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Cryptocurrencies are one of the most volatile financial markets. In order to invest successfully and generate profits, traders must have appropriate and flexible trading strategies and plans that change according to those fluctuations. In this article, we will present the popular trading strategies in the cryptocurrency market. Let’s follow along!
Position Trading is a strategy that involves holding assets for a while. Usually traders who follow these styles of trades will be interested in weekly, monthly and even yearly price movements. These traders are less concerned with short-term fluctuations but with medium and long-term trends.
To become a successful Position Trader, you need to skillfully use technical analysis to assess market trends. You also need to know how to combine different techniques. The goal is to be able to thoroughly assess the potential risk in the market. Following are some of the tools favored by position traders.
Support and resistance
The price areas of support and resistance help traders gauge the trend of the market. Based on this assessment, the trader can decide whether to open a long position and profit from the price increase. Or act the opposite when a bear market occurs.
The support level is the price that the asset will not normally fall below. Because buyers tend to buy assets at this price area, the demand force pulls the market up. Resistance is the point at which the price is no longer going up. Because buyers will tend to take profits and at the same time create a supply force that pulls the market down.
There are three important factors to consider carefully when determining support and resistance levels.
- Historical prices are the most reliable source for identifying support and resistance levels.
- Look at previous support and resistance levels to predict the future. For example, if support is broken, it could turn into resistance in the future
- Trading volume. This is a very important factor when determining support and resistance. Because it represents the force of supply and demand in the market.
Breakout is the starting point of the trend. Traders of this style often try to stay ahead of the wave. Usually, the breakout is the premise that precedes large-scale trades.
Combined with support and resistance, this type of trader will buy after the price breaks through the resistance level. Or enter a short sale when it falls below the support level. Therefore, to be a successful breakout trader, you need to feel comfortable identifying support and resistance levels. However, traders need to have a lot of experience and be able to analyze supply and demand in the market.
Pullback and retracement
A pullback is a temporary pullback in a long-term uptrend. Pullback trading allows traders to take advantage of these pauses in order to stock up. The aim is to buy low and sell high at the end of the temporary stop and continuation of the uptrend.
A pullback is sometimes referred to as a retracement but should not be confused with a reversal. Retracement when the price has an uptrend can be a long-term decline due to many different factors. To distinguish between pullbacks and reversals, there is a very powerful tool called Fibonacci Retracement.
Swing Trading is a style of trading that aims to profit from small price movements within a long-term trend. It works based on the Elliott wave principle of the market. This was created due to the tug-of-war between the bulls and the bears. Because of that, the price in the market constantly fluctuates even when in a particular trend. Swing investors identify these swings as profit opportunities.
By focusing on the points where the price reverses direction, Swing Trading allows profit in a shorter time frame than traditional investing. However, this style of trading is not constrained by all positions that must be closed by the end of the day. Instead, they can keep trades under an hour or possibly days.
There are two movements that traders will watch:
- Oscillating Highs: When the market peaks before falling, creating an opportunity for a short trade or short sale.
- Oscillating Lows: When the market hits lows and bounces, creating an opportunity for a long trade.
To better understand this style of trading we need to understand the following three factors.
The Elliott Wave is developed based on the price movement affected by the herd effect of traders. These fluctuations often appear in patterns or waves. By identifying the initial trend, traders profit when the price will follow the pattern.
There are two different types of waves identified by Elliott waves: impulses and corrections. An impulse wave goes in the same direction as the overall trend and consists of five waves. The rhythms of these waves are depicted as shown in the figure below. Waves 1 – 3 – 5 are impulse waves, while waves 2 and 4 are corrective waves in this trend.
The explanation of these 5 waves can be seen as follows:
- Wave 1: For example, a small number of investors decide to buy BTC, because they believe that BTC is at a low price.
- Wave 2: Some of the above investors started to take profits. This caused the Bitcoin price to correct lower.
- Wave 3: Because of the momentum from wave 1, a larger group of traders identified this as an uptrend. Therefore, decided to bottom out at wave 2 (correction wave) to catch up with the trend. Also, wave 3 is usually the strongest wave.
- Wave 4: After the strong push from wave 3, many investors reached their target profits and started taking profits, causing the price to correct again.
