Crypto trading is potentially the most lucrative way to make money from cryptocurrency. However, there is something crucial to making consistent profit from crypto trading: strategies for crypto trading. In this article, we'll explore the best and most popular crypto trading strategies, decide on the best cryptocurrency trading strategies for beginners, and explain how to use them.
What is crypto trading?
Crypto trading is a method of making money from cryptocurrencies by buying and selling cryptocurrency assets at a favourable price. It's a high-risk, high-reward way of earning money. While crypto trading is similar in many ways to trading more traditional financial instruments, there are also a number of differences. The main reasons for these differences are the young and under-regulated nature of the crypto market, as well as the relatively low trading volumes.
What is a crypto trading strategy?
When trading cryptocurrency, you cannot rely on chance. You must have a clear strategy to open positions effectively and make profit. Astrategy of trading cryptocurrency is a set of rules that describes your trading activity. It usually includes the following:
- Rules for selecting an asset to trade
- Rules for analysing the market
- Rules for opening and closing a position
- Rules of risk management.
Strategies for crypto trading should answer four essential questions about your trading positions:
- What triggers the opening of a position?
- What triggers the closing of a position?
- Where should the Stop Loss be?
- What size should the position be?
Experienced traders tend to use different cryptocurrency trading strategies depending on the market situation and refine and upgrade them as they use them.
The best crypto trading strategies
Because there are many different conditions that influence the choice of the best trading strategy, there is no single universal best strategy for crypto trading. In addition, the choice of the strategy of trading cryptocurrency also depends on the length of time you hold a trading position. So, even all other things being equal, the best crypto day trading strategies will differ from the best strategies for position trading. Below, we'll explain some of the most popular crypto trading strategies.
Range trading
Range trading is a fairly simple strategy used during sideways price movements. When the price moves sideways, it sets identical or nearly identical local highs and lows, creating a resistance level and a support level. While lower volatility decreases the potential for profit, the relative predictability of these highs and lows can mean less risk.
Before opening a position in range trading, it is important to first confirm the range. This means that the price must have made at least two identical highs and lows without breaking above or below at any intermediate point. Once the range is established, the simplest trading strategy is simply to buy near the support and sell near the resistance. Experienced traders also often open short positions near resistance and close them near support, profiting from price movements in both directions.
A Stop Loss in range trading is set outside the range boundaries. However, it is worth watching for signs of an impending breakdown, such as an increase in trading volume.
A variation of range trading is channel trading. In this case, the basic principles remain the same. However, it's not traded within a horizontal range but rather a channel formed by dynamic support and resistance lines. Unlike range trading, this strategy for trading cryptocurrency is used when there is a clear bullish or bearish trend.
Breakout trading
Breakout trading is a very popular crypto trading strategy thanks to its versatility. A breakout is a situation where the price breaks through certain key levels. After an upward breakout, the old resistance level acts as new support. Similarly, after a downward breakout, the old support level acts as the new resistance. Breakouts are a common situation in the market. Typically, the most notable price movements are the result of breakouts of price channels or price patterns, such as triangles, flags or wedges.
In breakout trading, a position is opened once the price has passed a key level, such as a resistance level or a trend line. The classic way to open a position is to enter at the opening of a new candle after a breakout. The Stop Loss is placed slightly below the broken level (or slightly above in the case of a short position). The Take Profit is often placed before the next key level. Sometimes, a Trailing Stop Loss, which moves behind the price in the direction of the breakout, is used as a Take Profit.
It's important to be able to recognise a false breakout, i.e., a situation where the price has broken through a key level but soon returns to it. A common sign of a false breakout is low trading volume at the time of the breakout. Also, a good indication that a breakout is true is a large breakout candle body.
In addition, many traders prefer to minimise risk by opening a position after the price has returned to the broken level and bounced back from it rather than at the moment of the breakout.
Moving averages crossovers
This is a very old and well-known strategy for trading crypto that often allows you to identify a trend change. This is the most effective crypto trading strategy based on the use of two moving averages (MA) with different time periods: one with a longer period and one with a shorter period. Traders who prefer swing trading often use MAs with time periods of 50 and 200 days. For day trading, MAs with time periods of 9 and 20 candles are more suitable.
