Cryptocurrencies are the latest trend in the financial markets. Crypto stems from blockchains that are decentralized meaning that crypto trading is not localized but an international trading marketplace.
Crypto trading can offer many benefits for investors if done right. This article is going to talk about the best crypto trading strategies that are most popular among investors.
What is Crypto Trading Strategy?
The cryptocurrency market has thousands of variants and it can be a difficult choice for an investor to select the best investment options. Cryptocurrency trading strategy is a defined method of picking the best cryptocurrencies to add to your portfolio.
At the same time, an ideal trading strategy works as a guide for investors about when to sell or purchase their positions. Additionally, investors may also refine their trading plan to pick ideal crypto options for creating long or short positions.
Types of Crypto Trading Strategies
Here are some of the most effective and suitable cryptocurrency trading strategies that are used by investors:
Dollar Cost Averaging (DCA)
Dollar Cost Averaging (DCA) is a method of consistent investment in a particular cryptocurrency at regular intervals. This type of trading method is recommended by investors like Charles Schwab.
Many investors believe that consistent investment in a given asset class over a longer time duration can beat the trading results based on the timing market. Here are some pros and cons of DCA:
- DCA is ideal for investors who are starting and have limited technical skills and market experience.
- Investors who have a small budget can benefit from DCA because it does not require a big market commitment.
- DCA is great for cryptocurrencies on account of their higher price volatility.
- DCA generates results in the long run and does not market big profits in the short-term.
- DCA is less effective than high-frequency trading or HFT.
Arbitrage is the method of trading where investors try to make profits by finding out the price difference in various crypto markets. Since cryptocurrencies are decentralized they offer greater arbitrage options.
There is another trading method called scalping that involves taking advantage of the smallest price differences between bid-ask spread. Here are the benefits and risks associated with arbitrage:
- Arbitrage can generate good returns for cryptocurrency investors without complex market analysis.
- Investors can purchase arbitrage bots that can perform trades automatically on their behalf.
- Arbitrage crypto trading is a low-risk method that mitigates the chances of losses and increases the ratio of profits.
- Investors may need more resources to perform arbitrage trading such as tools and skills to collect and compare trading data from various trading tools and platforms.
- The profit percentage created by arbitrage is limited meaning that the price differences across various exchanges are often very small.
HODL is a technique that entails holding on to the existing cryptocurrency position for a long duration. This type of trading strategy takes inspiration from the compounding effect and index trading options.
Many professional investors believe that holding on to a given asset class such as cryptocurrencies over long durations such as a year or a decade can generate greater profits than trading them more frequently.
- This technique is useful for investors who are only starting. It means that investors only have to buy the most popular trading options and hold on them to for a long duration until their profits multiply several folds.
- In certain cases, HODLing can generate considerable returns for investors.
- It is a long-term strategy that requires a lot of time and patience to generate results. In most cases, investors may lose their nerves and end up cashing out their positions sooner than intended.
- The investors must keep an eye on the changing dynamics of the market to make sure that the HODL crypto is not going off-rails to ensure that their investment is secure.
Crypto trading is a skill that needs time and effort to generate. However, cryptocurrencies offer an easy and inclusive method of investment initiation in the marketplace. When it comes to an ideal cryptocurrency trading strategy, it depends on the personal goals, budget, and experience of every individual investor.