Trading is perhaps one of the most performed activities in the cryptocurrency industry. Likely, the first thing newbie do upon joining the crypto space is to buy Bitcoin or one or two altcoins.
Crypto trading can be extremely profitable because of the number of trading opportunities that exist every day. The volatility nature of cryptocurrencies is unlike any other market and that excites traders. However, trading cryptocurrency also involves loss-making as traders could get rekt within the shortest time possible.
That’s why having a trading strategy is an important step for becoming a successful trader in the crypto market or any market per se. Here are three common crypto trading strategies that you could use to maximize your profits in the crypto market.
Fundamental analysis is a trading strategy that has its roots in the traditional markets of stocks. The idea of fundamental analysis is for a trader to identify undervalued companies using metrics such as:
Using these metrics, a trader is able to determine if a company is currently being undervalued by the wider market. If this is the case, then a trader will often take a long position to benefit from any upward price appreciation that occurs when the market realizes the value of the stock.
Now, the metrics above cannot be applied in the context of cryptocurrency trading because digital assets such as Bitcoin and Ether (ETH) are not companies, nor do they generate cash flow.
As the crypto market matures, we are seeing the emergence of crypto-specific metrics that can be used to determine if a digital asset is undervalued, such as:
- NVT Ratio – Network Value to Transactions Ratio
- Crypto-asset value proposition
- Quality of the team
This is not an exhaustive list, and we will likely see more metrics being used as crypto trading becomes a more widely performed activity.
Swing trading is a useful strategy to have in your tool belt, especially when trading in the crypto market. This is because, as already mentioned, the crypto market is extremely volatile on a day-to-day basis. It is not unheard of for cryptocurrencies such as Bitcoin to swing by over 30% upwards and downwards in the space of a few hours.
Swing trading allows the trader to capitalize on these wild swings and generate significant returns. This crypto trading strategy relies on the trader being able to accurately time the market, as the trader will need to be able to call when an upward or downward swing could potentially occur.
This is quite challenging given the volatile nature of the market. A trader could be susceptible to being stop-hunted or experience a fake-out. Despite this, however, with sufficient learning, it is not impossible. Carrying out effective swing trading is also best done using an automated setup for a better entry. We have also seen the use of automated trading in the form of crypto bots or signal groups (e.g. BitMEX signals) to be useful in the execution of the swing trading strategy.
Probably the most obvious trading strategy that can be used in the crypto market is arbitrage trading. This strategy simply involves buying digital assets such as Bitcoin at a lower price on one exchange e.g. Coinbase and then selling it at a higher price on another exchange e.g. Binance.
The reason this is possible is that it is often the case that cryptocurrencies such as Bitcoin will trade at different prices on different crypto exchanges, which means that you can profit from the price difference. Arbitrage trading relies on speed, as these price differentials can be quickly eroded.
Trading in the cryptocurrency market is still a relatively new activity. As a result, there are going to be a lot more strategies that will be developed as the market matures. These crypto trading strategies are just a few that traders can adopt today, depending on their preference.
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