Cryptocurrency trading strategy: diving in

Cryptocurrency trading strategy

Contents

Cryptocurrencies are gaining traction worldwide and the promise of the blockchain revolution is  becoming a reality. More and more people are dipping their toes into the crypto trading game. It’s already a huge market, with tens of millions of web users showing interest in digital asset investing and cryptocurrency trading. According to Bitinfocharts, there are 10-23 million cryptocurrency traders out there, with 4.9 million of them in the “hardcore” category. With the market continuing to develop by leaps and bounds, this number will steadily increase as people realize the kinds of opportunities cryptocurrency trading provides. Investing in lucrative tech projects was never this accessible in the pre-blockchain era.

And buying cryptocurrency is getting easier. You can do it with a debit card right on the exchange, and there are step-by-step guides for registering at all the exchanges. While there are plenty of active traders out there, many do not apply good professional standards to their practice. Implementing a successful trading strategy is difficult even for seasoned veterans, and especially for beginners.   

Here at Tokenplace, we’ve been in the thick of it, crypto trading 24/7, and are happy to share our strategies and offer a few tips. After all, not everyone can be a winner on the exchange! If someone is doing well, somebody else is probably losing. So it’s imperative that you find a worthy trading strategy. In this article, we’ll tell you about choosing the right exchange or broker. We’ll also discuss different time-based trading strategies, arbitrage, trading bots, news-based trading, and price manipulations.  

How to Trade Cryptocurrency – Getting Started

To start trading, you first need to buy bitcoin. Once you have Bitcoins in a wallet, you can deposit them on an exchange account. From there, you can trade from your order book and send new orders to market, or trade already existing orders. Many of the exchanges, including Binance, have now added an option to bring in fiat and buy crypto directly from a bank card. This has made the start-up process easier. You can also look at specialized fiat-crypto exchange services such as Coinmama, as well as P2P platforms like Localbitcoins and fiat-crypto aggregator Bestchange

How to Trade Cryptocurrency – Getting Started

New crypto exchanges are opening at a rapid rate. There are already over 500. There are also new cryptocurrency trading services, such as Tokenplace. Each exchange and each service has its own specific functionality, and it’s important to realize that many strategies are only possible on particular exchanges or trading services. For example, margin trading is only supported on the larger exchanges like Binance, Bitfinex, Bitmex, OKEX and a few others. 

Cryptocurrency Trading 101

Cryptocurrency Trading 101
Trading 101

Before dishing the details on trading strategies, we have a few pieces of sage advice for anyone who’s just starting out. 

  • Diversify your portfolio. If you’re only doing bitcoin trading, you have too much exposure to risk and are missing out on profitable opportunities. Look into some altcoins like Ethereum and the range of other cryptocurrencies in the top 20 like Litecoin or BNB. Keep in mind that the lower the market cap of an altcoin, the greater the volatility, so manage your risk wisely when bringing altcoins into your portfolio.  
  • Set your Take Profit and Stop Loss orders. This is probably the single biggest piece of advice for beginners, especially if you’re trading altcoins. Stops can be set for a certain asset price, for a percentage loss, or for volatility. For most crypto exchanges, the first type is the only available one. It’s best to set your take profit to stop loss ratio at 3:1, so your upside is three times your potential losses. 
  • Be strategic about time management. It’s possible to spend literally all your time trading crypto. Unlike traditional stock and bond markets, crypto exchanges operate 24/7, so make contingency plans for the time you are away. If you do decide to trade all day and all night, it’s unlikely to help you get rich quick. And you risk becoming a cryptozombie. A good trader should be well-rested and even-keeled!
  • Take calculated risks. The amount of money you trade should never be more than what you can afford to lose. We recommend that you keep a trading journal to better manage your trading over time. You can find an example here. Read on for more details on the varieties of risks you will face.

