Investing in cryptocurrency is deemed to be a risky, speculative investment, but with high-return value in most cases. So, you need to know the best crypto trading strategies to use when you are doing crypto trading. In this article, you will learn the best crypto trading strategies to use.
What is crypto trading?
Before we begin, let us help you understand what cryptocurrency trading is all about. Cryptocurrency trading is the act of speculating on cryptocurrency price movements via a contract for difference (CFD) trading account, or buying and selling the underlying coins via an exchange.
CFD trading on cryptocurrencies
CFDs trading are derivatives, which enables you to speculate on cryptocurrency price movements without taking ownership of the underlying coins. You can go long (‘buy’) if you think a cryptocurrency will rise in value, or short (‘sell’) if you think it will fall.
Both are leveraged products, meaning you only need to put up a small deposit – known as a margin – to gain full exposure to the underlying market. Your profit or loss is still calculated according to the full size of your position so leveraging will magnify both profits and losses.
Buying and selling cryptocurrencies via an exchange
When you buy cryptocurrencies via an exchange, you purchase the coins themselves. You’ll need to create an exchange account, put up the full value of the asset to open a position and store the cryptocurrency tokens in your own wallet until you’re ready to sell.
With the high fluctuation in Bitcoin price and all cryptocurrency prices (where a 10% swing on a daily basis is considered normal), you should choose strategies judiciously. Your right move will not only increase your investment exponentially but also avoid any kind of loss to your invested capital.
Now that we have established some basic knowledge and understanding of crypto trading, let’s dive straight into our top 3 trading strategies. If you are new to crypto trade and investing, you should start with time-tested and proven cryptocurrency trading strategies. These are 3 proven crypto trading strategies that are particularly best for crypto traders.
1. Dollar Cost Averaging (DCA) Strategy
Dollar-cost averaging (DCA) is an investing strategy where an investor invests a total sum of money in small increments over a period of time as opposed to investing all at once. DCA is designed to help offset any negative effect on an investment caused by short-term market volatility. For instance, if the price of an asset drops during the time you are dollar-cost averaging, then you stand to make a profit if the price moves back up.
As Bitcoin and the cryptocurrency market as a whole is a highly volatile market (where 10% daily price fluctuation is considered normal), the DCA strategy has proven efficient for Bitcoin too in the last several years. It has been seen that this strategy works best when it is continued over a longer period of time.
As per the strategy, you don’t invest your fiat currency all at once in a particular cryptocurrency (say, Bitcoin). You have to divide your investment into smaller amounts and invest them over regular intervals (say, daily/weekly/ bi-weekly/monthly) for a longer period of time (say, 5 years/10 years/20 years / 30 years).
Example of Dollar-Cost Averaging (DCA) Method of Investing
Let us explain it with the help of an example.
Suppose, you have US$20,000 with you, which you want to invest in Bitcoin (BTC). If you invest that amount of money in one go, it’ll be subjected to a lot of speculative risks. In fact, just after investing US$20,000, the market could plunge and your investment could get eroded.
To avoid such a high-risk, speculative move, you can divide your US$20,000 investment into 20 lots of US$1000. Now, invest each lot of US$1000 on a particular day of the week (say, Wednesday) to buy Bitcoin at a particular time (say, 10 am local time). You have to continue this habit of investing US$1000 every week on Wednesday at 10 am for 20 weeks continuously.
The best thing about the Dollar Cost Averaging method is that it reduces the impact of market volatility. As it averages out the risk associated with the price fluctuation, you’ll actually get more Bitcoin with the DCA method than investing all of the money in one go.
This trading strategy uses two moving averages (MAs). Moving average is a chart indicator line, which shows an asset’s average price over a certain period of time (say, the last 50 days, 200 days, and so on).
To utilize the Golden Cross or Death Cross successfully, you have to check the daily and weekly charts to find crossovers between the 50-day moving average and the 200-day moving average over long chart time frames. While 50-day MA is the average price of Bitcoin in the previous 50 days, 200-day MA is the average price of Bitcoin in the previous 200 days.
Golden Cross or Death Cross crypto trading strategy is a successful long-term trading strategy that works wonders over a comparatively longer period of time, which is more than 18 months.
Whether you’ll use the Golden Cross or Death Cross strategy will depend upon the types of crossovers you are looking for.
You should use the Golden Cross crypto trading strategy when there is a convergence. It’ll take place when the 50-day moving average crosses above the 200-day moving average.
When convergence takes place, it signals that the short-term momentum will exceed the long-term momentum. This indicates a buy signal.
You should use the Death Cross crypto trading strategy when there is a divergence. It’ll take place when the 50-day moving average crosses below the 200-day moving average.
When divergence takes place, it signals that a large number of traders will exit the market by selling Bitcoin. A death cross indicates a sell signal.
While using this strategy, always keep in mind that it is successful in a highly volatile market. However, in a market when the price moves sideways, it may give you mixed signals by providing you with too many buy and sell signals.
3. RSI divergencestrategy
Relative Strength Index or RSI measures the momentum of a digital asset through the calculation of the average number of gains as well as losses over a period of 14 days. The RSI indicator line moves between 0 and 100. It essentially shows whether crypto, say, Bitcoin, is “overbought” or “oversold”. To show this, a channel between 30 and 70 is used most commonly.
If the indicator line breaks above this channel above 70, it means that Bitcoin is “overbought”. This also suggests that the price will come down.
If the indicator line breaks through the bottom of this channel below 30, it means that Bitcoin is “oversold”. This suggests that the price will rise again.
RSI divergence trading strategy is mostly used for timing trend reversals. It helps traders to gauge when the price of Bitcoin or other crypto assets will start moving in the opposite direction, either from a downtrend to an upward one or the other way around. You can best find the RSI divergence trend on the daily window or 4-hour window.
Now that you have learnt these three strategies, we would also like to finally encourage you to continue doing your research into which cryptocurrencies suit your investment needs. Regardless of the strategy you choose, you must be willing to accept losses in a volatile market like cryptocurrency. Invest only in coins that you actually believe in – keep in mind that the market provides endless opportunities.
If you want to test out your preferred strategy out of the three crypto trading strategies and don’t know where to start – Sign up on Bitmama!
Bitmama is one of the best crypto exchange platforms with many features. With Bitmama, you can spend your Stablecoins using Bitmama crypto card and also buy crypto and pay later. Download the Bitmama App on the Google play store and iOS store to start your crypto trading journey.