Erik Weijers, 6 months ago

Four trading strategies for crypto

The difference between investing and trading exists in crypto just as much as it does in traditional markets. Although the jargon is sometimes different, the bottom line is the same. Do you want to time the market or rather not worry about the short-term price? But if you want to trade, on what timeframe?

Imagine a trainload of teenage girls on their way to their favorite K-pop band's concert. Do that times ten and you get a sense of the level of excitement and hysteria of crypto markets. Emotions run high. Every tweet you read, every TikTokker telling you to buy or sell now, your mother who always thought it was a bad idea.... From all sides you are bombarded with contradictory signals. How do you stay levelheaded? With a good trading strategy.

By (trying to) sticking to a strategy you prevent your own emotions or those of others from getting the better of you and you making the wrong decisions. Following your emotions often means following the crowd and that will not bring you profits. You'll most likely be too late.

Roughly speaking there are four strategies, suitable for different time scales.

1. Day trading

Day trading means that traders open (buy) and close (sell) positions on the same day. It is a short-term strategy that allows you to make profits from small price fluctuations.

Actually, the term is not quite appropriate for the crypto markets: after all, they are open 24 hours a day. But the timeframe is clear: short term. It can be a stressful activity and really only makes sense if you use data that supports your buying and selling moments. If you don't, then you are gambling.

Day traders therefore use so-called technical analysis to determine whether a buying or selling moment is coming. An example is moving averages (trend lines) on multiple time frames to determine if the price is near a local top or bottom. A trader sometimes uses a few indicators combined. If they give off the same "signal," that may be the time to hit that buy or sell button. Of course, these are only probabilities and not certainties!

A few indicators are:

  • The Relative Strength Index (RSI): measures the speed of price change. For example, after a rapid decline the price is 'oversold' which can be an entry point for traders.
  • The Moving Average Convergence/Divergence (MACD): two trend lines of different moving averages. If they cross, these are buy or sell signals.

2. Swing trading

Swing trading is a type of trading strategy for periods longer than a day but usually no longer than a few weeks or a month. It is less hectic than day trading: you can make informed decisions.

When you trade on this time scale, you first of all look at the price charts and corresponding technical analysis of these charts. But at the same time you also look at the underlying causes of price movements: the so-called fundamental analysis.

What is fundamental analysis? Suppose Bitcoin looks "technically good" and you hear a lot of news coming in about adoption by companies and banks that want to put BTC on their balance sheets. That's a macroeconomic signal that you can factor into your decision to buy.

On-chain analysis
In addition, in crypto you have a kind of fundamental analysis that you don't have in traditional markets, namely on-chain analysis. This involves data like:

  • How many active addresses are there?
  • Have hodlers bought/sold lately or just the short-term traders?
  • What are the Bitcoin miners doing?
  • How much Ether is locked up in defi contracts?

These are all factors that are behind price movements and are therefore 'fundamental'. They may not be visible in the price yet but can become so.

3. Trend trading

In which direction do you expect the price to move in the coming months or years? To a great extent you base that on the fundamental analysis mentioned above. The movements of the daily or weekly price will usually not tell you much about that. Is your buying based on trend analysis? Then you're not going to sell the day after. Think rather months later.

Some fundamentals to take into account:

  • How do governments view crypto? For example, is there a ban coming in certain countries while other countries are actually buying Bitcoin for the treasury?
  • What is the trendline of adoption of certain coins in certain countries and/or strata of the population?

In addition to these fundamental trends, in crypto you can also do technical analysis over longer time periods. The price movement of Bitcoin goes in cycles and traditionally altcoins move along in a certain pattern. Of course, there is no guarantee that those price patterns are going to repeat, but it is a factor to consider in your decision. Added to this are long-term macroeconomic trends. Think about interest rate policies of central banks. How hard or soft is the money press going brrr? Very important, also (especially) for the crypto markets.

4. Long term: buy and hold

This is not really a trading strategy but more a matter of passive investing. And that's fine. It is easier for many people to make money in the long run by investing than by trading. Many people have other things to do than to look at the prices and make decisions on a daily basis. For that reason, too, they choose to buy and hold - regardless of what the price does in a given week or month. For example, their buying decision is based on a certain view of the future of money. For example, you believe that there is a greater than 50% chance that Bitcoin will be used a lot more in five years than it is today. That may justify a one-time buying decision, where you don't make the trade-off to sell at every price dip. Among bitcoiners, this strategy has acquired the pet name "hodling". The acronym Hold On for Dear Life is appropriate in bear markets. Despite your conviction, it's not always easy to watch prices fall and still not sell.

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