To start trading, every person needs to think about what their trading style is. From there you can narrow down some common strategies that suite your style and then with experience, build on them. There are some general factors to consider when you are trying to narrow down what style fits you best such as: how much money you have to work with, the amount of time you have available to devote to trading, the level of trading experience you have, and your level of risk tolerance.
Some strategies require more time than others. Passive traders can spend a few hours a week on their investments or even step away completely by handing the work over to a cryptocurrency broker. Scalp trading which is a short-term strategy requires a full-time commitment and every minute of a trading session is spent actively managing trades. You also don’t have to stick to one specific type. You may decide that you are comfortable using more than one style. In this section, we will go over both active and passive strategies.
The Active Trader
The active trader is focused on short-term financial gain. They typically don’t hold individual currencies for long, so they don’t need to consider long-term trends. However, it is critical these types of traders spend a considerable amount of time using charts, researching and staying on top of the news in the market to understand what will happen in the short term.
The Passive Trader
A passive trader is more interested in investing for the long-term and relies on the age-old thinking that markets eventually always go up. Active trading requires constant commitment, but a passive trader doesn’t want to spend their free time studying the markets, trends and other factors that can influence the cryptocurrency market. Instead, they create a plan, do their initial research, invest, then sit back and wait – only monitoring occasionally. As long as their coins don’t decrease in value to a certain level they have predetermined, they will leave their investments alone. This is a strategy for those with patience, are not aggressive and not looking for quick returns.
Why would a person want to use this long-term strategy in a quickly changing market like cryptocurrencies? The main advantage is that over the long term if they manage their portfolio well and keep a level head, there are greater opportunities for profit. The key is to set a balance. You shouldn’t completely ignore your portfolio; you need to periodically re-evaluate the performance and consider long-term market trends. But also, don’t get in the habit of constantly checking your progress. This market dives and soars drastically in sometimes short periods of time. You may become uneasy with the constant changes and sell at the wrong point; abandoning your long-term plan for short-term gains that are far less.
Active Trading Strategies
At this point, you may be forming an idea of whether you lean toward being an active trader or a passive one. Keep in mind; you don’t need to be one or the other. You may choose to invest in some coins for the long term and have a smaller portion to use in an active trading strategy. For active trading, there are typically four common types of strategies. Swing trading is short-term with a holding period of a few days to a few weeks. Day trading is an aggressive form of short-term trading and only should last the day. Nothing should be active overnight. Scalp trading is by far the shortest term trading style; you could possibly hold a coin for only a few seconds to a few minutes. Let’s go over some trading strategies for both active and passive traders, then you can decide.
This is the most well-known form of active trading and involves buying and selling crypto coins on the same day, never overnight. Decisions are usually based on technical analysis, not fundamental analysis which is what passive traders would look at first. These types of traders have the potential to make or lose coins quickly. They attempt to profit from the daily price changes of a specific coin they are trading in by making multiple trades throughout the day, usually in batches. Note, this is a strategy for those who have some experience in the market. You will need to devote almost fulltime hours to this task due to the time needed to research the factors that influence the market, perform the proper analysis in short periods of time and immediately be aware of any interruptions like power outages.
A swing trader takes advantage of price swings that are short-term but last a few days to a few weeks. Unlike day trading, you would hold your coins overnight during this time. When a swing trader can see a trend forming or breaking, they will set up their trades and get into position just before it is predicted to happen. Swing traders create a set of rules based on both forms of analysis – technical and fundamental. These rules are designed to help the trader better pinpoint when to buy and sell. Swing traders can work effectively in both upward and downward trending markets, but a sideways market is risky for them. This style doesn’t always require constant attention like a day trader would need to. So those individuals who are comfortable performing analysis, are good at spotting trends and have the part-time hours to devote to trading do well with this style.
