Four Must-Know Crypto Trading Strategies
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So, you've finally caught the crypto bug? After years of hearing about how cryptocurrencies have revolutionized the financial landscape and created an investment pathway to wealth, you want to get involved in the action as a crypto trader.
Well, before you sign up on an exchange and begin your journey to becoming a crypto VIP, it's crucial to understand some of the basics. One of the vital investment aspects to learn is trading strategies.
Cryptocurrency traders use diverse methods to invest in digital assets. Each of these strategies come with risks and benefits, and understanding them is critical to determining what's right for you. Briefly, here are four of the most popular crypto trading techniques:
Day Trading
The cryptocurrency market is quite volatile, with the prices of digital coins subject to rapid changes. Some traders tailor their trading strategies to align with the market's volatile nature. One way to do this is through day trading.
Day traders typically buy and sell cryptocurrencies on the same trading day. The idea is to make profit off short-term and quick price changes.
Crypto day traders typically execute this strategy with multiple digital coins daily, and the decision-making process can occur within hours or minutes. This method also requires you to constantly monitor the market to determine the best time to buy and sell.
As a result, it's significantly time consuming, stressful, and demands much more expertise than other trading methods. Not to mention the fact that the market's volatile nature means you can get your forecasts wrong and suffer considerable losses.
However, day trading is an effective strategy if you're in the crypto market for quick profits with minimal long-term risks.
HODLing
HODLing is more or less the opposite of day trading, since it is a more long-term strategy. The term originally came from a misspelling of "holding" on a Bitcoin forum in 2013. Since then, it has become a popular slang among crypto traders and has evolved to become a trading technique.
It even has an acronym – Hold on for Dear Life (HODL). Basically, HODLing involves buying a coin and refusing to sell for a long time till it reaches a specific price range.
Crypto traders who use this strategy can hang onto a coin for months and even years. Since this strategy is more passive than day trading, it has become a popular way for newbie traders to enter the market. You don't have to constantly monitor crypto prices or worry about short-term price fluctuations.
Investors who use this technique also don't need to have the in-depth expertise of day traders. However, HODLing still has its fair share of risks. For instance, popular cryptocurrencies like Bitcoin have a more reliable track-record of long-term profits.
In contrast, it's almost impossible to predict the future performances of recent digital coins in the volatile crypto market. As such, holding onto these coins can be a risky venture. Let's not forget that government bodies can outlaw cryptocurrencies and derail your investment strategy.
Dollar-Cost Averaging (DCA)
Dollar-cost averaging (DCA) is another long-term trading strategy but with significantly lesser risks than HODLing. This technique requires traders to invest specific small sums into crypto assets at defined intervals, rather than making one lump purchase.
For instance, you could decide to invest $500 in a digital coin every month for a year. Since this decision is fixed, you're not bothered by volatility or other market forces. In other words, this strategy ensures that your investment choices aren't affected by emotions.
As a long-term investment strategy, dollar-cost averaging is also suited for newbie traders who don't have expert knowledge of the crypto industry or don't want to spend time studying the market before making trading decisions.
That said, the crypto market tends to rise with time. As such, price increments could see you purchase fewer amounts of your preferred coin using dollar-cost averaging in the long-term, and this factor could affect your profit margin.
Furthermore, focusing on investing in one coin over a lengthy period could mean ending up with a portfolio that isn't diversified. As such, you're more exposed to financial risks if that asset fails to perform as expected.
Swing Trading
Swing trading strikes the balance between long-term and short-term crypto investments. Traders who favor this strategy purchase coins and hold them for some days or weeks.
Basically, these individuals try to take advantage of the market’s medium-term price fluctuations. Swing trading is a significantly more passive approach than day trading; however, it requires more time investment and expertise than HODLing or dollar cost averaging.
You'll still need to analyze the trends and patterns in the market to determine your entry and exit points. If you get your forecasts right, though, you could walk away with some substantial profits. On the flip side, since swing trading requires speculation, inaccurate predictions could lead to heavy losses.
Conclusion
Cryptocurrency enthusiasts utilize different trading strategies to invest in digital assets. Your preferred investment method depends on several factors, including your goals and knowledge of the market.
Of course, there's no sure-fire strategy. Every technique comes with risks and benefits. With this fact in mind, it's crucial to carefully analyze your investment objectives and determine what's right for you.