Many users, starting to familiarize themselves with the cryptocurrency market and trading, quickly switch from the illusion of easy and fast income with minimal effort to an understanding of the importance of strategy. Having a clear plan, as well as the skills and sufficient discipline to execute it, is the foundation of successful trading of digital assets.
What is trading and how does it work in practice
Trading is the organized execution of market operations with various assets, particularly cryptocurrencies, with the aim of making a profit. The main principle of trading is simple and clear – buy low, sell high. However, in practice, things are a bit more complicated.
It all starts with choosing a trading asset. Before making a trade, a trader conducts market analysis, whether technical, based on the study of price movement charts and historical data, or fundamental, taking into account financial reports of companies, team data, user reviews, and other factors that directly or indirectly affect the value of the asset.
When a user finds an opportunity to make a profit, they open a position (buy), after which they wait for the price to rise to a certain target level and secure the profit (sell).
However, the main difficulty of trading is that at the moment of the transaction, both parties believe they are taking the right actions: one is sure that they need to sell, while the other is ready to buy. At the same time, both traders may use the same data but have completely different decision-making strategies and reactions to market events.
Top 10 trading strategies for beginners
To minimize losses and increase profits, a novice trader should rely on certain action patterns that help exploit various circumstances for profit.
Below are ten common trading strategies that traders of varying levels use to earn money, minimize losses, and achieve other goals.
Trend trading
One of the most popular and simplest strategies for beginners. Its essence lies in buying assets when the price starts to rise and selling when it reverses. The trend can be identified using technical analysis, and adhering to it helps avoid trades that contradict market sentiment and reduce the risk of losses.
Scalping
This is a strategy for those who want to earn quick profits from small price fluctuations. Scalpers typically make dozens, and sometimes hundreds, of trades a day, trying to earn a small profit on each trade. In addition, scalping is characterized by high frequency: trades remain open from a few milliseconds to several minutes.
Swing trading
Allows the use of cryptocurrency market volatility to profit from positions that are held open for several days or weeks. This strategy is particularly effective in a bull market, where the overall trend is upward, but short-term fluctuations still offer opportunities for earning.
News trading
Involves making trades based on economic news or corporate documents that can significantly impact the market. Beginners can use this strategy by focusing on key events, such as changes in interest rates by central banks or corporate earnings reports.
Arbitrage trading
This is a strategy that involves acquiring a digital asset with the goal of immediately selling it at a higher price on another market or exchange. It is possible to earn by taking advantage of the inefficiency of certain markets that do not manage to adjust the asset's value during price fluctuations.
To carry out these quick, low-risk operations, trading algorithms and other automation solutions are often used. Moreover, low risk implies a relatively small income.
Dollar cost averaging (DCA)
This strategy involves the investor investing a certain amount of money in an asset at regular intervals, generally regardless of market conditions or current prices.
Thus, during a rise, the trader will be able to purchase a smaller amount of the asset for a fixed amount, while during a decline, they will purchase more. This allows smoothing out volatility and gradually accumulating a significant amount of cryptocurrency at an 'averaged' cost that lies between price peaks and troughs.
Momentum trading
This strategy is based on the theory that after a strong breakout of a certain level, the trend is likely to continue in the same direction. To take advantage of the situation, traders identify the breakout of the current price range and make corresponding trades.
The main risk lies in the misjudgment of the strength of the breakout and the subsequent pullback of quotes to the previous level, so it is recommended to use tools to minimize losses, such as stop orders.
Reverse trading strategy
Unlike momentum trading, this strategy is based on anticipating a trend reversal. That is, market participants make a trade when they believe that the price has reached its peak or trough and will soon change direction, but has not yet done so.
Reverse trades carry higher risks, as they are made against the trend, but the income from them is often higher than from other methods.
Position trading
The use of this method involves opening long-term positions in various assets with subsequent profit from price fluctuations over an extended period.
Position trading is often chosen by traders looking for a calmer way to earn on financial markets. This strategy is also suitable for beginners who do not have the opportunity to constantly monitor quotes; however, it requires patience and skills to identify long-term trends that ignore local volatility.
Using moving averages
Moving averages are one of the most common tools for determining trends and signals for buying or selling an asset. Their use involves opening a position when the short-term moving average crosses the long-term moving average from below, and closing it in case of a reverse movement.
Moving averages help smooth out price fluctuations and determine the overall market direction. However, they can provide delayed signals, so it is recommended to use them in conjunction with other indicators.
As we can see, traders have a wide range of strategies at their disposal for making trades, some of which can be used simultaneously to maximize income. However, each has its own advantages, risks, and complexities that need to be considered before application.
Classic trading strategies
Among the basic trading strategies that have transitioned into cryptocurrency trading from traditional financial markets, we can mention:
trend trading. We already mentioned this strategy above, and it is one of the most common on financial markets due to its simplicity and accessibility. The main advantage of trend trading is that it allows avoiding trades against the main price movement, which reduces the likelihood of losses.
To identify and confirm a trend, technical indicators such as moving averages or the relative strength index (RSI) are often used, which help traders identify the direction and strength of the current price movement;
trading at support and resistance levels. Using this strategy, traders identify key levels on the price chart where the asset historically finds support or faces resistance from market participants. Thus, the first forms the lower boundary of the price range, while the second forms the upper boundary. Both are potentially difficult to break.
Traders use these levels to open and close positions: buying at support levels, expecting a bounce upward, and selling at resistance levels, predicting a pullback;
momentum trading. This is applied if the price breaks through the aforementioned resistance and support levels. A breakout means that the price has overcome a significant obstacle and is likely to continue moving in the direction of the breakout.
Breakout trades are especially effective in volatile markets, where strong price movements occur relatively frequently. However, an important element of this strategy is the skill of using stop orders, which allow minimizing possible losses in the case of false breakouts.
Classic trading strategies are basic templates that any novice trader should familiarize themselves with to understand the fundamentals of trading digital assets and further deepen their knowledge and skills.
Are there foolproof cryptocurrency trading strategies?
Trading is a high-risk activity that can lead to the loss of part or even all of the invested funds. Strategies allow minimizing these losses or increasing the profitability of trades, but, as already noted, each of them has its pros and cons. In addition, the cryptocurrency market is volatile and unpredictable, making it difficult to develop a 'universal' method that would work equally effectively in all situations.
However, a combination of different strategies and tools can help reduce risks and increase the likelihood of success. For example, technical indicators combined with fundamental analysis can contribute to a better understanding of market trends and more informed decision-making regarding a particular asset.
Furthermore, successful traders set boundaries within which they are willing to take risks and adhere to these rules, regardless of their emotional state or impulsive desires.
Conclusion
Cryptocurrency trading is a complex and risky activity that requires not only deep knowledge and understanding of market mechanisms but also the ability to exercise patience and adhere to the chosen strategy.
Traders use various approaches, such as trend trading, swing trading, or arbitrage, each of which has its own characteristics that may work differently in various market conditions. There is simply no 'foolproof' or 'universal' strategy, so market participants must always remain flexible and able to adapt their action plans to new circumstances.
Novice traders should not only familiarize themselves with basic trading approaches but also learn to manage risks correctly and develop control over their emotions. Only continuous accumulation of knowledge, as well as market analysis and personal mistakes, will help gradually increase effectiveness.