Scalping is the fastest paced strategy of all active trading. It involves making hundreds of trades per day to take advantage of small price differences usually between the bid and ask prices. This works by buying at the bid price and selling at the asking price to receive the difference between the two price points. Scalpers ideally don’t want to stay in these positions long as it greatly increases their risk if they do. They also don’t try this strategy with large volumes or difffferences in price. They focus specifically on small moves with small volumes but more frequently. Using this strategy means that their profit per trade is small so they focus on more in demand coins that will trade more often than lesser known cryptocurrencies. This strategy is considered very risky because you are relying on winning a lot of trades that give you enough profit. Precision and constant attention are required for this trading strategy as only one or two wrong moves can wipe out all your profifit for the day.
Position trading is sometimes considered to be a passive buy and hold strategy and not part of active trading. However, there is a difference between the two. The typical buy and hold strategy only involves hold trades for very long periods of time and therefor profiting from the belief the market always rises. Position traders can use both long and short-term strategies. Position traders use longer-term charts with other analytic methods to identify trends in the market. Depending on the trend, this type of trade could last days, weeks and sometimes longer which is why it often gets confused as a passive trading strategy. These trend traders look for trend signals like higher highs and lower lows. Once a trend is found they will position themselves to jump on once the trend has established itself and when the trend ends they will exit. This way they benefit from both the up and downside of the trend movement. However, when the market is very volatile, as in the case with many of the altcoins, this style of trading is difficult to pull off, and profits are lower.
An Active Strategy to Avoid: The Pump and Dump
A ‘Pump and Dump’ is a scam strategy that is illegal in any market. However, a cryptocurrency market is especially vulnerable to them because it is hard to enforce the law on a decentralized network. A pump and dump scam require two groups of people. The scammers buy a large amount of a cheaper coin over a period than as a group, increases the price by promoting it. As excitement around the coin builds, the soon to be victims, buy this coin believing that an upward trend is developing. Trading volume increases and the value of that coin goes up. Once the coin reaches the point the scammers desire, they sell all their coins. Everyone else who sees this often panics and begins to sell, sending the coin crashing downwards. Often everyone else but the scammers lose.
How to Detect a Potential Pump and Dump
There are a few signs that a coin is going to be used in a pump and dump scheme. You may notice the price is falling and there will be little rises each time a scammer buys. They do this to load up on the cheap coin without anyone noticing. Once they have reached their desired amount of coins, the promoting beings. They will use several different accounts to do this, and there may be a large group of individuals involved. They will head over to forums and other public places within the cryptocurrency community and heavily talk up their coin. They continue to do this until there is enough momentum and people start buying. This feeds the lies the scammers are telling everyone and drives the price up. Once it is high enough they will sell small amounts of coins as fast as they can without impacting price. You will see a greater number of buy transactions than sell, but the sell transactions will be small and consistent. These are indications a pump and dump scam is happening.
Passive Trading Strategies
The Buy and Hold
A buy and hold strategy is the epitome of a passive trading strategy and involves holding cryptocurrencies for long periods of time. This is often why this is considered to be investing rather than trading. As the cryptocurrency market matures this could eventually mean holding for decades just like in traditional investing. This way the buy and hold investor can ride out the many rounds of market volatility which can be very severe with cryptocurrencies. You will rely heavily on fundamental analysis and on occasion, technical analysis to confirm your choices. There are a few steps involved in this strategy.
First, you need to determine your investment objectives, timeframe and risk tolerance. Ask yourself, are you saving for a big purchase? Will you need the money sooner rather than later? Perhaps you would like your crypto coins to be part of your retirement portfolio along with your other mainstream investments. Where you are at in your life plays a part in this as well. The younger you are, the greater risk you can tolerate, and you can focus on growth. If you are older, you will have less tolerance for risk and may want to focus on being able to draw coins to supplement your income.
Second, you need to choose your cryptocurrency mix. You will want to eventually not have all your money tied up in one type of cryptocurrency. Diversifying allows you to protect your overall portfolio. You may want to have a larger portion of your money in coins that have proven themselves such as Bitcoins, Ether, and Litecoin. Then have a smaller portion in younger coins that are doing well in the market. Finally, you may be interested in investing a very small amount in an ICO or newly released coin with no market history.
