What is Cryptocurrency Trading?
As we know, trading is an act of buying or selling an asset in anticipation of making profits from the transaction. In the case of trading cryptos, these instruments can be traded in two different ways - trading the actual cryptos or trading them in the form of CFDs. Just as with trading any CFD, cryptocurrency trading involves buying and holding when prices are rising and shorting when prices are falling. Another aspect of cryptocurrency trading involves buying and selling the actual cryptos through an exchange. Let's break these down.
Trading Cryptocurrencies as CFD
When trading cryptocurrencies as CFD, you do not own the actual cryptocurrency. The CFD trading is a derivative which allows you to speculate on whether the price of the underlying cryptocurrencies will go up or down. After conducting your analysis (which we will cover later on in this article) and you believe the value of the cryptocurrencies will rise, you buy the CFD, i.e. "go long". Similarly, if you believe that its value will drop, you sell the CFD, i.e. "short".
There are several online brokers offering cryptocurrencies CFD trading platforms. The main advantage of trading cryptocurrencies as CFD is the leverage provided by these brokers. In this scenario, you get to access larger trading volumes without having to pay for their full value. The profit you earn from leverage trading is based on the full size of your trade. Although trading with leverage magnifies your profit, the severity of your losses is also magnified.
Trading Cryptocurrencies via Exchanges
A cryptocurrencies exchange is a platform where you can buy and sell cryptocurrencies. These platforms can either be online or at physical locations like airports lounges. When you buy cryptocurrencies via an exchange, you own the actual cryptocurrencies. In this case, you pay the full value of the cryptocurrencies, unlike with CFD, where you use leverage. Similarly, when selling cryptocurrencies via an exchange, you sell the actual cryptocurrencies.
Cryptocurrencies brokers are online-based exchanges which buy and sell cryptocurrencies to traders. The prices set by brokers are a premium compared to the market prices to allow the brokers to turn a profit.
Cryptocurrencies exchanges are where traders buy and sell cryptocurrencies according to the prevailing market prices. These exchanges deal with a variety of cryptocurrencies and charge a fee per trade.
Direct cryptocurrencies trading platforms allow for peer to peer trading. In this case, the price of the cryptocurrencies is not fixed or market-based. Individual traders get to set their prices. Buyers and sellers denote the prices they are willing to transact, and the platform matches the buyers and sellers whose quotations are close.
Cryptocurrencies funds allow regular traders to invest in a cryptocurrencies asset that is professionally managed. These funds are established by pooling select cryptocurrencies into one fund. Cryptocurrency funds allow you to trade in multiple cryptocurrencies that are professionally managed.
What to Know Before Trading Cryptocurrencies?
Unlike other financial assets, cryptocurrencies are relatively new and can be confusing for most new traders. Here are some of the basics you should know before you start trading cryptocurrencies.
The market is highly volatile
Witnessing market swings of up to 40% within a few days is not uncommon with cryptocurrencies. Therefore, when you start trading cryptocurrencies, whether CFD or via an exchange, you should be prepared to encounter these erratic volatilities. In any trading, volatility can help you earn massive profits or wipe out your value completely.
Therefore, your trading strategy should be able to account for the high volatility experienced in trading cryptocurrencies. You should ensure you have proper risk management measures in place to avoid the downside of volatility.
Cryptocurrencies are decentralised
It is important to note that cryptocurrencies are not fiat currencies. They are not backed nor controlled by any government. Therefore, when selecting a cryptocurrency to trade, ensure that it is decentralised and is only validated by a peer to peer transaction. This feature is essential in ensuring the security of the cryptocurrencies by reducing the risks of tampering.
Check the market capitalisation of the cryptocurrencies
The best cryptocurrencies to trade are those with higher market capitalisation. Since cryptocurrencies are relatively new financial assets, they are not as liquid compared to other financial assets like forex. Therefore, the higher the market capitalisation of a cryptocurrency, the the higher its liquidity. Higher market capitalisation for cryptocurrencies is preferred because of the ease to complete transactions.
The market capitalisation and the level of liquidity of a cryptocurrency should help determine the trading strategies you chose to implement.
Trading with leverage increases your risk
When trading a cryptocurrencies CFD, your broker gives you leverage for trading. While there is an upside of trading cryptocurrencies with leverage, it significantly increases the risk of your account balance being wiped out in the increasingly volatile market. When selecting your trading strategy, make sure to incorporate risk management measures to limit your downside.