In order to at least partially screen out false signals, the RSI indicator is used. When the short MA crosses the long one upwards, and the RSI is above 50, this is a signal to open a long position. Similarly, when the short MA crosses the long one downwards and the RSI is below 50, this is a signal to open a short position.
A position is usually closed either upon receiving an opposite signal from an MA crossover or by using a Trailing Stop Loss.
This strategy for trading crypto works best when there is a noticeable trend. It's not recommended to use it during sideways price movements. Also, as moving averages are lagging indicators, their crossover doesn't provide the best point to open a position.
MACD
The MACD (Moving average convergence/divergence) is one of the most popular indicators in trading. However, it's not possible to build a consistently profitable strategy on the MACD alone. That is why other tools, such as Stochastic, RSI, Parabolic SAR, etc., are usually used together with MACD.
A pretty popular and simple strategy for trading crypto is the use of MACD in conjunction with Parabolic SAR and Exponential moving average with a period of 10 candles (EMA10). With this strategy, the signal to open a long position is a combination of the following conditions:
- MACD line crosses the signal line upwards.
- A bullish candle is formed on the chart and is crossed by EMA10.
- Parabolic SAR breaks and starts moving under the price.
The opposite picture is a signal to open a short position.
Closing a position is advisable when the MACD or Parabolic SAR signals a change in trend.
Because this combination of indicators can still give false signals, the use of a Stop Loss is strongly recommended.
The MACD is not well-suited to trading in lower timeframes. It performs best on timeframes of one hour and higher.
Inter-Exchange arbitrage
The price of the same cryptocurrency on different exchanges varies. Usually, the difference is small, but during periods of high volatility, it grows and can reach several per cent. An inter-exchange arbitrage strategy for trading crypto involves operating on two exchanges at the same time. This strategy, unlike the previous ones, does not require knowledge of technical analysis and is quite simple:
- The cryptocurrency is purchased on an exchange where the price is lower.
- The cryptocurrency is then transferred to an exchange where the price is higher.
- The cryptocurrency is sold at a higher price.
Despite its apparent simplicity, however, this strategy is quite demanding and stressful. When looking for trading opportunities, you need to consider withdrawal, transaction and exchange fees. In addition, there is always the risk that the price of a cryptocurrency will change drastically due to high volatility and that you will both lose profits and incur losses. This is especially true for cryptocurrencies with slow transactions.
Given the volume of information that has to be processed and the speed required to take advantage of an emerging arbitrage opportunity, this strategy is very difficult to execute without using trading bots.
Choosing a crypto trading strategy
The choice of the best cryptocurrency strategy is an individual decision. It depends on many parameters: the amount of time a trader is willing to devote to trading, the trader's experience, stress tolerance, discipline, self-control, willingness to learn, goals they are pursuing, etc. In order to choose their own best crypto trading strategy, new traders should ideally try many different strategies. Later on, as they gain experience, traders usually try to refine the chosen strategy and adapt it even more to their own preferences.
The most profitable crypto trading strategy
There is no single crypto trading strategy that is the most profitable of all. The same strategy applied by different traders yields different results. Therefore, the most profitable trading strategy is different for each trader.
The easiest crypto trading strategy
Perhaps the easiest crypto trading strategy is to use a technical analysis tool, such as MACD, Stochastic, Bollinger Bands or others, with a simple risk management tool like a Stop Loss order. With technical analysis platforms such as TradingView, it's indeed easy to utilise them. However, using only one indicator gives too high a percentage of false signals, so it is still better to adopt more complex cryptocurrency trading strategies.
It's worth noting that all the crypto trading strategies outlined here are fairly simple and suitable for beginners, with the exception of inter-exchange arbitrage.
Advanced crypto trading strategies
There are many crypto trading strategies nowadays, both simple and complex. Advanced strategies usually require some special knowledge or a deep understanding of the market. Such strategies include, for example, using the Ichimoku indicator or trading based on the news.
How to use crypto trading strategies
Before using a trading strategy, study it thoroughly and make sure you understand how to apply it. Determine if it suits you and your trading style. Then, backtest this strategy on the assets and timeframes where you plan to apply it, taking into account the current market trend. If the backtest is positive, try trading using this strategy for trading crypto in a demo environment. If the strategy performs well, you can move on to using it in real trading.
