Cryptocurrencies are digital currencies that any central authority or government does not back. They are traded on decentralized markets, i.e., across a network of computers called a blockchain. This decentralization means the instrument is free from many political and economic concerns affecting traditional currencies.
In recent years, the adoption of cryptocurrency in Kenya has been steadily increasing, with more and more individuals and businesses turning to digital currencies as a viable alternative to traditional banking systems. However, the cryptocurrency movement is still subject to external factors such as supply and demand, key events, etc. It is essential to focus on portfolio diversification to hedge against risks and take advantage of positive movements in the market. Doing so allows you to avoid the problems occurred due to unpredictable volatility and volume.
When investing in cryptocurrency, deciding what trading strategy to use is important. Several investment game plans are available in the crypto sector, like other financial instruments. This article will delve into all the major crypto trading strategies you can use to improve your trading.
Dollar Cost Averaging DCA
Dollar cost averaging (DCA) is a crypto trading strategy suitable for beginners and experts. It involves investing smaller amounts of money at regular intervals rather than all at once. This helps to reduce the impact of market volatility and can result in a higher return on investment. For example, if you have $1000 to invest in bitcoin over ten months, you could divide this amount into monthly investments of $100.
Image 1. The green arrows indicate the possible points where a trader would have bought bitcoin in successive intervals. As the market returns to its original entry point, the overall loss becomes zero for the initial buy. The rest of the entries are in profit.
Scalping
Scalping involves using real-time technical analysis and opening positions every 5-10 minutes. The M5 timeframe is the most preferred for analysis.
There are two approaches to crypto scalp trading: manual and automated. Manual trading requires constant market monitoring, while automated trading uses a program to execute trades. In intuitive scalping, the trader relies on their experience, analytical abilities, and understanding of the market to make quick decisions.
Crypto scalpers utilize various scalp trading techniques to generate profits, such as leverage, range trading, and bid-ask spread.
- Leverage enables traders to increase their margin by contributing a certain amount from their pockets.
- Range trading involves monitoring trades that close within specific price ranges, and some traders utilize stop-limit orders to execute trades at future market values.
- Bid-ask spread involves benefiting from the price difference between the highest bid and lowest ask.
Arbitrage
Crypto arbitrageurs can make profits through different methods. One is cross-exchange arbitrage, where they purchase cryptocurrency on one exchange and sell it on another. Another method is spatial arbitrage, where they take advantage of the difference in demand and supply of digital assets in different regions.
Triangular arbitrage involves moving funds between cryptocurrencies on a single exchange to benefit from price discrepancies. Crypto arbitrage trading involves relatively less risk than other trading strategies because it does not necessarily rely on predicting market trends. The trades in arbitrage typically only last a few minutes, which means that the potential for exposure to trading risk is much lower.
Moving Average
A moving average calculates a single trend line by combining the price points of a financial instrument over a specific timeline. This line helps identify the current trend’s direction and support and resistance levels. To use crossovers, you wait for the price to cross above or below the moving average to signal a potential change in trend. Another strategy is to use two moving averages, one short-term and one long-term, to identify buy or sell signals when they cross.
Image 2. The cross-over between the moving average 50 and 200 is well known for predicting long-term trend changes. Here the 50 MA crosses the 200 from the bottom, showing a move to the uptrend. Traders should be careful while trading moving averages as they are a lagging indicator.
HFT
High-Frequency Trading (HFT) is a strategy advanced traders use in the cryptocurrency market. It involves the use of algorithms and trading bots to buy and sell crypto assets over a short time quickly. This is done by constantly monitoring and analyzing cryptocurrencies across multiple exchanges and taking advantage of price changes that occur in seconds or milliseconds. The development of these bots requires a strong understanding of computer science, mathematics, and complex market concepts, making it challenging for beginners.
Summing up
In conclusion, several crypto trading strategies are available, each with its benefits and risks. Evaluating your trading goals and risk tolerance before choosing a trading strategy is essential. Beginners may find the Dollar Cost Averaging strategy suitable, while advanced traders may prefer HFT or Scalping. The Moving Average and Arbitrage strategies are also effective for traders looking to exploit market trends and price discrepancies.
It is crucial to remember that trading in the cryptocurrency market involves a high level of risk due to the market’s volatility and unpredictability. Therefore, it is essential to have a well-diversified portfolio and a risk management plan in place. By implementing a suitable trading strategy and managing risk, traders can increase their chances of success in cryptocurrency.