Understanding the different order types
Due to the high volatility and low liquidity in the cryptocurrencies market, understanding the order types can help insulate you from the risk of slippage and to also benefit from it. The order types for cryptocurrencies trading are the same as those in the forex market. Different cryptocurrency trading strategies can be used with different order types. More so, using stop loss, take profit and trailing stop levels will help minimise your losses and maximise your profitability.
What is a Cryptocurrency Trading Strategy?
Whether you are trading cryptocurrencies as CFD or via an exchange, your primary goal is to make a profit. Therefore, it is prudent to conduct market analysis and have a plan of when to buy or sell cryptocurrencies. Your market analysis and the trading plan you create make up the cryptocurrency trading strategy.
The strategy you select to incorporate in your trading should match your trading style. Here are some of the reasons why you need a trading strategy when trading cryptocurrencies.
Avoid Fear of Missing Out
Since cryptocurrencies are relatively new, there is a lot of buzz surrounding them. This hype has been exaggerated by the extreme volatility that accompanies cryptocurrencies trading. Having proper trading ensures that you do not fall into the crowd mentality and end up buying cryptocurrencies when the prices are high only to lose your investment when the prices fall. Your trading strategy will ensure that you enter and exit a trade based on your analysis and not the market hype.
Determine the duration of your trading
The trading strategy you choose will help inform whether you are trading cryptocurrencies for a short term or long term. Short term traders in cryptocurrencies tend to prefer trading them as CFD to maximise profits by using leverage. The trading strategy will ensure that for long term traders trading on exchanges incorporate fundamental analysis. Conducting fundamental analysis of cryptocurrencies will help you determine the intrinsic value to establish whether they are over or undervalued.
Timing of entry and exit of a trade
A trading strategy will help you identify when is the best time to open a position or buy a cryptocurrency. The techniques you select for your market analysis will also help you to identify the optimal levels of exiting your open positions to ensure that you maximise your profits or minimise the losses if the market goes against you.
Furthermore, the trading strategy will enable you to select the most appropriate cryptocurrencies trading order types. One of the signature traits of cryptocurrencies is their market volatilities. Therefore, market orders might sometimes be susceptible to price slippage and may not be practical all the time. Therefore, it is vital to understand how cryptocurrency pending orders work. This knowledge will ensure that you take full advantage of the frequent volatility observed in cryptocurrencies. Furthermore, your trading strategy will help you to minimise the downside risk of volatility.
Selecting the best cryptocurrencies to trade
Although cryptocurrencies are relatively new, there are over 1700 cryptocurrencies available in the market. Having a trading strategy will help you identify which cryptocurrencies you want to trade hence helping you to diversify your portfolio. With a trading strategy, you get to select multiple cryptocurrencies that are suitable for your trading goals. Reading through the whitepaper will give you the bigger picture of various cryptocurrencies and help you to select the ones that fit your portfolio. Furthermore, this will also help you weed out potential scamming cryptocurrencies.
Consistency in trading and profitability
Having a trading strategy encourages self-discipline. Being able to stick to your strategy will help to keep your emotions in check even when markets are volatile. In the volatile cryptocurrency markets, a trading strategy gives you a sense of calmness because you are aware that even if markets are going against you, you will not lose more than what you are willing to lose. In a scenario where you do not have a trading strategy, panicking when markets are choppy can prevent you from benefiting from such volatility.
Furthermore, adhering to a cryptocurrencies trading strategy will encourage you to conduct backtests to ensure that your preferred strategy would have worked in past trades. The backtesting ensures that in the future, you will have consistency in your trading schedule and profit-taking.
The List of Strategies
Moving on to specific strategies, we will be outlining 10 different strategies that have proved successful:
Part 1 Basic
- 1. Using the Stochastic Oscillator To Identify Overbought & Oversold Signals
- 2. The Relative Strength Index Indicator Strategy
- 3. Trading Cryptos Using Moving Averages
Part 2 Intermediate
- 4. Using Bollinger Bands to Generate Reliable Trading Signals
- 5. Generating Profits by Using the TRIX Indicator While Trading Cryptos
- 6. Pattern Trading - Identifying Buy/Sell Signals Using the Engulfing Pattern!