How to Compare Exchanges

When choosing an exchange, first check out the reviews. Unfortunately not all forex brokers and crypto exchanges are reliable, so take the time to figure out who to trust and with how much of your money. Before diving in to trading real sums, do some training on trading simulators, or try paper trading. Some crypto exchanges like Bitmex and HitBTC allow you to open a demo account. 

How to Compare Exchanges

For most market players, the main activity is not to hold cryptocurrencies long term, but to make educated guesses about price movements. That’s why it makes sense to start out by using a forex broker before getting on a crypto exchange. You can pick one of the ones that works with both forex and cryptocurrency markets, such as plus500 or eToro. 

When choosing a crypto exchange, study the interface and trading functionalities they offer. See if there’s a mobile app, or at least a mobile version of the site, and how well they work for you. Then look at their fees. The key figures are: deposit and withdrawal fees, trading fees, and margin trading fees. There are two kinds of trading fees at each exchange: maker and taker. A maker posts orders at a price higher or lower than the current market price, thus adding liquidity to the book. A taker posts orders at market price, and they are executed immediately, thus taking liquidity off the book. That’s why a taker fee is higher. So the same transaction can cost you a smaller fee if you set the price higher or lower than the market rate.

Don’t forget that brokers and exchanges, as intermediaries between you and the market, can suddenly go bankrupt or suffer some other unexpected event that leads to your login being frozen. To stay safe, you should have multiple accounts. There’s also the risk of hackers: both centralized and decentralized exchanges are periodically attacked. Even a big fish like Binance, with its vast investments in security, has already been hacked three times and lost tens of millions of dollars. So it’s probably unwise to keep a huge balance on any one cryptocurrency exchange, and the best practice is to store your coins in cold wallets. However, major catastrophes with cryptocurrency exchanges are rare. Here is a list of the leading crypto exchanges that have earned the community’s trust:

One easy way around the problem of choosing is just to register with each of these, and then trade on all of them via Tokenplace. Then you don’t have to be dependent on a single exchange, and it’s quick and easy to set up. 

Risks

Setting up a serious cryptocurrency trading practice is like starting any other business. You have to weigh the pros and cons, and identify financial risks. 

Low liquidity. Even on the top tier exchanges, the majority of trade volume is in a small group of trading pairs composed of top-10 ranked cryptocurrencies. But the spread on these is low. Less popular cryptocurrencies offer a higher spread, but lower trade volume. Weigh these factors wisely when honing your trading strategy. Keep balance in the force you must!  

Risks

Exchange closings. Remember that all exchanges carry the risk of closure. The list of sad examples includes Cryptsy, Komcort, Mintpal, and Swisscex. They were once mighty exchanges, and investors lost big money on all of them when they shut down. To mitigate this risk, remove some portion of your earnings. For example, on the first of each month, withdraw half of all of you profits from each exchange. That way your balance continues to grow but you hedge yourself by taking real profits rather than just seeing growth in a virtual account.

The problem of scalability. A given trading strategy may face limits to the volume that a robot is able to execute. For example, a balance of more than 10 BTC on Bittrex is excessive, since a bot won’t be able to keep up with transacting such a large sum. However, certain markets and trading pairs offer very high liquidity, so if you’re trading BTC/USD or ETH/BTC, it will be quite some time before you run into such limits. 

The risk of orders failing to execute. A fund’s strategy is dependent on its ability to establish and maintain a market position while juggling financial instruments. If trade orders are not being executed effectively and on time, the fund risks being unable to achieve its desired positions and losing money.

Operational risks. All operations in fund management bear risk of error: executing orders, reconciling positions, reporting, recording gains and losses, internal accounting and risk management, transfer of funds, etc. Human error as well as systems failures can both play into this. 

Risks associated with unhedged positions. Certain strategies may be impossible to hedge, which brings a certain level of exposure. This list of risks can go on and on: exchange errors, bad deals, trades made outside of the exchange. You should analyze each case and arm yourself to the teeth against your many enemies!