The final point is that you should invest regularly and remember to review your portfolio at least annually to rebalance if needed. As you gain experience and understand the market more, you can choose to invest additional money into cryptocurrencies to build your portfolio. You will be able to have bigger gains and therefore meet your investment goals within your timeline. Once a year, you will review your objections, the performance of your portfolio and adjust as needed depending on your life circumstances. You might even consider doing this on a semi-annual basis when you first start to ensure that you have made the right selections with your crypto coins.
Any trader, regardless of their skill level, is capable of losing all of their profits they have earned their entire trading career in just one or two bad trades. If you are considering using some of the active trading strategies we have reviewed in this eBook then understanding your options to minimize risk is critical.
Stop-Loss & Take-Profit
Using stop-loss and take-profit points are two ways to plan ahead in your cryptocurrency trading. These are the two best ways to remove emotion from active trading which is the main reason people lose out. They allow fear or overconfidence to rule their trading decisions. Fear will make you hold on to coins longer than you should, losing more than you needed to. Greed and overconfidence will make you hold on to coins trying to get more profit, which usually means you will only sell when the price begins to fall.
A stop-loss point is the price you are willing to sell at and take a loss on the trade. This could happen for many reasons, in the end, the coin didn’t perform as you hoped, and a stop-loss will prevent you from holding onto a bad coin. A take-profit point is the price you are willing to sell a coin and take a profit. This limits you from holding on too long as mentioned before.
Setting Stop-Loss Points
To set your stop-loss and take-profit points, you will need to use both technical and fundamental analysis. Moving averages which are covered in a later chapter are the most popular way to set these points since they are easy to calculate and widely used. You will apply them to your coins chart in a charting platform of your choice and use the key moving averages of 5, 9, 20, 50, 100 and 200-day averages. Then you will be able to see if your coin has reacted to any of these points as either a support or resistance level.
The Final Step: Calculating Expected Return
In order to use stop-loss and take-profit points, you will have to calculate the expected return. The formula used is: [(profitability of gain) x (take profit % gain)] + [(profitability of loss) x (stop loss % loss)]. This formula calculates the expected return for that particular coin. This formula is very important to use as it will help you think your trades through, allow you to compare coins and select that ones that make the most profit.
Short selling allows you to borrow a cryptocurrency from a person or organization and sell it at the current market prices. You receive money to then buy the cryptocurrency back at a later date. Bitcoins are the most common coin used for this type of activity. The trick here is that you need to buy the same currency back when it is lower than you purchased. This will allow you to repay what you borrowed and still have a profit. Let’s run through a simplified example. You borrow one bitcoin and sell it when the unit price is $3,000 on the market. You now have $3,000 in your wallet. You wait until the unit price dips to $2,000, buy the coin back that you owed, return the Bitcoin back to the borrower and you keep the profit of $1,000.
Understand the Risks
This method of trading sounds appealing and an easy way to recover losses you have already incurred or make large profits quickly. Which it can, however, it is considered a high-risk trading style. If you are new to trading, you may want to wait until you become more familiar with the cryptocurrency market before attempting this trading method. With normal trading, you only can lose what you put in, but in short selling, your losses can go beyond what you initially have put into the market. If you don’t read or time the market right, your coin might go up rather than go down when it is time for you to buy. Let’s use the previous example to illustrate this problem. As before you bought one bitcoin and sold it when it was $3,000. You received the $3,000 in your wallet. You wait for the price to go down but instead, it goes up to $4,000. If the borrower calls the loan now and you must invest another $1,000 in order to buy the coin to return to the borrower.
In short selling, the borrower can call the loan at any time, and they are required only to give you short notice. This means they may do this before the price drops! Make sure you read any regulations or guidelines for covering any coins you short sell. Only invest if you are very confident the prices will drop and if you have the money to cover any losses.
Still Interested in Short Selling?
If you are confident in your skills, then you can try short selling with Bitcoins. There are trading agencies and platforms that will sell Bitcoins from their own supply. CFD (Contract for Difference) trading platforms will allow short selling, Bitcoin exchanges like Kraken offer this option as well. Pick a borrower with a good reputation and manage your coins wel