Which Crypto Trading Strategy is Most Effective?

If one thing is for certain, it is that cryptocurrencies are volatile in nature. The market drivers which influence the prices of cryptocurrencies continue to reshape. So, how does one profit from crypto trading given that market conditions are undergoing continuous transformations?

The answer to this question would differ from one trader to another, as it depends on risk tolerance, time orientation, the goal of investing/trading. Not just that, but the prevalent market conditions of a certain cryptocurrency also make the answer to this question ever-so variant.

The dynamic environment of the crypto industry makes impossible for a crypto trading/investing strategy to have a 100% success rate. The efficacy of a certain crypto trading strategy would grow & shrink based on omnipresent sentiment, fundamental factors and techincal readings surrounding a specific cryptocurrency.

There isn’t – and will likely never be – a golden strategy that works every time.

Let’s explore the underlying concepts of risk tolerance, time orientation and the goal of investing/trading and how they play a major role in shaping an effective crypto trading strategy, before shedding light on the importance of prevalent market conditions.

Risk tolerance

To risk or not to risk. Okay, it is more complicated than that. In essence, risk tolerance refers to the degree of risk than a trader/investor is willing to endure given the volatility of a certain investment. The terms “low-risk, low-reward”, “medium-risk, medium-reward” and “high-risk, high-reward” are subjective and cannot be generalized nor quantified; low-risk for someone who has $10,000 in his/her bank account would differ from what low-risk means for a millionaire.

Typically, crypto traders & investors which adopt a low-risk, low-reward mindset tend to incorporate methods and strategies which does not provide a very profitable prospect, but will also incur small losses when things don’t go the way they’re intended to.

Time orientation

Some traders play the long-term game, while others seek to capitalize on short-term price fluctuations. Traders & investors oriented more towards the long-term often incorporate disciplined strategies which realize periodically-consistent returns on their investments over multiple years, or enjoy significant gains after a considerable amount of time.

Long-term trading methods diminishes the need for constantly keeping up with price action, have the potential to generate consistent and periodic returns, and isn’t impacted by emotion-fueled decisions. Yet, they typically generate low returns and can lead to hefty losses if no exit plans are put in place.

Short-term traders on the other hand aim to generate a consistent income from their sporadic trading activity, which entails opening and closing positions in a matter of weeks, days, hours, minutes or even seconds.

Such traders adopt methods & strategies which exploit the small price change increments and take advantage of the heaps of rewarding opportunities. Short-term trading methods tend to generate fast returns on investments, and rewards profits which accumulate to larger gains. However, they can be very time-intensive, are typically for advanced traders which comprehend techincal readings and can lead to significant losses if no contingency plans are put in place.

The goal of crypto trading

Why would one trade cryptocurrencies in the first place? Cryptocurrency trading/investing is seen as a way to make money, and can hence represent secondary income. The crypto market has significantly grown in size to the extent that some even regard it as their primary source of income. That does not mean, however, that the income will remain to be stable or even positive on a consistent manner. Adopting trading strategies which are appropriate to current market conditions and reviewing the strategy results in a consistent manner would be the key to prosperity, so let’s put it all together.

Which crypto trading strategy is most effective?

Combining the aforementioned concepts, low-risk, low-reward traders & investors oriented towards the long-run typically adopt a trading strategy by the name of dollar-cost averaging.

Dollar-cost averaging is a trading method which has been around for decades, long before cryptocurrencies were born. This method centers around the periodic investment of funds towards certain assets, regardless of the market sentiment or asset price.

The way dollar-cost averaging works is by the mechanism of recurrent, small investments averaging out any short-term peaks, troughs and volatility. Dollar-cost averaging is an appealing approach for crypto beginners and even the fanatics, as it doesn’t factor-in temporary price volatilities and doesn’t necessitate frequent monitoring.

One would regularly invest $1,000 for example in Bitcoin every month, given its bright future prospects, and would then redeem the return on investment several years later.

Those which seek to gain quick profits but also have low risk tolerance could undergo scalping with a small amount of funds.

Scalping is when traders open and subsequently close the position within minutes, if not seconds. This strategy is purely technical, exploiting the ups & downs of crypto asset price adjustments, and thus requires active and close monitoring of charts, trends and patterns.

Day trading is also a popular short-term crypto trading method. It entails opening and closing trading positions on the same day. Given that the crypto market is active on a 24/7 basis, the market continues to present and envisage trading opportunities.

Usually, day-traders initiate more than one order in a day, capitalizing on the volatility and perhaps the instability of crypto prices. This is typically based on detailed technical analysis, as traders aim to make small or moderate profits by utilizing moving averages, support/resistance levels or general trendlines.

Adapt, test, review, repeat

Given that there is no golden formula that’ll persist to be always effective, as cryptocurrency market conditions are dynamic, it is best advised for beginners and professionals alike to adapt to current market situations before testing the strategy in mind. It is always advised to stay informed about the contemporary market revelations and to recognize prevalent market trends as they tend to provide direction to the future price movements of cryptocurrencies.

Effective risk management is important for safeguarding funds and protecting your trading positions. Explore our tips on short-term trading strategies, long-term trading methods and our inclusive guide on how to build a balanced crypto portfolio to pave your way towards achieving prosperity.