List of contents

  • Introduction

  • What is a trading strategy?

  • Active trading strategy

    • Day trading

    • Swing trading

    • Trend trading

    • Scalping

  • Passive investment strategy

    • Buy and hold

    • Index investing

  • Closing


Introduction

There are many ways to make a profit from trading cryptocurrencies. Trading strategies help you organize techniques into a coherent framework that can be followed. This way, you can continuously monitor and optimize your crypto strategy.

The two main schools of thought you need to consider when building a trading strategy are technical analysis (TA) and fundamental analysis (FA). We'll differentiate which ones apply to certain strategies, but make sure you understand the differences between these concepts before going any further.

Since there are many different trading strategies, we will discuss some of the most common ones. This article will focus on cryptocurrency trading strategies. However, this also applies to other financial assets, such as forex, stocks, options or precious metals such as gold.

So, do you want to create your own trading strategy? This article will help give you the basics of how to speculate in the crypto market. With a solid trading strategy, your chances of achieving your trading and investment goals will be greater.


What is a trading strategy?

We can describe a trading strategy as a broad plan in all your trading activities. It is a framework created to guide you in all your trading endeavors.

A trading plan can also help reduce financial risk, as it eliminates many unnecessary decisions. Even though having a trading strategy is not actually mandatory, however, it is very necessary, because it can save you at any time. If something unexpected happens in the market (and it will), it's your trading plan that determines how you react – not your emotions. In other words, having a trading plan keeps you prepared for any eventuality, as well as preventing you from making hasty and impulsive decisions, which often lead to large financial losses.

As an illustration, a comprehensive trading strategy will include the following:

  • what asset classes you trade

  • what kind of settings do you do

  • what tools and indicators you use

  • what triggers your entry and exit positions (placement of stop loss)

  • what determines your position size

  • how you document and measure portfolio performance

In addition, a trading plan can also contain other general guidelines, even down to some small details. For example, you can determine that you will never trade on Fridays, or that you will never trade if you feel tired or sleepy. Or you can create a trading schedule, so that you only trade on certain days of the week. Do you always check Bitcoin prices during the weekend? Always close your positions before the weekend. Personal guidance like this can also be included in trading strategies.

Designing a trading strategy may also include verification by backtesting and forward testing. For example, you can do paper or simulated trading on the Binance Futures testnet.

In this article, we will discuss two types of trading strategies: active and passive.

As you will see in a moment, the definitions of trading strategies are not always binding, there will be overlap with each other. In fact, it may be worth considering a hybrid approach by combining several strategies.


Active trading strategy

Active strategies require more time and attention. We call it active because it involves constant monitoring and a lot of portfolio management.


Day trading

Day trading or intraday trading is perhaps the best known active trading strategy. However, you are mistaken if you think that all active traders are day traders.

Daily trades enter and exit positions on the same day. Thus, day traders aim to take advantage of intraday price movements, that is, price movements that occur within a single trading day.

The term “day trading” comes from traditional markets, where trading is only open during certain hours of the day. So, in these markets, day traders never stay overnight in the same position, when trading closes.

Most digital currency trading platforms are open 24 hours a day, 365 days a year. So, day trading is used in a slightly different context, if we talk about the crypto market. It usually refers to a short-term trading style, where traders enter and exit positions within a 24-hour period or less.

Day traders generally use price action and technical analysis in formulating trading ideas. Additionally, they may use many other techniques to find inefficiencies in the market.

Daily trading of crypto assets can be very profitable for some people, but it is also often stressful, very demanding, and carries high risk. Therefore, this type of trading is recommended for advanced traders.


Swing trading

Swing trading is a type of long-term strategy where you hold a position for more than a day but usually less than a month. In some ways, swing trading is somewhere between day trading and trend trading.

Swing traders generally try to take advantage of waves of volatility that occur over several days or weeks. This type of trader may use a combination of technical and fundamental factors in formulating their trading ideas. Basically, fundamental changes may take longer to play out, and this is where fundamental analysis comes into play. However, chart patterns and technical indicators can also play a major role in a swing trading strategy.

Swing trading is perhaps the most convenient active trading strategy for beginners. The main advantage of this type of trading compared to daily trading is that swing trading is carried out over a longer period of time. However, it is short enough that it is not too difficult to track trades.

Allows traders more time to consider decisions. In most cases, they have enough time to react to ongoing trades. With swing trading, decisions can be made faster and more rationally. On the other hand, day trading often demands fast-paced decisions and execution, which is certainly not ideal for beginners.