Part 3 Advanced
- 7. The Bladerunner Crypto Trading Strategy
- 8. The Rejection Strategy
- 9. The False-Breakout Price Action Strategy
- 10. Trading Cryptos Using the Flag Pattern
1. Using the Stochastic Oscillator To Identify Overbought & Oversold Signals
Most retail traders are accustomed to trading the traditional financial markets such as Stocks, Forex, Bonds, and the derivatives of these financial instruments. But in recent times, trading of cryptocurrencies has become one of the most common practices among these traders. The reason for this could be the opportunity to make quick profits by taking advantage of the high volatility nature of cryptos. However, it will be impossible for you to make consistent profits without proper fundamental and technical analysis.
This particular strategy will guide you on how to apply the use of a Stochastic oscillator and identify the overbought and oversold areas when trading the crypto market.
Stochastic is one of the most popular indicators used by day traders. It consists of two lines; the first one is K% which is the indicator line, and the D% is the signal line. The fundamental purpose of this indicator is to identify the overbought and oversold signals in the market. The Stochastic oscillator typically follows the speed and momentum of the change in the price of any given crypto.
Stochastic oscillates between the 0 and 100 level. When it reaches the 80 levels, it indicates that the asset is overbought and we can expect a downside reversal. Likewise, when it reaches level 20, it indicates that the asset is oversold, and the trend is about to turn to buy-side. This indicator also helps in identifying the bullish and bearish divergence. Divergence occurs when the indicator is moving in one direction, while the price action moves in another. We can expect a reversal when we see divergence on the price chart.
Picking the Currency
The best way of selecting cryptocurrency is by checking their volatility and liquidity. There are over 3,000 cryptocurrencies available in the market, but most traders prefer a few that have higher liquidity and moderate volatility. When trading, you can pair cryptocurrencies with each other, or you can pair them with fiat currencies such as USD.
Overbought and Oversold Signals
The below image represents the buying entry we took in the BTC/USD pair. The pair was in an overall uptrend, and during the pullback, it turned sideways for a long time. When the Stochastic oscillator goes into the oversold area, it was a sign for us to go long in this one (as shown by the green arrows).
The below image represents a sell trade in the same BTC/USD crypto-fiat pair. The Stochastic indicator was at the overbought area, which indicates a clear Sell signal shown in the screengrab below.
When the price action and the indicator simultaneously go down or up, it means that both of them are moving together and soon we can expect the breakout. As the breakout happens, we choose to go long in this by placing the stops just below our entry. Once the trendline has been breached, we notice that the price continues to rise. If the price action holds above the trend line after the breakout, it confirms that the breakout is real.
The ‘Last’ Stochastic Strategy
The Last Stochastic trading strategy is the latest one in the industry, and it performs quite well. The buy signal is generated when the K% line goes above the 50 level, which indicates the trend is strengthening.
- Find out the break of the most recent higher high.
- The stochastic indicator must go above the 50 levels.
- Hit Buy.
- Put the stop loss below the entry.
The image below represents our trade in the LTC/USD pair. We went long (buy) once the pair fulfilled the above conditions.
Stochastic Swing Rejection
The image below represents the buying trade in the XRP/USD pair. We went long when the conditions were fulfilled. The pair traded sideways for a while, then went higher, trading at new higher highs. In this types of trades always place the stop loss just below the entry as the pair establishes new higher highs.
- Stochastic approached the oversold territory.
- Stochastic crosses above the 40 level.
- The indicator develops another dip without going into the oversold territory.
- Stochastic breaks its most recent higher high.
- This indicator provides a lot of trading signals. Therefore, there is no problem of signal scarcity.
- Stochastic is available on most of the trading terminals, and it is a very simple trading indicator to understand and use.
- It offers reliable trading opportunities in the ranging markets.
- One significant problem with the stochastic indicator is that it sometimes gives false trading signals in the trending market. It is because when the prices rise or sharply decline, this indicator keeps moving at the overbought or oversold area.
- Another problem with this indicator is related to divergence. It indicates that the market is about to reverse. The issue here is that no one knows when the trend will reverse, so it is hard to rely on the divergence signals.
The only difference between the traditional and digital asset market is the volatility factor. Since the stochastic oscillator follows the price momentum, it is useful in giving you the best entry and exit signals. It is, however, advisable to use other indicators along with the stochastic to confirm these signals.
2. The Relative Strength Index Indicator Strategy
Cryptocurrency day traders use the trading charts to interpret the short-term movements of the price action. This comes under technical analysis which is a simple and most straight forward tool which helps us in gaining insights on the upcoming movements. The technical analysis focuses on the internal market events, which involves studying the charts, checking the news, and analysing the past market data.
