A trading strategy is a set of disciplined rules to provide a framework for investors to follow in order to reduce financial risks and increase profitable gains. In general, strategies can be divided into two categories; active trading and passive investment.
1. Active trading strategy
The active trading strategy is true to its name and takes regard to listening to news, portfolio and graph status. This method can be further separated into subcategories as follows: Day trading, Swing trading, Trend trading, Scalping and News trading.
1.1 News trading
News trading is pretty much following up on daily news and keeping up with its effects towards the market. With market volatility being a factor investors are needed to take into account, news can be a source of fluctuations in the market, making it a suitable source for preparation or asset management.
The upside to news trading is that news and correlating fluctuations can take place daily, making it possible to benefit off of this strategy nearly every day.
However, a downside is that the task can be tiring and during certain moments wherein traders are resting, more news could be coming their way, ultimately making them late to the current news.
1.2 Day trading
Day trading is a strategy that has derived from traditional stock markets, where traders buy in and sell out in the short period of time of only a day, to receive short-term profit.
However, in the crypto market, there are no closing times, making day trading an actual trading period throughout the span of 24 hours. It is required for traders that fall under this category to be adept in technical analysis in order to be able to deviate trading plans in accordance with market trends and make decisions. It goes without saying that investment risks are involved, therefore, being well-trained and constantly conducting research would be highly beneficial.
1.3 Swing trading
Swing trading is a method which can be suitable for traders new to the market. This variation relies on benefiting off of market volatility for profit and utilizes knowledge in assets and technical analysis for buying cheap and selling expensive. Swing trading can take up a moderate amount of time, varying from around weeks to months, making it suitable for traders new to the field.
1.4 Trend trading
Trend trading is a long-term strategy that relies on buy-selling assets in accordance with market trends. Traders in this category would trade in correspondence with market trends. If in an uptrend market, traders have been found to buy and in downtrend ones, sell.
Other than identifying market trends, trend traders are also required to be able to acknowledge reversal signals to reduce risks that any open orders wouldn’t be cancelled in time. This strategy can be suitable for inexperienced traders, but risk management is still a matter to look into.
Scalping takes place when trading a very short time frame for only a considerate amount of profit, but instead relies on frequent orders instead for consistent profit collection. Traders have been found to buy and sell in a matter of seconds.
It is crucial for scalpers to trade in a liquid market in order to accomplish their trades instantly. Furthermore, scalping is highly risky and may not be suitable for new traders as the matter of risk management is crucial, as well as discipline. An example for risk management is setting a cut loss point with a risk/reward ratio of around 1:1 with a win/loss ratio of 2:1.
2. Passive Investment Strategy
Passive investment is a strategy opposite of the active trading strategy. Essentially, traders aren’t required to take much concern over their investments. An example would be buying and holding assets for long term profit.
2.1 Buy and Hold
Speaking of buying and holding, or HOLD (Hold on for Dear Life), traders under this category invest long-term for potential asset value growth and may not take the purchased amount into account. This strategy is one of the easiest to follow as there is no need to learn the basics of technical analysis and there is high potential for asset value growth in the future as well.
An exemplification of assets that are often bought and held is Bitcoin, which is considered a store of value and often referred to as the digital gold, meaning it could have immense value in the future. However, not all assets are suitable for this strategy.
3. Investment for Passive income
In the crypto market, fees, which could be more profitable than bank interest fees, can be acquired through numerous channels, such as providing liquidity on exchanges, DeFi and staking.
DeFi (Decentralized Finance) is a means of providing liquidity in pools for various coins and tokens for other users to borrow and use through the utilization of gas fees in accordance with the platform’s set ratio. Users that lend or provide liquidity would receive rewards in terms of fees. Examples include Maker, Compound, Aave, Uniswap, SushiSwap and many more.
Nonetheless, investors are highly advised to be cautious when investing in DeFi as there have been many occasions wherein scammers and hackers take over systems or represent the platform itself, especially when the designated rewards ratio is too high to be true. Assessing a risk management strategy would be crucially important.
Exchanges are platforms that offer trading services for cryptocurrency. By providing liquidity on exchanges, users are able to acquire passive income as well. In detail, the system would take the user’s provided funds and allocate them to other users on the exchange that desire to trade with margin (leveraged trading) and bring back yielded reward fees (generally around 2-5%).
Margin trading takes regard to borrowing funds for trading and receiving additional rewards if the graph’s movement coincides with the projected trend. In opposition, if the asset travels in a contradictory direction, the user would lose funds.
Though some platforms may offer less attractive amounts of rewards, providing liquidity on exchanges can be a safe method of receiving income. However, always be vigilant of any suspicious activities on the platform or its developers.
Regardless of trading strategy, investors are highly advised to conduct deep research before initiating any investment method. It is integral to study the risks associated with trading in cryptocurrency, as well as its management.