How to use HODLing: A long-term cryptocurrency strategy
By holding cryptocurrencies during market volatility, traders can
allow traders to benefit from rising prices over time. The HODLing strategy enables traders to reduce the impact of short-term volatility on their trades and capitalize on major market trends.
This article discusses how to use the long-term HODLing strategy for cryptocurrency trading.
*This is merely an example to enhance consumer understanding of the strategy outlined above and should not be considered personal advice from Blueberry Markets.
What is the HODLing strategy?
The HODL (Hold On for Dear Life) strategy is often used by cryptocurrency traders to buy cryptocurrencies and hold them long-term. Regardless of market volatility, traders following this strategy keep their trading positions, expecting things to turn in their favor over time. Traders need to be patient; selling in a panic during downturns is not an option when using the HODL strategy.
How to use HODLing in cryptocurrency trading?
Research and select cryptocurrencies.
The first step is to research cryptocurrencies and choose those with long-term potential. Traders should consider factors such as project technology, team, use case, community support, market adoption, and more.
Establish an investment plan
Since the HODL strategy is a long-term strategy, traders should ensure they set their long-term goals and timelines. Traders can determine the percentage they wish to allocate from their portfolio to cryptocurrencies, setting it aside for several months or years to reap profits. Only invest money that the trader can afford to hold for a long period.
Open a CFD account
Cryptocurrencies can be traded directly or via Contracts for Difference (CFD). CFDs on cryptocurrencies can be traded by funding the trading account with capital allocated for that purpose.
Set up a HODLing position
Calculate the position size for each trade based on risk tolerance and capital. Start a long-term position in cryptocurrencies and hold it for the long term until it aligns with your long-term investment goals.
Limit exposure as a risk management technique
Next, protect yourself from losses using stop-loss orders and avoid over-leveraging. Regularly monitor account balance and maintain sufficient margin to ensure traders can follow the HODL strategy without issues.
Maintain a HODL position
Regularly evaluate the performance of cryptocurrency holding positions. Although this is a long-term strategy, it is essential to remain cautious about market conditions and make informed decisions.
Manage overnight costs
Nightly fees or swap fees may be charged when holding cryptocurrency CFD positions for extended periods. These costs can accumulate over time and affect overall profits. Assess whether the potential gains from holding a position outweigh the costs of maintaining it.
Indicators to enhance signals for the holding strategy
Bollinger Bands
Bollinger Bands consist of three bands that expand and contract based on market volatility. These bands help traders identify market trends and reversal points. When used with a HODLing strategy, they confirm buying opportunities as the bands widen. When the price approaches the upper band, it may indicate a strong upward trend, reinforcing the decision to hold. Conversely, if the price reaches the lower band, it indicates a downward trend, suggesting a reassessment.
Average True Range
The Average True Range (ATR) calculates the average price range between the high and low prices over a certain period to assess market volatility. It indicates the degree of price movement rather than its direction. When the ATR is high, it indicates more volatility, suggesting a decision to continue holding the position in an upward trend, and vice versa.
Volume Indicators
Volume indicators analyze the number of cryptocurrency CFDs traded to understand the overall market trend. They confirm the current strength of large-volume cryptocurrency CFDs, indicating the necessity for traders to hold their current positions, and vice versa.
Chaikin Money Flow
The Chaikin Money Flow (CMF) is a volume-weighted indicator that measures the pressure of long and short trades in the market. This indicator combines market volume and price movement to understand market trend strength. Positive CMF values indicate long trade pressure, supporting the trader's decision to stick with an upward trend, and vice versa.
Advantages and Risks of Using the HODLing Strategy
Advantages
Long-term Growth Potential: The HODLing strategy allows cryptocurrency CFD traders to benefit from the long-term appreciation of cryptocurrencies, leading to significant gains as asset values increase over time.
Lower transaction costs: By avoiding frequent trading, HODLing reduces transaction fees and spreads, which can accumulate with frequent trading.
Emotional Discipline: The HODLing strategy makes the trader more disciplined, reducing impulsive decisions driven by short-term market volatility, and focusing on long-term value.
Risks
Market Volatility: Cryptocurrencies are volatile, and holding assets during market downturns can lead to significant losses if prices drop significantly.
Opportunity Cost: By holding cryptocurrency CFDs for the long term, traders may miss out on other investment opportunities or gains from better-performing assets in the short term.
Lack of Flexibility: The strategy can limit the ability to adapt to changing market conditions, leading to missed opportunities to rebalance the portfolio or capitalize on new trends.
Top tips for trading using the HODLing strategy
Analyze the project's fundamentals and technology
Investing in cryptocurrency projects with strong fundamentals and innovative technologies increases the chances of achieving long-term profits. Traders should ensure they are well-informed about each project before investing, as they will need to hold the cryptocurrency for a long time.
Choose currency pairs with long-term potential
Traders should choose cryptocurrencies with proven long-term growth results based on market adoption, historical performance, and current market trends. Cryptocurrencies with practical applications are usually suitable for starting a HODL strategy.
Determine Trading Frequency
Reduce the number of trades to lower transaction fees and avoid making emotional decisions. Frequent trading with a HODLing strategy increases trading costs, so it is advisable to avoid it.
Reinvest profits to achieve compounded gains over time
Reinvest any profits from trading to buy more over time. Compounding allows traders to benefit from compounded growth, improving long-term wealth accumulation.
Diversifying investments across multiple cryptocurrencies
Traders should diversify their investments across various cryptocurrencies to reduce market risks. Diversification enhances profit opportunities from multiple growth avenues simultaneously in the long term.
Dealing with short-term market volatility using the HODL strategy
The HODL strategy is ideal for investors seeking to profit from the long-term growth of cryptocurrencies by holding assets during market volatility, avoiding repeated trading costs and emotional decisions. However, this strategy may not be suitable for those who prefer short-term gains or require flexibility, as it exposes investors to significant volatility and may lead to missed short-term investment opportunities or necessary adjustments to their investment portfolios.