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Crypto is a growing asset class that has found its place in financial portfolios with distinction. Traders in decentralized or centralized markets build a strategy before dipping their feet in the market.
Furthermore, they ensure that before making a purchase, they have extensively researched the asset class and its offerings. And due to the high volatility of the crypto market, these aspects of trading, i.e., research and strategy formulation, have become more imperative than ever. These strategies, in turn, formulate a set of unsaid rules in the crypto market.
Here we will be discussing a few strategies that crypto traders use and how one can choose the best one for themselves.
5 Crypto Trading Strategies & How to Choose the best one
Compared with traditional asset trading, cryptocurrency trading is also riddled with risks and pitfalls, much like trading in stocks and commodities. Therefore, investors must formulate strategies that can make trading efficient so that they can reap the benefits of crypto systematically and securely. An effective trading strategy can reduce financial risk. Moreover, it prevents investors from making impulsive decisions that could result in an unsatisfactory crypto journey. Let us briefly understand a few crypto trading strategies that seasoned investors use.
Day trading
Day trading in cryptocurrencies includes taking a position in the market and closing it the same day within trading hours. Due to the fact that deals are frequently initiated and completed within a single day, it is also referred to as intraday trading. Profiting from minute market swings is the exclusive goal of day trading in crypto. Since the crypto markets are volatile, the risk and reward profile of day trading with cryptocurrencies is considerably higher.
A trader choosing day trading should be skilled in developing strategies through technical analysis. Mostly, seasoned traders delve into day trading due to its risky nature.
Scalping
Scalping is a day trading strategy that calls for rigorous TA (Technical Analysis) and discipline. Traders who wish to enter and exit the market quickly use the scalping technique. Scalping is a high-risk, high-profit trading method compared to other markets because of the volatility of the crypto market. Scalpers frequently make small, recurring profits from their trades. Their objective is to achieve small but reliable profits continuously.
Scalpers are experts at performing technical analysis and are well-versed in capital management and charting software.
High-Frequency Trading
Traders often utilize HFT, which is a type of algorithmic trading approach. In order to enter and exit a crypto asset fast, trading bots and algorithms are created while using this strategy. Therefore, understanding mathematics and coding become imperative for using this strategy. Additionally, creating such bots requires a robust comprehension of complicated market principles. Thus, primarily, experienced traders use this technique while trading in crypto. Their main objective is to formulate a trading strategy based on the market activity of other traders.
Arbitrage
Arbitrage involves buying crypto on one exchange and selling it on another. ‘Spread’ is the difference between the buy and sell prices. Trading volume and liquidity differences present opportunities for traders to make a profit. To use this strategy, a trader utilizes exchanges where there is a significant price spread for the crypto they are trading.
Dollar Cost Averaging
It is essential to understand that timing the market is practically unrealistic when trying to discover the ideal entry and exit points in a crypto market. Dollar Cost Averaging is the term for recurring, fixed-amount investments. This method allows investors to avoid the laborious task of market timing and create long-term riches.
DCA necessitates researching market trends and comprehending market cycles. A thorough understanding of technical analysis and charting tools is necessary to ensure a smooth market exit. In this strategy, the traders keep an eye on oversold and overbought areas.
Conclusion
These are just a few of the trading strategies that crypto traders are using. Strategies ensure that investors do not make random and impulsive decisions while trading crypto. However, this doesn’t full-proof your crypto journey. One should try whatever works for them. That having been said, here are some essential to-dos to keep in mind before dipping your toes into the volatile waters of crypto trading:
- Always DYOR!: Before applying any strategy in trading, please ensure that you have done enough primary research.
- Avoid making trading decisions based on hype and trends: The news and opinions you see on Social Media are not necessarily accurate. You should take the advice of anyone and everyone with a pinch of salt and ensure that you do sufficient research before making your decision.
- Balancing the Portfolio: Crypto being a newer asset class, is highly volatile. Hence, investors should ensure that they balance their portfolios by including a variety of currencies in their portfolios.
