Crypto Trading Strategies

Anybody can buy some assets on a crypto exchange, but only a few will profit from it. Most efficient traders follow (sometimes unconsciously) a trading strategy. This blog post is about explaining what are the most common crypto strategies, and how to use them to gain profit. Enjoy the read!

What is cryptocurrency trading?

Crypto(currency) trading is the act of buying, selling, or exchanging cryptocurrencies on various exchanges with the end goal of profiting from price fluctuations. Traders use different strategies and methods to speculate on market changes. The trading itself can be done manually or through automated methods. It involves market analysis: watching market trends, and technical indicators and following the news events - all that to make the best decisions. Unlike the traditional financial markets. cryptocurrency market operates 24/7, which makes it at the same time more challenging and gives you more opportunities.

What are the crypto trading strategies?

A crypto trading strategy is a plan that traders use systematically to buy, sell, or hold cryptocurrencies with one goal - making as much profit as possible. The crypto trading strategies involve predefined rules based on market analysis, risk tolerance, and time frames - guiding traders on when to enter or exit a trade.

Crypto trading strategies

Below we have listed some of the most popular crypto trading strategies and methods you will encounter.

Arbitrage trading

In simple words - exploiting the price differences of the same asset on different exchanges. You just buy on exchange A and go to exchange B to sell with profit.

• Pros
  • Low-risk compared to other strategies
  • Potentially consistent profits
• Cons
  • You need to be fast and efficient with trading
  • The profit isn’t always significant
  • High transaction fees and potential delays (even milliseconds) mean less profit

💡 John buys 1 BTC on Binance at $60,000. Then sells that 1BTC on Kraken at $60,500. He gains $500 on this action (transaction cost is not included).

Read more about arbitrage trading and statistical arbitrage strategies.

Day trading

It’s one of the most popular strategies which is all about buying and selling cryptocurrencies within a single day - therefore capitalizing on short-term market movements. Day traders use market data analysis, chart patterns, and various indicators to predict the outcome.

• Pros
  • Possible high returns within a short period
  • Everyday chances and opportunities due to crypto’s high volatility
• Cons
  • Relatively high risk
  • It needs to be constantly monitored
  • Stressful due to rapid market changes

Dollar-cost averaging (DCA)

DCA means investing a fixed amount in a crypto asset at regular intervals - no matter the asset’s price. There’s a reduced impact of volatility because of the purchases’ spread over time. It’s one of the least-engaging strategies and could be treated more as a long-term investment.

• Pros
  • Simple and easy to execute
  • No risk of large investments at a high price
• Cons
  • Takes a long time to profit
  • Possibility to miss out on buying larger quantities in dip

Event-driven trading

For people who are very involved in the crypto world and spend a lot of time on Twitter. This strategy involves making trade decisions based on news, economic reports, or other events that may affect the price of a cryptocurrency. Traders not only react quickly to specific events like regulation changes, elections, tech upgrades, hacks, etc.

• Pros
  • A change to yield significant profits if events are correctly anticipated.
  • Leverages fundamental market analysis
• Cons
  • Unpredictable outcomes
  • Requires rapid decision-making
  • You need to stay in touch with the world 24/7

Futures trading

💡 Futures are derivatives that allow traders to speculate on the future price of a crypto asset without actually owning it.

Futures trading means buying contracts that allow one to speculate on the future price of an asset.

• Pros
  • Smaller initial investment
  • Ability to profit in both rising and falling markets
• Cons
  • High risk due to leverage
  • This can result in significant losses, including more than the initial investment.

💡 John believes Bitcoin's price will rise, so he buys a 1 BTC futures contract at $60,000 with 10x leverage, meaning he only needs $6,000 as a margin. If Bitcoin's price goes up to $65,000 at contract expiry, he makes a $5,000 profit. However, if the price drops to $58,000, he loses $2,000. Futures trading allows traders to profit from price movements without owning the asset, but leverage also means a higher risk of significant losses.

