A crypto trading strategy refers to a set of rules and guidelines a trader abides by to make informed crypto decisions in order to gain profit from the crypto space. Though there are different trade strategies available, a trader has to opt for a strategy considering their investment requirements, risk tolerance, and time frame along with volatility, liquidity, and regulations of the market dynamics.
Risk management
Management of risks is an inevitable part of an effective trading strategy. A risk management technique helps a trader determine the risks associated with trading and adopt various measures to mitigate the impacts of risks. Opting for an effective risk management system not only reduces the chances of loss but also increases the potential for profits.
Setting stop loss and take profit levels
Stop loss and take profits are the key concepts of trading in which a trader is instructed to reduce the size of a position automatically when the asset attains a minimum required level.
A stop-loss order is considered a risk management tool that closes the position of the holdings when a stake falls to a predetermined level. This eliminates the risk of losing the capital and instead loses an amount that a trader is comfortable with. The stop-loss mechanism helps a trader identify the entry and exit points and adds an additional layer of standard to the trading pattern.
In a highly volatile market like crypto, opting for a stop-loss strategy increases the return rate on a long-term investment. While setting a stop-loss order an investor must have the proper idea of what they can afford a loss. A technical analysis indicator can be used to determine the price levels.
Take-profit order is a strategy aimed at protecting the gained profits. According to this strategy, a percentage of the profit will be closed when a winning position attains the targeted price. Both the stop loss and take profit orders function automatically, helping investors to prevent chances of missing the opportunities. A predetermined exit point allows a trader to neglect emotions while encountering a severe fluctuation in price.
Position sizing
Position sizing refers to the amount invested by a trader in a specific platform, usually represented in the number of units. Account size and risk tolerance of the trader are considered while determining the position sizing which helps them to reduce the risks as well as gain profits.
For position sizing a trade, an investor has to analyze their account risk, which is generally the percentage of the capital investment. After determining the account risk, one has to evaluate the trade risk which involves where to place a stop-loss order.
A trade risk is the difference between the entry and stop loss price. After knowing the trade and account risk, an investor can form the correct position size, and divide the account risk by trade risk, which returns the percentage of shares one can buy.
Percentage share = account risk/trade risk
Choosing a time frame
Choosing a time frame is a key strategy to improve the profits in the crypto platform. Investors buy crypto assets both for long and short terms. Some keep the assets for several days while others sell them within a day after buying them. Shorter time frames help in quick gains however longer time frames are preferred for spotting long-term trends.
Day trading
Day trading is one of the most common types of trading in which traders buy and sell investments in a single day. Day trading provides frequent profits with quick price fluctuations.
Swing trading
Swing trading is the contrary of day trading, an investor keeps a crypto asset for several days in the hope of getting a good profit. Swing traders analyze the trends of the crypto space and keep the stakes on hold until a retaliation or decline happens.
Combining technical and fundamental analysis
For creating an effective trading strategy analyzing the technical and fundamental features of the crypto platform is mandatory.
Technical analysis involves collecting past data, price patterns, and technical indicators to determine future price fluctuations and trends.
Fundamental analysis evaluates basic factors related to crypto including the worth of cryptocurrencies, technology uses, market competitions, and conditions.
By combining both technical and fundamental analysis an investor can make informed decisions while investing in crypto platforms.
Backtesting and Strategy Optimization
Crypto backtesting is used to evaluate the effectiveness of the strategies applied in a crypto trade. It is done by analyzing previous data, traders input their rules and conditions to a backtesting platform to calculate the strategy performance.
Once the results are generated, traders get an insight into the effectiveness of the strategy and refine them if necessary. Testing a strategy before live trading eliminates the chances of potential risk and improves the gain associated.