Taxes and Regulations

Taxes and Regulations

Many countries have already passed legislation regulating cryptocurrencies and established relevant tax laws. Look at how your country regulates crypto trading, and as you calculate your profits you’ll need to factor in the tax burden. Each jurisdiction will have a different tax scheme. In the USA you have to pay taxes on cryptocurrency you sell, while in Germany and Singapore you don’t have to pay if you’ve held the tokens for more than 12 months. Most countries tax cryptocurrency trading profits as capital gains, including Australia, Japan, Great Britain, and others. Some countries will require you to declare your investments in cryptocurrencies. So in some cases you’ll have to report your assets even before you’ve made any money on them. This is the case in the US, for example. In our next round of articles, we’ll take a closer look at the legal specifics of owning and trading cryptocurrencies. 

Widespread Trading Strategies

Widespread Trading Strategies

At last, we can get into some cryptocurrency trading and investment strategies. The crypto market is rapidly growing, so new trading technologies are coming on line over the next few years: bot trading, big data analytics, neural networks, news analytics and even tools for tracking the behavior of large numbers of traders. Big players will be entering the market, launching cryptocurrency derivatives (index, futures) and investing in them. In short, the market will grow significantly in the near term, and the demand for cryptocurrency investing will grow. In this context, your challenge is finding the trading strategy that will help you make your mark.

Trend Trading Strategies

This is probably the most widespread strategy among traders with some experience. It relies on analysis of indicators like moving average or MACD in order to identify the dominant trend. This classic type of analysis relies on past events, however, and things in crypto change rapidly. So trading on long-term trends going back more than a couple weeks or a month should be done with great caution. 

Trend Trading Strategies

Front-running is related to trend analysis. In this strategy, a trader analyzes the pending buy/sell orders on an asset, its liquidity, and the volume of different positions. The big play is to find a very large pending order and place your smaller order at a higher price. For example, if there’s a large order to buy an altcoin, when the order is executed the price will jump, allowing you to immediately sell at the higher price. If it’s a large sell order, then you can buy in at a lower price after it drops. Frontrunning is also part of the HFT world, since it relies on high-speed algorithms. 

Correlation-based strategies

Another trading strategy is based on correlation data. Traders exploit the correlations between crypto assets and their trading pairs. At its simplest, this involves tracking price correlations of altcoins to a big fish like BTC or a stablecoin like USDT, aka Tether. To implement such a strategy, you’ll need to run a statistical analysis of the assets and set up automated trading. 

Day Trading

Trading can be classified not only by types of trades, but also by time interval: day trading, swing trading, and long-term trading. Day trading is a strategy in which the trader enters and exists from a position within the course of a single day. Cryptocurrencies are probably the best market for day trading, since price movements within a single day tend to be much larger in crypto than traditional stock markets, or even forex. Bitcoin and other cryptocurrencies trade 24/7, and traders can often find numerous profitable points of entry and exit in a day. Bitcoin is a relatively stable crypto asset that can also be a good target for day trading. You can start by looking for a bottom, the lowest price point on the day’s chart. For example, if there was a recent correction, but the downward movement met resistance and started moving back up. Conversely, you can look for the highest price of the day, the top, when the growth in price stops, volumes diminish, and a sideways trend moves in. The best move of all is to wait for when the price breaches a psychological barrier and then trade on trend. That way you’re risking less.

Swing Trading 

Swing Trading

Swing trading is a middle-term trading strategy. The task of the trader is to figure out the trend for the next 2-3 days. Swing trading is generally done with a small number of transactions. The challenge is basically to predict the future and trade on the trend you foresee unfolding for the cryptocurrency over the next few days. These predictions can be based on good news or bad news coming down the pipeline for a given asset or for the cryptocurrency market as a whole. Once you’ve identified a trend, you need to take a position and wait. Hold the position until you have evidence that the trend has changed. The key to this strategy is not to react to insignificant fluctuations that seem to be going against the trend.