- Wave 5: The final move of the general trend usually occurs because of many participants. These are the people who can no longer resist the fear of missing out.
Three mandatory rules when counting waves:
- Wave 2 never corrects beyond the start of wave 1.
- Wave 3 is never the shortest wave.
- Wave 4 must not enter the area of wave 1.
Three guidelines when counting waves:
- When wave 3 is the longest wave, wave 5 will approximate wave 1.
- The formation of wave 2 and wave 4 will replace each other.
- After 5 impulse waves, the correction usually ends at the bottom of wave 4.
The RSI indicates whether the market is overbought or oversold. It helps to determine the next trend of the market. RSI measures price and volume traded in the market over a certain period of time (usually 14 days).
According to the RSI, when this indicator exceeds 70, the market is in an overbought state, and the price is expected to fall. Conversely, when the RSI falls below 30, the market is in the oversold zone, and the price is expected to bounce.
For Swing trading, determining the market’s reversal point is extremely important. Observing the trading volume combined with the RSI indicator will help traders to count waves accurately. Usually the trading volume exceeds 1.5 times the 10-day average. Along with that, an overbought (or oversold) RSI is a reversal signal.
Day Trading and Scalping Trading
Day Trading is a style of trading several hours a day. Usually the most popular time for traders is daytime in the US when the market is most active. Day trading style is not a bad choice for investors who choose trading as a livelihood.
Scalping is a style of continuous speed trading that aims to profit from small changes in price. The extremely important element of this style is discipline and not being greedy. Due to the extremely large number of trades and the small profit from each trade, Scalper must strictly follow his trading system. Always have to avoid a huge loss that can wipe out dozens of successful trades. The advantage of this style is that you can make a profit every time. The profit is small, but if done many times, it will become a significant number.
The difference between Day Trading and Scalping is that day trading takes more time between buying and selling cryptocurrency.
To be able to make profits in a short time and often, traders mainly use technical indicators. Here are some of the most popular indicators.
Moving Average (MA) calculates the average price of the market over a given period. When drawing the MA line, you will see any erratic short-term spikes.
MA is classified as short-term, medium-term or long-term. It is up to the trader’s preference to determine the time period for each MA. Usually traders use MA 9-50-200 for short, medium, long term. MA consists of two main forms:
A common way traders use MAs is to watch when the market’s short-term MA crosses the longer-term MA. When the short-term MA crosses the long-term MA from below, it is a sign that the price is about to rise and vice versa.
Besides, the MA line often acts as an extremely strong support and resistance area. So prices will often sideway around this area. Traders can continuously place orders and take small profits through the price differences in this zone.
The Stochastic Oscillator is an indicator similar to the RSI. It compares the closing price of a market to its price range over a given period.
Stochastic Oscillator is displayed on the chart from 0 to 100. Although it is similar to the RSI, it is overbought above 80 and below 20 is oversold. Also, it owns two lines in the graph. One shows the oscillating current value and the other shows the three-day MA.
An overbought or oversold reading does not necessarily mean a reversal is imminent. Strong trends can persist in and out of overbought-oversold ranges for several sessions. For this reason, many traders notice when two stochastic oscillator upper lines cross each other. Judging this is a sign that a reversal could be in the works.
The Parabolic SAR is an indicator that helps determine the trend of the market and provides opening and closing points. SAR stands for ‘stop and reversal’. The indicator is a series of dots placed above or below the price bars. One dot below the price is bullish and one above it is bearish.
The change in the position of the dots indicates that a change in trend is taking place. The chart above shows that short-term trades can be taken when the price moves below the SAR points and bought when the price is above them.
Any investor who buys and holds virtual currency can be called a Hodler. However, there are some who truly believe that cryptocurrencies will eventually replace fiat currencies. Not stopping there, they believe crypto will become a global payment unit in the future. Those are the true Hodlers. They are not affected by sudden price changes, fake news. Even any other content spread by social media influencers.
HODLer keeps their money while they ignore callers to take profits. They simply hold, which makes them immune to two other styles that have a negative effect:
- FOMO: fear of missing out affects traders wanting to buy.
- FUD: fear, uncertainty and doubt can lead to panic selling (SODLing)
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