Traditional traders a.k.a. day traders and swing traders have developed a formidable selection of trading strategies over the years. It’s a safe assumption that trading strategies exist for cryptocurrency too. A caveat is in order: no failsafe strategy can guarantee profits for any form of trading. There is an inherent degree of risk when trading volatile contrarian assets like Bitcoin, Litecoin, Ethereum, Ripple, and other digital currencies.
Multiple tracks currently exist for buying and selling cryptocurrency. These include the traditional methodology of purchasing the digital currency as an asset and storing it in a Bitcoin wallet. With this technique, cryptocurrency exchanges facilitate the purchase and sale of digital currency tokens. Profitability results when the underlying asset is sold for more than its purchase price. Profits are not realized until the asset has been sold, given the highly fluid nature of appreciation and depreciation with digital currency options. The ‘buy and sell’ approach requires the asset to appreciate over time.
Derivatives Trading of Cryptocurrency
Before you pick a trading strategy, it is worth considering another trading option. Contracts for difference (CFDs) are derivatives trading instruments whereby a trader or investor purchases a contract that mirrors the performance of the asset. These CFDs do not confer ownership of any form of cryptocurrency – they are simple contracts which either expire in the money or out of the money. Cryptocurrency trading involves ‘Buy’ or ‘Sell’ options from a range of crypto trading possibilities.
These include the likes of Ripple (XRP), IOTA, NEO, Litecoin, Crypto 10 Index, Bitcoin, Ethereum/Bitcoin, and Ethereum. The leverage offered on these options can be as high as 1:2, indicating that for every $1 that is invested, $2 worth of the underlying asset can be traded. With CFDs, there is no need to purchase a hardware device for storing crypto, and no need to register at a cryptocurrency exchange. The options are available to trade 7 days a week, not like traditional stocks, bonds, forex, and indices.
Fundamental & Technical Analysis for Cryptocurrency
The fundamental analysis tracks the metrics with assets. These include debt/equity ratios, dividend yield, earnings per share, and price to earnings ratios. With fundamental analysis, the objective is to determine what the asset’s intrinsic value is. If the asset is trading below that value, it is worth buying. If an asset is trading above its intrinsic value, it is overpriced. Technical analysis looks at trends, charts and graphs.
This is the technique that is used by cryptocurrency traders to evaluate buy and sell options. In trading parlance, the trend is your friend. In a relatively short period of time, cryptocurrency traders have come to rely heavily on technical analysis. It is safe to assume that there is no intrinsic value to any digital currency, irrespective of its popularity. This asset class is unique; it is volatile and subject to whipsaw price movements, and only demand/supply considerations determine pricing.
When formulating any trading strategy with crypto, the best determinant of buy and sell decisions is mass-market sentiment. When evaluating the strength of a digital currency, always look at trading volumes. The greater the demand, the higher the price. The lower the demand, the lower the price. When volume doesn’t support price movements, downward revisions in price are the likely result.
As a case in point, one might see the price of Bitcoin suddenly spike to a 50-day high, while volumes don’t support maintaining the price at that level. A logical assumption, in this case, is that the price will retreat. If buying volume or selling volume is high, you can expect the trend to follow the volume movement. Excess buying capacity will lead to higher prices and excess selling volume will lead to lower prices. These are failsafe trading strategies to adopt with cryptocurrency.
Trading Bitcoin Based on Latest Price Movements
Source: StockCharts BTC USD (Values on 26th of November 2019)
The above chart indicates how the price of Bitcoin has moved relative to the US dollar in recent months. The 50-day moving average of BTC/USD is $8,561.11, and the 200-day moving average is $9,315.24. At the prevailing price (listed above) of $8,485.92, BTC/USD is trending bearish, lower than the 50 and 200-day moving averages. RSI indicators are momentum oscillators that determine how quickly prices are moving. With a value between 0-100, the RSI index is a popular way to determine what strategy to adopt for an underlying asset, including cryptocurrency.
When the RSI approaches a value of 70, the asset is deemed overbought. When the RSI drops below 30, the asset is deemed oversold. However, it is worth pointing out that many stocks are overbought or oversold for prolonged periods of time. Nonetheless, RSI proves to be a useful additional resource to validate current expectations. For example, if BTC is on a downward trajectory and the RSI is less than 30, we can assume that it is oversold and possibly ripe for the picking.
Sage Trading Advice Based on Current Price Movements
As you can tell, it’s always important to follow the trend. Indicators typically support trend movements and will often confirm what we think to be true about Bitcoin price movements. Other useful trading options available to crypto aficionados include the money flow index and the true range breakout indicators. Whenever you are engaged in day trading activities, always use stop-loss protection to sell the cryptocurrency if its value drops to a certain level, thereby stopping the losses that you will experience. It’s never a good idea to trade emotionally. Too many people tried to jump onto the bandwagon when crypto was burning red hot, and they all got burned. They got in at the wrong time and sold at the wrong time. Rather bide your time, monitor the money flow, wait for the reversal, buy on the dip, and enjoy the rebound!