Long-term trading

Many crypto traders and holders or cryptocurrency practice long term trading, since it doesn’t take up a lot of time and won’t drive you crazy. The simplest strategy for Bitcoin trading is that of the hodlers. You can also find an altcoin you love and stick with it. The idea is to buy a cryptocurrency and invest in it over a long period of time. This strategy doesn’t take any specialized analytical skills, only a lot of patience. In general, patience is the key to success in the crypto market, especially for beginners. When faced with such a volatile market, it’s important to remember the words of the Oracle of Omaha, Warren Buffet, who said that if you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes. The interval between the big crypto rally in 2017 and the 2019  upwards correction was more than a year. Only the most stubborn traders outlasted the crypto winter and thus avoided losses. 

One way of implementing this strategy is just to buy bitcoin, set your stops, and wait a year before looking at the results. The Tokenplace team is a fan of this strategy. Many of our employees put aside $15 per day from the salary to invest in altcoins. It’s a sum that’s not too scary to lose, but holds the potential for doubling up on your investment multiple times. You can find tips on which altcoins to invest in when our next installment comes out. 

Scalping

scalping

Another widespread trading strategy on crypto markets involves holding a position for mere minutes or even seconds. It’s especially effective for altcoins, since their high volatility makes it possible for trader to make 5 or even 10 percent in a single trade. For those new to the game, scalping is a very risky strategy. In the current period of increasing bitcoin domination, only the top range of crypto is growing as before, and taking a short position is still risky. You need a good sense of the market and ideally of the specific altcoin you’re trading. You risk losing serious losses if you make mistakes in scalping. 

News-Based Trading and Technical Analysis

News-based trading gives good results in crypto, and has taken over the lead from fundamental analysis. After all, the crypto market is a market of expectations and moods. Not just rank-and-file traders, but even the whales take positions based on the news. A good practice is to take a calendar and mark all the important events upcoming for the asset you are interested in over the next two months. Various industry conferences used to have big price effects on crypto assets. Now there’s a lot of movement tied to what the exchanges are doing. A listing on a large exchange like Binance is 100% going to result in price movement for an altcoin. Bitcoin’s price gets driven upward by cryptocurrency companies gaining regulatory approval or licensing in the US, or by news that a large corporation is investing in crypto. For example, there have been talks for over a year to launch an ETF for bitcoin on the US market. On the other hand, successful attacks by hackers tend to drive the market down, as do regulatory crackdowns. Buy if you see good news on an asset you’re tracking, sell if something bad happens. The key is to do so before the crowd gets to it. If you’re late, somebody else has already taken the profits, and you’ll be stuck with a loss. If you hone your skills and learn how to extract correct trading decisions from the news in a timely manner, you can make good money. The big cryptocurrency media outlets like Coindesk and Cointelegraph can get you started. 

News-Based Trading and Technical Analysis

Classical charting and technical analysis also works well for cryptocurrency trading. But do take into account the risk that high trade volume and volatility can lead to misreading the results of the analysis. Don’t mistake a false breakthrough for a signal that something is going to the moon. Before making a trading decision, make sure you have scouted out the landscape in terms of price levels and trade volumes. A simple and convenient indicator for making decisions related to trade volume is the On Balance Volume (OVB) indicator. We’ll get more in-depth on technical analysis in later articles. Meanwhile, you can test some of these out using Tradingview.

Manipulations

Within the realm of news-based trading lies another key aspect of the crypto markets: hidden manipulation and market making. The value of certain altcoins are artificially kept up through market making. Any good news can become an excuse for market makers to drive the price up. Good news items are also often parlayed into Pump and Dump schemes. In this shady trading strategy, the manipulator takes an altcoin with low liquidity and starts making promises to bring its value up to a certain level. Information about this is spread on social media and through messenger groups, often on Telegram or Discord. He’s an example of a pump group. However, when traders who want to get in on the pump go to buy the asset, the price has already moved higher. By the time everyone who wanted to join the pump make their purchase, the price is already falling back to the original level, and most participants in the scheme end up with serious losses, sometimes more than half of their deposits. So our recommendation is to avoid pumps altogether. Yobit is one of the exchanges that sees the most pumps nowadays, while Bittrex used to be the favorite pumper destination. You can read more about these schemes here

