Fiat-to-Crypto Trading Strategies and How to Use Them
With crypto markets open 24/7, automated trading strategies and algo trading, or algorithmic trading, has been gaining popularity with traders. Find out how you can trade like a pro on Binance.
Main Takeaway
Many experienced traders look for ways to simplify their trading experience, relying on trading strategies that automatically trade cryptocurrency on their behalf.
Simple automated trading strategies like dollar cost averaging (DCA) or understanding moving averages (MA) and relative strength index (RSI) can help users make smarter trading decisions.
More advanced strategies like algo trading can be complex, requiring in-depth knowledge about cryptocurrencies and trading.
Learn how you can incorporate automation into your trading even if you are just starting out in trading cryptocurrencies.
When starting your crypto trading journey, you will likely encounter different types of traders and trading strategies. Trading strategies may be influenced by a variety of factors, and seasoned traders are usually aware of which strategy is the best for them. These factors include one’s time horizon, financial goals, time commitments, risk appetite, and so on. Some people find satisfaction in trading, while others prefer to adopt crypto trading as a passive income stream. However, most beginners will want to start by buying some crypto using their preferred fiat, or local currencies. Common ways to buy crypto on Binance include using a credit/debit card, bank deposit, or transfer. The next step is to develop a trading strategy to help improve efficiency and profitability.
One class of trading strategies have seen popularity in recent years: automated trading. Automated trading calls for the help of a system, software or method to automatically execute trade entries and exits without repetitive manual involvement from the user. This ranges from basic techniques to automate trading, to technical solutions, including the use of algo trading software that trades on behalf of users. Let’s start with a basic trading strategy you can use to trade automatically.
DCA as an Automated Trading Strategy for Beginners
Dollar Cost Averaging (DCA) is beginner-friendly and involves setting a simple buy execution for the system or software. DCA is a popular long-term trading strategy where users divide their cryptocurrency purchases into different time periods.
1. Advantages of the DCA Strategy
Because DCA can be a fully automated process, users enjoy advantages including convenience, speed, and removing emotion from trading. In addition, DCA can help to reduce the impact of market volatility, lower risk of purchasing at a bad timing, and allow users to benefit from long-term appreciation. Here’s how it works.
Alex intends to invest $5000 in bitcoin. Instead of buying $5000 of bitcoin at once, he uses the DCA strategy, and allocates smaller chunks of his investment money into 50 lots of $100. He decides to spread out his purchase and buys $100 worth of bitcoin weekly for 50 weeks. For convenience, he automates this weekly purchase with the help of a system. This way, the risk of buying bitcoin when prices are not favorable will be spread out throughout the 50 weeks. The DCA strategy is thus suitable for users with a lower risk tolerance or just starting to buy crypto and are not experienced enough to time the market well for purchases.
2. Employing DCA Strategy on Binance
Binance enables users to program DCA purchases with its Recurring Buy function on both the Binance app and website. This feature enables users to make scheduled cryptocurrency purchases on a weekly, bi-weekly, or monthly basis. For the uninitiated, there is also a step-by-step guide for beginners that explains the Recurring Buy in more detail.
For more advanced users looking to further automate their trading strategy, algo trading may be a strategy worth looking into.
Three Benefits of Algo Trading
Automating processes allows human intervention to be minimized, and algo trading is no exception. Here are some benefits of automating the trading process.
1. Convenience
For traders with little time to spare, but want to trade long term, you can do so with minimal human intervention by using algo trading. Once trading instructions are set up, the system executes trades as soon as an opportunity, defined by the trading parameters, arises. This also means that trading can be done round the clock, even when you are fast asleep. Algo trading thus takes away the cumbersome aspect of monitoring the markets 24/7, and wasting time manually keying in order entries.
2. Removing Emotion from Trading
If you have heard of the term ‘panic selling’, you would be aware that human emotions can affect trades. Trading with emotions like stress and greed can cloud the decision-making process, resulting in reckless selling in market downturns. Algo trading allows emotions to be taken away, minimizing deviation to your initial trading plan.
Because algo trading enables the execution of trades automatically, there is little room for under or over-thinking before a trade is executed. Once the defined prerequisites have been met, the trades will be executed, regardless of how you feel at that moment. Removing the emotional aspect of trading thus enforces trading discipline even in volatile market conditions, preventing panic selling and other irrational decisions.
3. Speed and Accuracy
With algo trading comes the ability to overcome natural inefficiencies like manual analysis and order execution. By automating order entries and, to a certain extent, conducting analyses of the market, traders can use algorithms to scan multiple indicators and execute trades at a rapid pace. As a result, it allows a frequency of trading that human traders cannot match. And since instructions are given beforehand, with the right parameters, a computerized algo trading software can respond far more quickly to changes in the market than its human counterpart. In addition, human errors like accidentally keying the wrong price or quantity of cryptocurrency will also be removed. In a space where market conditions are volatile, speed and accuracy in trading can provide you with a better position to take advantage of opportunities.