High-frequency trading (HFT)

It’s a type of algorithmic trading that uses bots to conduct a large number of orders fast. Sometimes it all happens in fractions of seconds with the simple goal of profiting as much as possible.

Within high-frequency trading, there are strategies such as:

1. Arbitrage: similar to regular arbitrage trading, but performed at a much higher speed/frequency.
2. Market-making: Placing buy and sell orders simultaneously to earn from the bid-ask spread.
3. Liquidity detection: Identifying large pending orders in the market to take advantage of anticipated price movements.
4. Momentum trading: Using algorithms to detect market trends and execute trades rapidly.

• Pros
  • Detects and acts on small price changes throughout the day
  • No need for constant overlook
  • Profits from both volatility and market inefficiencies
• Cons
  • Expensive. Requires big investment in tech
  • Regulatory risks due to market manipulation concerns.

Learn more about high-frequency trading strategies in crypto.

HODL/Hodling

Term & strategy that comes from a typo HOLD, or Hold on for dear life, meaning buy and keep your cryptocurrency regardless of market changes. The idea behind this is to earn from the long-term growth potential of an asset.

• Pros
  • I believe this is the simplest strategy of them all. All you have to do is buy
  • No need for constant market monitoring
  • Potentially great return on investment over time
• Cons
  • Could take a long time. Even years
  • You miss out on short-term trade opportunities
  • You need strong faith and be very patient about the chosen asset

Source: reddit.com/r/Bitcoin

Index investing

Investing in crypto indexes instead of a single asset. Because of that the risk is lower, but the potential profit is also lower. It’s just a safer way to invest in crypto.

• Pros
  • Diversification of your investment reduces risk
  • Simple and pretty straight-forward
  • Less management time required
• Cons
  • Less potential profit compared to a single asset trading

Range trading

Slightly more complicated technique that involves identifying stable, high, and low price levels of an asset and buying at the low end of the range. The profit comes from selling later at the high end. It uses technical indicators like support and resistance levels.

• Pros
  • Predictable entry and exit points
  • Stability of profit
  • Effective in non-trending markets
• Cons
  • Not effective in highly volatile situations
  • Requires precise timing
  • Good market knowledge and analysis needed

💡John wants to buy 1 BTC. It’s current price is $60,000. He buys it at $60,000. John is anticipating the price to rise to $65,000. He will trade it in a range between $60,000 and $65,000.

Scalping

It’s a form of day trading strategy that involves making tens or even hundreds of trades per day to scalp small profits from each trade. It uses small price gaps created by order flows or spreads to gain income.

• Pros
  • Low exposure to market risks due to very short holding times
  • A lot of trading opportunities
• Cons
  • Depending on the exchange could mean high transaction costs
  • Requires some technical skills
  • You need to make decisions fast

Leverage trading

Involves borrowing funds to increase exposure to the market, allowing for larger trades than one's capital allows. It’s a very common technique in margin or futures trading.

• Pros
  • Potential for large profits with small initial capital.
  • Ability to trade both long and short positions.
• Cons
  • Significantly increases risk and potential losses.
  • This can lead to margin calls and forced liquidation.

Margin trading

Margin trading is a strategy that involves borrowing funds from a broker or exchange to trade larger positions than the trader's actual capital, allowing for potentially higher returns. In cryptocurrency trading, this means using leverage to amplify both gains and losses.

• Pros
  • Higher profit potential from leverage amplifying gains.
  • Ability to profit from both rising and falling markets.
  • Access to more capital through borrowing to increase trade size.
• Cons
  • Amplified losses can exceed the initial investment.
  • Risk of forced liquidation if the market moves against the position.
  • Accumulating interest and fees on borrowed funds.

Momentum trading

Involves buying an asset when its price is moving up and selling when it appears to have peaked. Uses indicators like RSI or moving averages to determine momentum.

• Pros:
  • Can yield high profits during strong trends.
  • Clear entry and exit points.
• Cons:
  • High risk if momentum reverses suddenly.
  • Requires quick reaction times.