Market Making

Market making is probably the most reliable way to turn a profit on the crypto markets. Most market makers work with altcoins by an agreement with the people who created them. Their task is to keep up the value of the cryptocurrency, and move it up if possible. This requires capital to the tune of hundreds of thousands or millions of dollars. Once they have that, it’s simple: they post bids and offers and come into the asset from below, at the resistance level, buying it up with high volume. Then they move the price up, increasing trade volume, which in turn leads to exponential growth in the price as the crowd moves in. When the crowd has had its fill and it becomes clear that everyone who wanted in on the asset has already gotten theirs, the market maker starts to sell, but very gradually, so as to maintain the price level. Some market makers use their own funds, while others play with borrowed capital. 

Bots

Trading bots are algorithms that automatically place and execute buy and sell orders at the moment when certain indicators are reached. Bots can transact on cryptocurrency exchanges by connecting to them via API. There are preset trading bots, which work automatically, as well as custom scripted ones that a trader creates by hand. 

crypto bots
crypto bots

Bots can help beginners orient themselves in the jungle of various trading strategies by testing them out using a ready-made bot. There are active message boards, such as the one on Quora, where you can get links to already available bots that can help you assemble a trading strategy. These include ga-bitbot, mtgox-autotrader, cryptotrade, BitcoinTrader, and others. 

The Merkle has put together a list of the top 6 bitcoin bots:

Cryptocurrency prices are highly dependent on the trends of the day, so it’s a market that requires timely adjustments to one’s algorithms based on the market conditions for a given crypto asset. Keep this in mind if you use a bot over a long period of time. Scripted bots need to be recalibrated, and preset bots might become obsolete if the trends change. For example, bots that showed a good profit in 2017 put out big losses in 2018. So bot trading can give you excellent results, but you should try to find a bot that’s kept up to date by a team of professional traders. 

Arbitrage Trading

Arbitrage is one of the most consistent strategies for making money in cryptocurrency trading. The basic form of arbitrage derives value from the price differences for a given cryptocurrency from one exchange to another. You just find where the price is lowest, and where it’s most expensive. Then you buy low, transfer it to the other exchange, and sell high. 

In theory, inter-exchange arbitrage basically guarantees results. This is not always the case, however, especially for the inexperienced. The problem is that exchanges have long caught on to this strategy and have a bag of tricks for countering it, especially with altcoins. Inexperienced traders often lose money trying to play the price differences in altcoins because moving coins from one exchange to another takes too long. The case is different with Bitcoin and the top altcoins, where arbitrage strategies still work well. But since price differences among the various exchanges for these coins aren’t more than 5-10%, it’s often not worth the risk. Another version of the arbitrage strategy doesn’t involve inter-exchange transfers. Here, a trader buys and sells the same asset on two exchanges simultaneously, and pockets the price difference.

Statistical Arbitrage

statistical arbitrage

Statistical Arbitrage is a more complex strategy than basic arbitrage. It involves playing the price differences between several cryptocurrencies simultaneously. In this case, the combinations of transactions are harder to choreograph, and there must be at least three assets involved; for example, Ripple, Ethereum, and USDT. Special services are used to set up these kinds of trades, helping you find the right combinations. Statistical arbitrage also requires quick action to execute the whole series of trades within a few minutes while the price differences hold. We don’t recommend those who are new to trading to dive into arbitrage, and especially not statistical arbitrage. First of all, it requires a large deposit. Second, if you mess something up you’ll probably be facing a loss. Spoiler alert: the Token Engine trade aggregator we’re working on at Tokenplace will revolutionize arbitrage, and allow users to buy all crypto assets at the lowest market price in real time. 

We’ve given you a small but potent dose of our hard-won wisdom, and shared some basics about the most popular strategies for cryptocurrency trading. Draw your own conclusions, and send us your questions. We’ll try to answer them all in the next articles. Happy hunting! 

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