Trend trading

Sometimes also referred to as position trading, trend trading or trend trading is a strategy of holding positions for a longer period of time, usually at least several months. As the name suggests, trend traders try to take advantage of trend movements. This type of trader may enter a long position during an uptrend and a short position during a downtrend.

Trend traders will usually use fundamental analysis, but this is not always the case. Even so, fundamental analysis takes into account events that may take a long time to play out – these are the moves that trend traders want to take advantage of.

A trend trading strategy assumes that the underlying asset will continue to move in the direction of the trend. However, traders must also take into account the possibility of a reversal. Thus, they can also include moving averages, trend lines and other technical indicators in the strategy to try to increase the success rate, and reduce financial risks.

Trend trading can be an ideal choice for novice traders if they perform proper due diligence and manage risks.


Scalping

Scalping is one of the fastest trading strategies available. Traders don't want to take advantage of big moves or protracted trends. Strategy focuses on exploiting small, repetitive movements. For example, profiting from bid-ask spreads, liquidity gaps, or other inefficiencies in the market.

Scalping traders do not intend to hold their positions for a long time. It is very common to see this type of trader opening and closing positions in a matter of seconds. This is why scalping is often associated with High-Frequency Trading (HFT).

Scalping can be a very profitable strategy if there are recurring market inefficiencies, and traders can exploit them. Each time they occur, they can generate small profits that add up over time. Scalping is generally ideal for markets with thicker liquidity, where entry and exit of positions is relatively smooth and predictable.

Scalping is an advanced trading strategy that is not recommended for novice traders due to its complexity. It also requires a deep understanding of market mechanisms. Apart from that, scalping is generally more suitable for large traders (whales). Profit target percentages tend to be smaller, so trading with larger positions makes more sense.


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Passive investment strategy

Passive investment strategies provide an easier approach, where portfolio management requires less time and attention. Although there are differences between trading and investment strategies, essentially, trading means buying and selling assets in the hope of making a profit.


Buy and hold

“Buy and hold” is a passive investment strategy in which traders buy assets with the intention of holding them for a long time, without worrying about market fluctuations.

This strategy is usually used in long-term investment portfolios, where the idea is to enter the market without regard to time. The idea behind this strategy: over a long enough period of time, the timing and price of entries won't matter.

Buy and hold strategies are almost always based on fundamental analysis and are usually not influenced by technical indicators. With this strategy, portfolio performance may also not need to be monitored regularly – just occasionally.

While Bitcoin and other cryptocurrencies have only been around for a decade, the HODL phenomenon can be compared to a buy-and-hold strategy. However, cryptocurrencies are a risky and highly volatile asset class. While buying and holding Bitcoin is a well-known strategy in the crypto world, however, it may not be suitable for other cryptocurrencies.


Index investing

Generally, index investing means purchasing ETFs and indices in traditional markets. However, this type of product is also available in the crypto market. Both on centralized cryptocurrency exchanges, and in Decentralized Finance (DeFi).

The idea behind a crypto index is to take and group together crypto assets and create a token that tracks the combined performance. These pools can be a combination of coins from similar sectors, such as privacy coins or utility tokens. Or, it could be something completely different, as long as it has a reliable price feed. As you can imagine, most of these tokens rely heavily on blockchain oracles.

How can investors use crypto indices? For example, they can invest in a privacy coin index instead of selecting a single privacy coin. This way, they can bet on privacy coins as a sector by eliminating the risk of betting on a single coin.

Tokenized index investing will likely become more popular in the coming years. This approach makes it easy to invest in the blockchain industry and cryptocurrency markets.


Closing

Designing a crypto trading strategy that suits your financial goals and personality is not an easy task. We've covered some of the most common crypto trading strategies, so hopefully, you can figure out which one works best for you.

To know what really works and what doesn't, you have to follow and track each trading strategy – without breaking the rules you set. It is also helpful to keep a trading journal or sheet, so you can analyze the performance of each strategy.

It's worth noting that you don't have to follow the same strategy forever. With enough trading data and records, you should be able to adjust and adapt your methods. In other words, trading strategies should continue to evolve as you gain trading experience.

It may also be beneficial to allocate parts of your portfolio to different strategies. This way, you can track the performance of each strategy while performing proper risk management.

If you want to read more about risk management, see Asset Allocation and Diversification Explained.