For day traders, the technical analysis offers the best opportunity to capitalise on short term volatility experience in cryptocurrencies. Here, we do not focus much on the fundamentals; instead, we go on technical aspects. Indicators are an excellent tool to analyse and predict market trends. On the same note, here is a crypto trading strategy based on the RSI indicator.
The RSI Oscillator
RSI stands for Relative Strength Index. The RSI indicator is a momentum indicator that measures the magnitude of price changes to find the overbought and oversold trading opportunities. The indicator consists of a single line, which oscillates between the 0 level and the 100 level. When the indicator approaches the 70-level, it means the market is overbought, which could lead to a reversal. Conversely, when it reaches the 30-level, it means the market is oversold, and one can expect a reversal to the north. The 50 level represents the centre level of the indicator, and when the price action moves above and below this line according to the trend, it simply means the ongoing trend is strong.
1. Overbought and Oversold levels
The image below indicates a buying signal on XRP/USD. The pair was in an overall uptrend, and during the pullback, the indicator approached the oversold area, indicating a long signal. In hindsight, the pair continued trending upwards after opening the long position.
The image below represents a sell entry on the same asset. Initially, the pair was in a downtrend. During the pullback phase, when it approached the resistance area, it failed to go higher. Besides, the RSI indicator also reversed around the overbought area. This reversal indicated a signal to go short.
2. RSI Swing Rejection
- Wait for the RSI to approach the oversold territory.
- The RSI should cross above the 30-level.
- RSI registers another dip without going below into the oversold territory.
- RSI breaks its most recent high.
As you can see in the image below, the indicator first goes down to the oversold area (as represented by (1)). The second point (2) indicates the immediate rejection from the buyers. At the third point (3), sellers again tried to go lower, but the buyers brought the price back, as shown by (4). So, the fourth point (4) is our entry showing that the buyers are flocking the market as the pair formed new higher highs.
3. RSI Support and Resistance
The image below represents a sell example on XRP/USD. You can notice that the pair had been trading in a steady uptrend. When the RSI indicator approached the overbought region, the market price and the indicator broke the trend line, signalling to go short.
4. RSI Double Bottom
Considering the image below, you can see that the RSI indicator developed two double-bottoms. The two bottoms indicate that the buyers prevailed in the market since sellers failed to take the price action any lower. Therefore, there are net buyers in the market. We enter the market (for a buy) at the second bottom and put the stop loss just below our entry.
- The RSI indicator is easy to analyse and use.
- It works best in non-trending markets.
- It is used to find out the loss of momentum from the market. The indicator trends sideways when momentum dissipates.
- Sometimes it is hard to trade the RSI in the trending market. In the trending conditions, it will give you many reversal signs, but none of them might work.
- Fake divergence is a common occurrence in trending markets. Keep in mind; the divergence works in the choppy market conditions, not in trending markets.
RSI is a momentum indicator used to find out when the momentum is coming to an end. It is also used for finding potential opportunities at oversold and overbought situations. By following the above strategies, you can quickly capitalise on the volatility in the crypto market. The RSI indicator will help you identify trades which have the potential to go for new higher highs or lower lows. Ensure that you have 'stop-loss' and 'take profit' levels set to protect yourself from the volatile crypto market.
3. Trading Cryptos Using Moving Averages
As with any other type of tradable financial asset, conducting a thorough technical and fundamental analysis will increase your chances of making profits with cryptocurrencies. Before trading cryptocurrencies, you need to understand the difference between these two concepts. If you are an intraday trader, then the technical analysis is all that you need to trade the market, and if you are a swing trader or investor, then one must focus on the fundamentals as well. Firstly, check the cryptocurrencies news then get into applying the technical tools to trade the market.
Moving Average (MA)
The moving average is the most straightforward technical analysis tool which used to determine the trend of the asset. The indicator is also useful to find the best support and resistance levels. It tends to smooth the price data to form a trend following indicator. Therefore, moving averages do not predict the trend; instead, they define the current trend. The indicator uses the past price, which makes it a lagging indicator. There are infinite numbers of averages that exist, and the longer the number of averages you use, the more significant the lag you will witness.
The 10-period or 20-period MA will give you a few signals in a day whereas the 200-period MA will generate a couple of signals in a month. There is no fixed timeframe to use with any number of MA. Thus, the only way you can find which average works on which timeframe is solely through a trial and error approach.
