How to Trade Cryptocurrency: 7 Trading Strategies to Learn

All Cryptocurrency articles are written by our contributor, CryptoNexis

1. Pairs Trading

Pairs traders try to capitalize on price changes between two closely related cryptocurrencies (share the same dips and highs). 

For example, ETH and UNI. If ETH rises but UNI falls, you would sell ETH and buy UNI, or hold if UNI doesn’t move. Since the performance of both UNI and ETH is connected, the price gap should correct itself. You would then take profits by closing your short-sell (buy back the ETH previously sold), and selling the UNI bought. 

Pairs trading requires good timing and knowledge of historical prices for both assets. Traders monitor factors such as wallet holders, large buy/sell orders, and any news causing divergences in price between crypto pairs. 

An advantage for pairs traders is the ability to trade divergences that occur during both bull and bear markets. 

You may also try a similar strategy of taking a market neutral position, which means going 50% long and 50% short on different assets, not necessarily related (as with pairs trading).  

2. Scalp Trading

Scalp traders capitalize on very small price changes. A typical scalper makes quick trades, within small margins, at high volumes. 

Having a strict exit strategy is key because one mistake can make all your small gains disappear. It is very much a game of inches. So, scalp traders need stamina to focus on real-time price analysis tools.    

With newer cryptocurrency projects, scalpers will take advantage of the predictable initial rises and dips. And with more established projects, scalpers will keep an eye open for cryptocurrencies known for consistent variances in price. 

A scalper’s goal is accumulating as many small profits as possible. It is a common style for those who are more risk averse. Making many small trades minimizes exposure time to the market and allows you to take a “hit” on a bad trade without severely damaging your portfolio. 

There are also hybrid versions of scalp trading. Some crypto scalpers will open a larger/longer term trade but then look for small windows to make quick enter and exit scalp trades. 

The main types of scalping are: first, try out-squeeze the market maker (liquidity provider). Obviously, this is very difficult since you’re competing against an already tight margin. 

The second approach is to trade huge amounts of crypto. Even though your upside may only be a fraction, if you’re making repeated $100K trades, the small gain will add up.  

The third approach is to enter and close a position at the first exit signal, as soon as you’ve hit your risk/reward ratio. This is contrasted with traders who seek to enter right at the start of a price movement and riding an uptrend for as long as possible. 

Risk/reward ratios compare expected returns of an investment with the investment risk, i.e., the purchase price. For example: an investment with a risk-reward ratio of 1:3 means that an investor is willing to risk $1, for the prospect of earning $3. 

3. Dollar Cost Averaging (DCA

Dollar Cost Averaging is a trading strategy of dividing your crypto investments into smaller purchases over time rather than going “all in” with a large purchase. The aim is to “smooth out” your purchase price over time, particularly when buying a very volatile crypto. It is a longer term strategy; traders will watch for price dips, slowly accumulating more crypto. 

For example, if you’ve set aside $10,000, you’d divide into $1,000 chunks and buy whenever there happens to be a better entry point than your last buy price. 

DCA is particularly helpful if you misjudged an entry point. This also reduces the risk of taking a big loss when trading in volatile markets. It is popular with risk averse traders or when the market is particularly unpredictable.

4.  Staking

Staking simply requires holding your crypto in a wallet (usually on an exchange) in return for profits. 

Profits are generated from a “Proof of Stake” mechanism. In very simple terms, transactions require gas/value to validate. When you stake your coins, you are participating in the validation or mining process; or delegating your assets for a project’s other operations. Thus, you receive a portion of the fees/rewards. In terms of profits, the more you stake, the more you’ll earn. 

Since staking requires placing your coins in someone else’s wallet, a major risk is that a project will scam and pull your assets while they’re staked. This will why some traders prefer to stake only with reputable exchanges like Crypto.comBinanceKucoin, or Coinbase.

Another risk is that some crypto projects have a lock period whereby you cannot un-stake your coins. In a volatile market, you could lose significant profits since you cannot freely sell when prices rise. 

5. Mean Reversion Trading

Mean reversion traders make trades when crypto prices move away from the average, in either direction. Traders expect that a crypto’s price will eventually revert to the average price. 

When the current market price is less than the average price, traders will buy, anticipating that prices will rise. When the current market price is above the average price, traders will sell, seeking to re-buy (close their position) once the price consolidates. 

This type of trading is common where a cryptocurrency has consistently move sideways, with somewhat predicatable peaks and valleys. This approach serves as the cornerstone of many trading strategies. 

These traders rely on analysis tools such as the relative strength index (RSI) and moving averages with convergance/divergence lines (MACD) to identify optimal trading zones (e.g., overbought and oversold zones).

Similarly, and to contrast, momentum or trend traders look for breakouts—significant upward trends from sideways movement. Trend traders look for changes in volume; the influx or exit of investors; marketing and news releases to guage levels of interest in a project. People will generally hold investments longer depending on when they entered the upward trend and seek to “ride the trend” for as long as possible to maximize profits. 

6.  Algorithmic Trading

Algorithmic traders rely on programs or “bots” to automate trades. Traders input market data such as volume and percentage price change to trigger the execution of orders.

The advantage is that these “trading bots” perform more trades much faster than a human. Traders need a good grasp market analysis and mathematical formulas in order to make good profits. 

Beginners can still get involved. Cryptohopper and Hummingbot are popular options that allow you to copy the technical parameters of experienced traders.

7.  HODL

HODL is an acronym for “Hold on for Dear Life.” A Hodler will hold onto cryptocurrency investment with iron hands through the lowest of lows. While Hodlers of Bitcoin through the $20K to 4K crash are yet to see the fruits of their labor, hodlers from 2013-2015—when BTC crashed from $1100 to $150—were certainly celebrating when BTC hit $20K. 

The key, of course, is knowing what to HODL. The majority of coins which nose-dive never recover. Only a few “game changing” projects will survive a nasty bear market and push through to new all-time highs. These are projects you have extensively researched, have solid teams, and are contributing something new to the field. You should only HODL if you are absolutely confident a project will deliver on its roadmaps. 

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