The 5 crypto trading strategies that every trader needs to know

Crypto trading: what you need to know

Cryptocurrencies are traded on decentralised markets, meaning they aren’t issued or supported by a central authority like a government – they’re run across a network of computers (called a blockchain). Due to the decentralised nature of cryptocurrency, they’re free from many of the political and economic concerns affecting traditional currencies.

However, this doesn’t mean cryptocurrencies are free from external factors. To the contrary, cryptocurrencies are unpredictable and are affected by factors like supply and demand, media presence, integration of e-commerce payment systems and key events.

These factors make it important that your cryptocurrency trading strategies not only focus on a way to navigate volatility, but focus on diversification of your portfolio. Trading a wide variety of asset classes – including cryptocurrencies – allows you to diversify your portfolio. By solely trading one asset class or market, you are confining yourself to the conditions of one market out of thousands.

By diversifying the types of trades you make, you can hedge against the risk of a market moving against you, as well as gaining the benefits of positive movements.

Trader’s maze: crypto trading strategies

Due to the volatile and unpredictable nature of cryptocurrencies, it is important to have a cryptocurrency trading strategy before attempting to trade the market.

When we speak about crypto trading, we’re referring to the act of speculating on crypto price movements through a CFD trading. These are leveraged derivatives, which enable you to speculate on price movements without having to own the underlying asset.

Find out more about trading CFDs

Alternatively, you can buy cryptocurrencies via an exchange – meaning you’ll purchase the coins yourself. You’ll need to create an exchange account, fund the full value of the position and store the cryptocurrency tokens in your own wallet until you’re ready to sell. Buying cryptocurrencies directly can be complex and isn’t advised for beginner traders.

Moving Average Crossovers

Trading moving average (MA) crossovers requires an understanding of MAs, and crossover trading strategies. Let’s start at the beginning: a moving average is a lagging technical indicator combining the price points of a financial instrument over a specific timeline, dividing by the number of data points to give you a single trend line.

This single trend line allows you to determine the direction of the current trend, while lessening the impact of random price spikes. It also enables you to examine the levels of support and resistance through analysing previous price movements.

So, how do you incorporate this indicator into your cryptocurrency strategy? One of the main methods of utilising the moving average is called ‘crossovers’. A price crossover, or crossover, is when the price of the asset crosses above or below a MA to signal a potential change in trend.

To trade a moving average crossover in cryptocurrency markets, you’ll need to wait for the price crossover before you go long or short on the cryptocurrency in question – by using a financial instrument like CFDs.

Another strategy applicable is to apply two moving averages to a chart: one short term and one long term. When the shorter MA crosses above the longer MA, this shows the trend is shifting up – and is known as a golden cross, which can be considered a buy signal. When the shorter MA crosses below the longer MA, this indicates the trend is shifting down – and is known as a death cross.

Read our complete guide to trading moving averages

Relative Strength Index (RSI)

The relative strength index (RSI) is a technical indicator, which is used to identify momentum, overbought and oversold market conditions. It can also be used to highlight signals of divergence and hidden divergence in the financial markets. This type of trading is also known as trend trading.

The RSI is a calculation of the profitable price closes relative to unprofitable price closes – reflected as a percentage.

It is calculated using the formula:

RSI = 100 – (100 / [1+RS])

The indicator is depicted as a percentage out of 100, with a lower percentage typically indicating an oversold position and a higher percentage reflecting and overbought position.

So, what’s the best crypto strategy for trading RSI? Well, that depends on your risk appetite and trading style. The RSI can be used for trading both short and long signals when the price is rangebound in nature as well.

However, as markets regularly move in trends, using an RSI indicator to highlight trends for entry and trends for exit will give you an idea of when to engage.

Event-driven trading

A strong media presence of a specific coin or crypto exchange can impact cryptocurrency markets. This cryptocurrency trading strategy focuses solely on taking advantage of these ‘events’. It’s a popular trading strategy for those new to trading.

News coverage of current events can influence the prices of many things like forex pairs, stock indices and commodities – not just cryptocurrencies. This influence is not just speculation – many experienced traders will take advantage of this.

You’d normally wait until the market shows a consolidation pattern before an expected news release (like an earnings report) and then act as soon as a market breakout occurs. Yet, due to the volatile and unpredictable nature of cryptocurrencies, you may have to wait until after such a news release is published before engaging in the trade.

Simply put, you’d buy your chosen cryptocurrency when positive news is announced and short it when negative news comes out.

Scalping

Scalping is the practice of opening positions in line with a trend, often entering and exiting the market multiple times in a short period as it develops. Individual trades are held for just a few seconds – minutes at the most – so it is one of the most short-term strategies.

This trading strategy works very well for active day traders. Scalping focuses on minute-to-minute price changes, which are driven by quantity. As soon as the trade becomes profitable, you’d exit the trade.

There’s no ‘waiting for the market to depict trends’ as you’ll have to be quick, and close trades that are losing money instantly. The more volatile the market, the better it is to employ scalping.

You may want to use tear-off tickets when you’re scalping. With them, you can set up a position in the opposite direction so that you’re ready to exit, either taking your profits or limiting your losses.

Bear in mind that scalping can be risky if you’re placing multiple trades on a very short-term basis. It’s essential to manage your risk carefully.

DCA (Dollar Cost Averaging)

If you’re looking for a crypto trading strategy that doesn’t involve indicators, then dollar cost averaging (DCA) might interest you. DCA is a popular strategy for both beginner traders and experts alike.

Instead of investing all your money into a specific asset at once, you divide your investments into smaller amounts. These amounts are then spread out over a predetermined timeline and are regularly invested on a particular time and day of the week – and only on that day and time.

What does this look like in execution? Let’s say you decide you’d like to invest in bitcoin. You’ve set aside $15,000 for this purpose, and decide a DCA strategy will be the best way forward. So, you’d then divide your initial amount by the number of weeks you’d like the strategy to run for.

For the purpose of this example, we’ll say that you’d like to invest your $15,000 over six months. You’d then divide the initial amount by 24 (the number of weeks in six months), giving you $625 per week. For the next six months, every Tuesday at 2pm you invest your $625 into bitcoin – until your initial amount is depleted.

Why invest like this? Buying an asset in regular intervals helps alleviate the impact of market volatility, meaning you’ll typically receive more of the currency from your final investment than if you’d invested all your money at once.

It’s important to note, to fully make use of this strategy you’d need to trade the specific coin through an exchange – and not through a broker like us.

How to apply strategies in your crypto trading

Now you know the basics of cryptocurrency trading strategies, how do you get started? Well, you can follow our easy guide to placing your first cryptocurrency trade:

1. Open an account with us or log into your existing account. From there, you’ll be able to access the cryptocurrency market through our platform
2. Learn how the cryptocurrency market works and choose a coin to focus on. With so many options, remember the importance of diversifying your crypto portfolio
3. Build a trading plan from the above strategies. Choose one which aligns with your personality and risk appetite
4. Choose your cryptocurrency trading platform. We offer an award-winning* and cutting-edge platform with around-the-clock support
5. Open, monitor and close your first position. Or open a demo account to practice your cryptocurrency trading strategies with virtual funds

Footnotes

* Best Finance App, Best Multi-Platform Provider and Best Platform for the Active Trader as awarded at the ADVFN International Financial Awards 2024.