In conclusion, we should understand that there is no best or worst strategy for trading crypto. Hence, an investor should first understand and keep in mind their financial goals while investing in any particular asset class.
Frequently Asked Questions
How To Invest In Cryptocurrency?
There are two ways of investing in cryptocurrency, mining and via exchanges. Cryptocurrency mining is considered the procedure of verifying and adding transactions to the blockchain public ledger. Another option is via cryptocurrency exchanges. Exchanges generate money by collecting transaction fees, but there are alternative websites where you can interact directly with other users who want to trade cryptocurrencies.
Is Cryptocurrency Safe To Invest In?
Cryptocurrency investments are subject to market risks, but if sufficient security measures are not taken, trading accounts can be maliciously accessed. Investments come with risks and uncertainties, and we cannot claim that any digital currency investment is risk-free. Buying and selling cryptocurrencies can be risky even if the trader is knowledgeable about the market and treats their coins carefully.
Which Cryptocurrency Is Best To Invest In 2021?
Many altcoins are flourishing to invest in. Some cryptocurrencies with great potential are Ether, Ripple, Tron, and more. Investors are trying to diversify their portfolios and are flocking to the leading cryptocurrencies. Many growing businesses are already accepting cryptocurrency as acceptable payment methods.
What Is The Safest Cryptocurrency To Invest In?
Bitcoin has had the highest market capitalization, has been around the longest, has the most experienced development team, and has enormous network impact and brand recognition. As a result, while trading cryptocurrencies, the rate of return on Bitcoin is commonly used as a benchmark. However, the risks associated with cryptocurrencies remain, and the safest cryptocurrency for you depends on your analysis.
Are Cryptocurrencies Legal In India?
In India, cryptocurrency is legal, and anyone can buy, sell, and trade it. Because India lacks a regulatory system to regulate its operations, it is presently uncontrolled. According to the Ministry of Corporate Affairs, companies must now document their crypto trading/investments inside the financial year.
Is Mining Cryptocurrency Legal?
Cryptocurrency mining can be time-consuming, expensive, and sporadically profitable. Mining has an appeal for many cryptocurrency enthusiasts as miners are paid directly with crypto tokens for their efforts. The legality of cryptocurrency mining is dependent on where you live. In India, there is no restriction on crypto mining.
Who Invented Cryptocurrency?
Satoshi Nakamoto invented cryptocurrencies and the technology that makes them function in 2009. The presumed pseudonymous individual or persons who invented Bitcoin used this identity. In addition, Nakamoto created the first blockchain database. Even though many people have claimed to be Satoshi Nakamoto, the person's identity remains unknown.
What Is Cryptocurrency?
A cryptocurrency is a digital currency secured by encryption, due to which chances of activities such as counterfeiting and double-spending taking place get close to impossible. Cryptocurrencies get created on blockchain technology ( a distributed ledger enforced by a distributed network of computers). Cryptocurrencies are unique in that they do not get issued by any central authority. The term "cryptocurrency" comes from the encryption techniques used to keep digital currencies and the network safe.
How To Invest In Cryptocurrency Stocks?
Cryptocurrency can be purchased in two ways: through mining or exchanges. The process of confirming and adding transactions to the blockchain public ledger is known as cryptocurrency mining. Cryptocurrency exchanges are another option. Exchanges make money by charging transaction fees, but there are alternative platforms where you may communicate directly with other cryptocurrency traders.
Is Bitcoin And Cryptocurrency The Same Thing?
Bitcoin is a cryptocurrency that was designed to facilitate cross-border transactions, eliminate government control over transactions, and streamline the entire process without third-party intermediaries. The absence of intermediaries has resulted in a significant reduction in transaction costs. Satoshi Nakamoto, the creator of Bitcoin, created the first cryptocurrency in 2008. It began as open-source software for money transfers. Since then, plenty of cryptocurrencies have emerged, with some focusing on specific fields.
Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
