Cryptocurrencies are rapidly transforming the financial sector. At the moment, they’re finding greater acceptance in payments besides offering an alternative investment vehicle. The reasons for their increased popularity are varied. Chief, though, is their decentralized nature and potential for high returns. From these reasons, it is easy to see why they’d be an attractive investment.
Crypto trading is as lucrative as it’s risky. It is, therefore, imperative to adopt a solid investment strategy. Again, investing in digital assets needn’t be a complex engagement. The market is rich in strategies that ease potential investors’ foray into the space.
This article examines five proven strategies that one may bank their crypto trading on in 2021.
Which are the Best five Trading Strategies to Adopt in 2021?
As already indicated, there is a myriad of trading strategies at any investor’s disposal. Individual preferences determine the choice of the means to employ. Here are five concrete plans that you can depend on this year.
1. Scalping
Scalping is a trading strategy defined by short durations between a trade’s opening and closing. The underlying thinking is that little profits snowball into huge ones in time. Scalpers are traders employing this technique. It utilizes market volatility and is handy in slow market days.
Types of Crypto Scalping Strategies
A scalper may pick from any of the following five strategies:
- Crypto Range Trading- the range is the difference between the price support and resistance. Scalpers buy at support and sell at resistance.
- Bid-Ask Spread- The scalper opens a position at either the bid or ask price. To get a profit, they then quickly close the position a few points lower or higher.
- Arbitrage- here, the investor profits from trading the same asset in different markets. Arbitrage is either spatial or paring.
- Price Action– the trader uses price movements to make trading decisions.
- Margin Trading- It entails transacting with borrowed funds.
The Pros and Cons of Crypto Scalping
Like any other trading strategy, scalping has its pros and cons. One advantage is that the small position sizes make it low risk. Additionally, regular small price changes enhance profits, and one can automate their transactions.
Finally, affordable entry positions expand trading opportunities.
On the other hand, scalping is demanding; Any slight delay may lead to losses. Further, it has low returns per trade, and traders incur higher transaction costs.
2. Buy the Dips and Hold
Downswings offer excellent buying opportunities. If the affected asset is strong, the price will appreciate once it gains its market confidence.
An examination of cryptos reveals periods of over and undervaluation. Additionally, the crypto market reacts to media coverage. Positive reportage triggers increased acquisition at overvalued rates. The reverse causes traders to panic, therefore, sell their coins below their real value.
Undervalued cryptocurrencies are ideal investment opportunities. Traders using this strategy study the market to determine peak undervaluation. They also predict the earliest recovery. After this, they do their trades holding out for profit when the market corrects itself.
Pros and Cons of Buying the Dips and Holding
A significant plus for this strategy is that one needn’t have special high-frequency trading software to trade. It is convenient as a single trade suffices. Moreover, one profits from both the cryptos upside and the undervalued amount.
The downside is that it is a long term approach. There aren’t quick profits here. Additionally, it requires a proper grasp of the market. Finally, the strategy calls for calmness amidst market turbulence.
3. Fading Trading
A high-risk trading strategy, fading involves betting against the market’s momentum. The trader sells when there’s an upswing in the market and buys when the market experiences a downswing.
Owing to its high-risk nature, it’s a suitable method for experienced traders. Also, it’s ideal for risk-inclined individuals. However, it could yield dividends when correctly applied and is best suited for a highly volatile market.
Pros and Cons Of Fading Trading
When adequately executed, Fading can be a lucrative trading strategy. Traders can realize profits from any market reversals, a situation that always follows an upsurge or a markdown. That said, it is a risky strategy. One risks incurring massive losses if they misread the market.
4. High-frequency Trading
High-frequency trading is the most profitable yet complex trading strategy to use. It involves the full automation of trading strategies. HFTs are algorithmic and entail volume trading in milliseconds.
Pros and Cons of High-Frequency Trading
HFT trading is beneficial in several ways. Firstly, it reduces the bid-ask spreads, enhances market efficiency, and creates high liquidity to mitigate the effects of market fragmentation. Further, HFT removes emotions out of trading hence improving better decision making.
On the other hand, HFTs could be disadvantageous. For example, algorithms are susceptible to spoofing, thus price anomalies. Secondly, the hardware and software required for trading are costly. Also, the risk of glitches isn’t far away.
5. Golden Cross and Death Cross Trading
The golden cross denotes a situation where a cryptocurrency’s short term average crosses its long term average. Whereas the short term average comprises the currency’s 50 days average, the long term is its 200-day average.
The death cross, on the flip side, is the opposite of the golden cross. It is the point when the short term average goes under the long term average. The gist of this strategy is buying at the golden cross and selling at the death cross.
Analyzing the changes in trading volumes confirms the occurrence of these trends. Although some use technical indicators such as RSI and the MACD, many consider volume one of the best indicators.
Pros and Cons of Golden Cross and Death Cross Trading Strategy
A major boon for the strategy’s users is that it helps to determine the market trend. Using both indicators is essential in pointing out attractive entry and exit points.
Conversely, other schools of thought consider the two to be lagging indicators. Thus, they indicate momentum after price movements have occurred, not before. Additionally, some of the momenta they show could be temporary hence unreliable.
Final Thoughts
The growth of cryptos has ushered in an exciting period in global finance. Besides expanding the payments sector, it has created alternative investment avenues. This growth is fuelled by, among others, the higher ROIs recorded in the space.
To the first time investor, navigating crypto investments could be exacting. For profitability, they need concrete strategies. Luckily today, there are many sound ones that help ease their entry into the sector. These vary in their utility, and ultimately the choice of one over the other is individual. That said, they serve the same end; taking the guesswork out of investments.
So, let us know which of the five strategies you’ll be adopting this year!
