is to the downside, use the low points.
See how here, the trendlines basically match. They don’t have to be exactly the same angle, but the closer they are the more confidence you can have that momentum is solid and this trend will continue for now. Still, you are looking for both to be hitting higher highs in this case.
Now let’s look at a divergence.
Now notice here how the lows are going in clearly different directions. The price action was still hitting lower lows, but the RSI was starting to hit higher lows. This is what you are looking for. It wasn’t very long before dropping prices levelled off and began to rise, but this shift would have been harder to spot if you were only paying attention to the value of the RSI and not the ongoing trend.
Breakout trading is based around the ideas of support, resistance, and channels. Various metrics can form areas of support and resistance, and these act as places where price action tends to get stuck or turn around. Support refers to when one of these areas is below the current price, and resistance is the term when it is above. What creates these lines? A variety of things. Historical price action, psychological levels, trendlines, Moving Averages, Fibonacci retracement and extension levels, to name common ones. We won’t be getting into all of these things here, so we’ll keep it simple and we’ll talk about channels and wedges.
We spoke about trend lines earlier, and how they can define a rising or declining trend in price action. As these trends go on longer, traders become increasingly confident that these lines represent meaningful resistance levels. Often trends begin to emerge on both the highs and lows in price action, and if these are roughly parallel it is referred to as a “channel,” or “flag.” If the lines are more converging, this is generally called a “wedge.”
What you are looking for here is for this pattern to break. Price can stay inside of ranges like this for variable amounts of time, but when a significant break occurs with sufficient volume, it is likely that action will have some notable momentum behind it and carry on for some time. See here where this ongoing trend finally broke out of its pattern, and how the price responded.
Wedges are similar, but again the price range will be tightening, not parallel. Because they keep getting into smaller and smaller ranges, you can usually place an upper limit on when this break must occur. Usually they break before reaching the extreme of this area, but as they approach it each time the price tests the trendlines the chance of a breakout becomes higher.
Whether a channel or wedge, be aware of false breakouts. Again, there are no guarantees, so occasionally there can be a spike or dip in the price that looks like it is about to break the trend. However, this is why volume is important, because if the movement came from a fairly small trade volume then it is unlikely to hold for long, and it is plausible that the price will revert into its channel yet again.
As mentioned, there are many chart patterns besides just channels and flags, and this handy infographic covers the most common ones:
Also, you may be wondering how to know if the price will break up or down. This can be tricky, of course, and there isn’t one predominant opinion. As you can see in the above image, wedges for example can be seen as continuation patterns or reversal patterns. It can depend on whether they are rising or falling, as well as the predominant trend in the market, but even so the way they break out is never a guarantee.
Often, traders use price points slightly outside of a given channel to place entries and exits into their “Long” and “Short” trades. Long trades are generally what many people think of when they think of trading, which is buying an asset in the hopes to sell it for a higher price later. It is the type of trade almost all traders begin with as it is a bit more straightforward and obvious what is going on. The breakout trading strategy still works well here as it can help traders identify a good place to get in or out near the beginning of a pump or a dump.
However short trades work in reverse, basically. When you short something it means you believe it will go down. You can actually make money here (as opposed to just cut losses) if you borrow the asset from your exchange with an agreement to return it, sell it at current value, re-purchase it after the price drop, and then return the originally borrowed amount and pocket the difference. This can be a bit riskier, but many exchanges allow for it and it is the way people can actually make impressive profits even when an asset tanks.
Be aware there are usually very specific time parameters for short trades, so you can’t just wait indefinitely to return the asset in the hopes it will finally drop. Furthermore, when you go long your risk is limited, as any asset can only ever drop to $0, destroying your capital but that’s it. Shorting has theoretically infinite risk, as prices can always continue to rise and you will still be obligated to pay back the exchange. This is why having specific “stop losses,” in your strategy is absolutely essential. If shorting sounds scary, know that you don’t have to expose yourself to infinite risk, but that’s what you are facing if you don’t have proper parameters set up.
We’ve saved leverage trading for last because it stands to bring the biggest gains but also comes with the biggest risks. Leverage trading is basically the practice of creating larger positions than you actually have capital for by borrowing money or assets from the exchange. Shorting, which we just discussed, is a form of leverage trading because it involves borrowing, but leverage is often applied to longing too. Say you want to purchase $1000 worth of Bitcoin because you believe the market is about to go up, but you really only have $100 to spend. If your exchange allows for leverage, you can put up your $100 as collateral, and the exchange will put up the additional $900. When you exit the trade you must of course give back that $900, but any profits you get to keep. So if Bitcoin went up 10% for example, your $100 worth of Bitcoin would only be worth $110, but a 10x leveraged position with $1000 worth would now be worth $1100. You would then pay back $900 to the exchange, and you would have doubled your investment.
Of course this ability to multiply gains also multiplies risks. Let’s look at the other scenario, where Bitcoin drops by the same amount, 10%. If you had just purchased $100 worth of Bitcoin, it would only be worth $90. Not ideal, but if you continue to hold it will likely go back up and besides, you still have the Bitcoin. The amount of Bitcoin hasn’t changed, just its value in USD. Now let’s say you were in a 10x leveraged position. When the 10% drop comes, your $1000 position is now only worth $900. Well, the exchange needs that $900 back to break even, so it will exit the trade immediately and take its money back, and you’ll be left with nothing. Keep in mind an exchange will never let you lose its money in a position, and if you ever do find an exchange that does, it won’t be open for very long.
Shorting on leverage is pretty much the ultimate in risk. Just imagine the issues outlined with shorting above and add a multiplier to it, and you can imagine how fast you can lose money. Of course,
an exchange knows that you can’t pay back trillions of dollars if things get out of hand, so there will be limits. Usually, you will be required to have some type of collateral reserve (on top of the collateral you put in the trade) that gets taken if your position goes bad. Again, the exchange basically will end the trade when this reserve is met, but this is how people can lose massive stores of collateral in literal seconds if market conditions go perfectly against their predictions and positions. Generally speaking in cryptocurrency, this is called getting “rekt.”
If you are interested in leverage trading, you’ll need to find an exchange that allows it. Some notable exchanges offering this type of trading include Binance, Kraken and StormGain. Depending on the exchange and asset, you usually can find anywhere from 3X to 200X leverage options, so the possibility to make amazing gains is certainly on the table. Note that not all of these exchanges are available in all countries and that certain conditions will usually need to be met to open a leverage account, usually a mix of identity verification and funding a minimum reserve collateral pool.
At this point, you should have the basic information needed to begin using any of these strategies for yourself. Hopefully, we have made it clear that none of these techniques mean guaranteed success, but when used properly should help shift your odds towards increased profits. Just go slow and keep re-assessing what you are doing. If you want to practice, some exchanges offer “dummy” accounts where you can trade fake cryptocurrency against real-world market data, so that you can learn the ropes with literally no risk. Whatever you do, know that trading is about ongoing education and evaluation, and there is no “quick trick” for success. Again, remember that BeInCrypto has a whole Telegram community for people learning, just like yourself! On that note, good luck trading cryptocurrency and using these strategies, and stay tuned here at BeInCrypto for more!