Simple Moving Average Trading Strategy
The simple moving average trading strategy is straightforward to interpret. Typically, intraday traders use this strategy. It is an ideal indicator if you intend to make multiple trades in one day.
The idea of this strategy is to wait for the MA to go below the current price, and then open a long position. When the current price goes above the MA, this is a signal that the market is about to start trending upwards.
As you can see in the below image when the moving average shifted from selling to buying territory, we can prepare to go long on the pair.
We place the stop-loss order just below our entry point. This positioning is because the MA also works to identify dynamic support to the price action. And we exit our position when the MA turns into sell territory from the buying territory.
The below chart shows a short trade we took using the simple MA. When the price of the pair crosses the simple MA from above, it indicates that there are net sellers in the market. The presence of net sellers in the market is an indication that the pair will start trending downwards. Therefore, the sell signal presents when the current price trends below the simple MA.
We took the sell entry around 285.4. After a couple of hours, we witnessed the pair forming new lower lows. The price action dropped from the 285 to 200 area.
Moving Average Support and Resistance Strategy
After establishing your ideal levels and you are comfortably trading using the simple MA strategy, you should then try using the MA to establish support and resistance levels.
This strategy is similar to the previous one. The only difference is we are going to use the support level to make an entry in the market. To go long in the market, we wait for when the price action changes from a downtrend to the buying territory to establish the entry point. If the pair trades in an uptrend then retracts and touches the MA, you should scale in your trade. You can continue with this process repeatedly.
As shown below, we took four buy entries – at 44, 45, 47, and 50. In this trade, we significantly increased our position systematically using the above strategy. We exited all open positions when the MA went into the 'sell' territory.
Similar to the above buy example, let us look at a sell example.
When the MA moves above the price, it means the trend has shifted into a downtrend. Our first entry point for shorting the pair is when the current price touches the MA. Our first sell trade came around 295, the second one was at 290, and the third trade was around the 275 area. To ensure that we did not lose the profits we had made so far, we set a trailing stop-loss order just above every position. We closed all our open positions when the MA shifted into the buying territory.
Double Moving Average Trading Strategy
The image below represents a buy example on the BCH/USD pair.
The pair was in an overall uptrend. Let's look at how you can use the double MA strategy. First, you need to set different parameters for two separate MA. For our trade with the BCH/USD pair, we waited for the pullback phase when the indicators were below the price action. When the MA with the lower parameter crosses above the one with a higher parameter, it is the signal to go long.
As you will notice from the screengrab below, the moment we opened our position, the price of the pair continued in an uptrend forming higher highs.
The image below represents the sell trade in the BCH/USD pair. As you can see, when both of the indicators go above the price action, it means there are net sellers in the market. The sell signal is formed when the lower parameter MA crosses below, the higher parameter MA. As you can see, the price continued to drop after the sell signal formed.
Breakout Trading Strategy Using the 200 Period Moving Average
The 200-day moving average is used to establish a long-term trend in the market. When the price action goes below the moving average, it is a clear sign that the higher time frames and all the lower time frames momentum shifted from the selling to buying side.
In the image below, when the MA goes below the price action means the uptrend has begun, and by using any other technical tool, we can easily make buy trades. When the MA goes below the price action, it means the momentum shift has happened, and the breakout of the most recent higher high was a sign to go long.
- It gives the one smoothed line which is less prone to whipsaws up and down in response to slight market moves.
- Sometimes in a trending market, it is hard to find the support area to take an entry. And the MA solves the problem by giving the dynamic support and resistance levels.
- The MA being a lagging indicator, it takes time to generate trading signals. As a result, traders might end up entering late.
- The indicator can be spread out on any timeframe, which could be problematic because the trend of the lower time frame can be different than the higher timeframe. For example; what appears to be a downtrend by using the 40-period moving average could be an opposite move on the higher timeframe in an uptrend that reflected the 200 periods MA.
The Moving average is a popular indicator which simplifies the price data by smoothing it out, and it gives the straight line that indicates the direction of the trend. Furthermore, one single line can be used for so many different purposes. The shorter period average responds quickly than the long period average, which could be used to show the magnitude of a trend. For example, if you are using the 20-period MA on digital assets, then you can expect a few entry signals. Conversely, if you are using the higher timeframe MA, then you can expect fewer entry signals.
Thats it for the basic strategies, now lets move on to PART 2 to look at more complex intermediate strategies for trading crypto