Three Drawbacks to Algo Trading
While algo trading provides several advantages like executing rational trading decisions and increased frequency of trading, there are also drawbacks that you should consider.
1. Algo Trading Software Errors
With so many different types of algo trading strategies and softwares available, it may be possible to incorporate one that is faulty or erroneous. Furthermore, trading algorithms may have a short lifespan and work only in specific market conditions, and may backfire as the market changes. Since algo programs are developed and trained by human traders, such softwares may not work in the real world after continuously being tested with the specific market conditions or data it was developed with. As algorithms are programmed to execute trades only in predetermined conditions, they are not able to switch trading strategies when the need arises.
2. Regular Monitoring Required
Due to the possibility of errors and failure as mentioned above, algo trading still requires regular monitoring to ensure that trading goes smoothly. In addition, the more complex the algo trading strategy is, the more likely it is prone to over-optimization. This is when an algorithm’s performance is reduced in a bid to include more parameters to enhance its sensitivity or accuracy. Because it is possible for algo trading software to execute trades that may not be profitable, traders will still have to constantly monitor the trades, even if they are not manually analyzing or executing the trades themselves.
3. Not Beginner-Friendly
Although algo trading is an automated process, it often requires the user to decide on a trading strategy, acquire reliable software, and monitor the execution and outcome of the trades. Therefore, algo trading demands a level of trading and cryptocurrency knowledge, and people who are still getting a grasp of crypto trading may find it difficult at the start. Algo trading often follows trends in technical indicators, so a beginner who does not have knowledge in technical analysis may find it hard to monitor the software. For instance, widely-used algo trading strategies include weighted average price strategy, as well as the momentum and trend based strategy, which involve knowledge of technical indicators like Moving Averages.
Two Common Trading Strategies for Algo Trading
While instructions for DCA may be simple, algo trading often involves deeper knowledge. If you’re exploring algo trading, you can start by learning more about two trading strategies commonly used in algo trading — Moving Averages and RSI lines.
1. Understanding Moving Averages for Algo Trading
Moving Averages is an indicator that is also commonly known as the golden cross or death cross trading strategy. This strategy uses two moving averages (MAs). MAs are chart indicator lines that represent the mean average price of an asset over a specified period of time. Using the Moving Averages strategy, users look at the crossover between the 50MA (average price of past 50 days) and 200MA (average price of past 200 days) over long time frame charts like the daily or weekly charts. The two crossover events are the golden cross / convergence, when 50MA crosses above the 200MA, and the death cross / divergence, when 50MA crosses below the 200MA. Convergence signals a short-term momentum that is exceeding the long-term momentum. Some traders will interpret this as a buy signal. In contrast, divergence signals a short-term momentum that is falling below the long-term momentum. Some traders will interpret that as a sell signal.
2. Understanding RSI for Algo Trading
Relative Strength Index (RSI) is a chart line measuring momentum by calculating the average number of gains and losses over a 14-day period. This can be used to highlight when an asset is overbought or oversold. When an asset is overbought, it’s expected that the market will correct itself and price will move in the opposite direction in the near future. This is known as a trend reversal.
Experienced traders use the RSI to time trend reversals before they happen. The RSI line usually moves together with price. However, when the RSI moves against price, it signals an early stage momentum of reversal.
The RSI line ranges between 0 to 100. A channel with a range between 30 to 70 is most commonly used as a baseline. When the indicator line breaks out of the channel above 70, the asset is considered overbought. When the indicator line falls below 30, the asset is considered oversold. The best time frames to look for divergence are typically the four-hour or daily window, as these periods tend to show stronger shifts in the mid-to-long-term trend.
3. Customizing MAs and RSIs on Binance
To customize MA lines, follow these steps:
Step 1: Head to Binance Trade page (e.g. BNB/BTC trade)
Step 2: Click on the [Settings] icon next to the MA, as seen below.
Step 3: Adjust your MAs and click on [Save]
To activate RSI lines, follow these steps:
Step 1: Head to Binance Trade page (e.g. BNB/BTC trade)
Step 2: Click on the [Settings] icon next to the MA, as seen below
Step 3: Scroll down to check the [RSI] box, and adjust the RSI to your preferred number of days before clicking [Save]
Once you have completed the step above, your chart should appear as such:
Conclusion
Automated trading strategies, including algo trading are popular ways to earn passive income and average down your risks in volatile markets when trading long term. If you are a beginner, you can start streamlining your trading processes with DCA and learn more about basic technical analysis before incorporating complex algo trading strategies. Apart from RSI and MA, Binance offers other technical indicator tools that can come in handy when making trading decisions. Finally, keep in mind that there are pros and cons to algo trading, so do remember to do ample research before trying it out.
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Disclaimer: Cryptocurrency investment is subject to high market risk. Binance is not responsible for any of your trading losses. The opinions and statements made above should not be considered financial advice.
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