Moving Average Crossovers (MA)

A strategy based on two moving averages (a short-term and a long-term) crossing over each other. A buy signal is generated when the short-term average crosses above the long-term average, and a sell signal when it crosses below.

• Pros:
  • Simple to understand and implement.
  • Useful in trending markets.
• Cons:
  • Ineffective in choppy or sideways markets.
  • Can produce false signals.

💡John sets up a Moving Average Crossover strategy on Bitcoin using a 50-day moving average (short-term) and a 200-day moving average (long-term). When the 50-day moving average crosses above the 200-day moving average, John buys 1 BTC at $60,000, expecting an uptrend. Later, when the 50-day moving average crosses below the 200-day moving average, he sells his 1 BTC at $65,000, anticipating a downtrend. This strategy aims to capture profits in trending markets but may lead to losses if the market moves sideways, causing false signals and frequent trades.

Relative Strength Index (RSI)

It’s not a strategy, but an indicator that people who use some strategies are considering while trading. Watching this momentum indicator that measures the speed and change of price movements can help you determine overbought or oversold conditions. A value above 70 is considered overbought, and below 30 is considered oversold.

• Pros:
  • Helps identify entry and exit points.
  • Useful in trending and ranging markets.
• Cons:
  • Can produce false signals in volatile markets.
  • Needs to be combined with other indicators for best results.

💡John uses the Relative Strength Index (RSI) indicator to trade Bitcoin, which is currently priced at $60,000. When the RSI drops below 30, indicating the market is oversold, John buys 1 BTC, expecting a price rebound. As the price rises and the RSI moves above 70, signaling an overbought condition, John sells his 1 BTC at $65,000, anticipating a potential price drop. This strategy helps John identify entry and exit points, but in volatile markets, it can produce false signals, so he combines it with other indicators for better accuracy.

Swing trading

It is a medium-term strategy that involves holding an asset for several days or weeks to capture short-to-medium-term gains. It’s a more advanced technique that uses technical analysis to identify entry and exit points for the trade.

• Pros
  • Less time is required than day trading
  • There’s an opportunity to get serious profit
• Cons
  • Requires some monitoring and good analysis
  • Risk of missing long-term trends

Trend trading

Identifies and follows the prevailing market trend, either upward or downward. Uses technical indicators like moving averages to determine the trend.

• Pros:
  • Can yield high profits if the trend is correctly identified.
  • Less frequent trading than day trading or scalping.
• Cons:
  • Losses can be significant if the trend reverses unexpectedly.
  • Requires discipline to stay in or exit the trade.

Crypto trading strategies - which is the best one?

As you can imagine, the answer is - it depends. There are many things you need to consider while choosing the right strategy for you.

How to improve my crypto trading even more?

A strategy is one thing, but the tools you’re using are equally as important. We’d like to present our EMS Trading API to you! An Execution Management System that is equipped with many features created to improve and optimize your trading strategies and overall efficiency.

A few of many EMS Trading API’s features:

• Multi-Exchange Access: The API allows traders to access and manage trades across multiple exchanges from a single platform. This feature is particularly useful for those looking to diversify their trading activities and capture opportunities across different markets. Especially if speed and low-latency is one of the key aspects of your strategy.
• Real-Time Market Data: The API provides real-time market data, enabling traders to make informed decisions quickly. This is crucial for strategies that rely on up-to-the-minute information, such as high-frequency trading and algorithmic trading.
• Advanced Order Types: The EMS Trading API supports a variety of advanced order types, allowing traders to execute complex trading strategies. This includes limit orders, market orders, and more, providing flexibility in how trades are executed.
• Integrated Compliance and Risk Management: The API includes features for compliance and risk management, helping traders and institutions adhere to regulatory requirements and manage trading risks effectively. This is particularly beneficial for institutional investors and asset managers.

Interested in taking your trading to a whole another level? Read more about our EMS Trading API or discover its docs!