Simply said, a trading strategy is a plan you adhere to when placing trades. Each trading strategy will mostly depend on the trader’s profile and preferences because there is no one right way to do it.
Regardless of how you trade, making a plan is essential because it specifies your objectives and can stop you from deviating from your route because of emotion. Normally, you should choose what you’re trading, how you’re going to trade it, and the entry and exit points.
We’ll discuss a few common trading strategy examples in the chapter that follows.
The formation and administration of a group of investments is the focus of portfolio management. A collection of assets, the portfolio itself could include everything from Beanie Babies to real estate. It will most likely contain some combination of Bitcoin and other virtual currency and tokens if you just trade cryptocurrencies.
The first thing you should do is think about your expectations for the portfolio. Are you searching for a portfolio of assets that will be largely insulated from volatility, or are you looking for something riskier that could result in quicker returns?
It is really advantageous to give your portfolio management some thought. Some people might like a passive strategy, in which you put up your investments and then leave them alone. Others can adopt an active strategy, regularly buying and selling assets in order to generate profits.
Trading success depends on effective risk management. This starts with determining the categories of risk you might experience:
Market risk is the possibility of financial losses brought on by the asset’s depreciation.
Liquidity risk is the possibility of losses due to illiquid markets, where it may be difficult to sell your assets.
Operational risk is the possibility of suffering losses as a result of operational errors. These could result from employee fraud, hardware or software malfunctions, or human error.
Systemic risk is the possibility of losses brought on by key firms in the sector you operate in failing, which has an effect on all companies there. The demise of Lehman Brothers had a ripple effect on global financial systems, much like it did in 2008.
As you can see, identifying risks starts with the assets in your portfolio, but for it to be effective, it needs to take into account both internal and external elements. The next step is to evaluate these hazards. How frequently are you likely to come across them? Just how bad are they?
You can rank the risks and design suitable strategies and actions by balancing the risks and determining their potential impact on your portfolio. For instance, market risk can be reduced by using stop-losses, and systemic risk can be reduced by diversifying investments.
The strategy of day trading entails taking and closing trades in the same day. The phrase is derived from historical marketplaces, which only operate during specific hours of the day. Day traders are not expected to hold any open positions outside of certain times.
You undoubtedly already know that there are no set hours for starting or closing cryptocurrency markets. Every day of the year, you can trade all hours of the day. However, day trading typically refers to a trading strategy in which the trader enters and quits positions within a 24-hour period when used in relation to cryptocurrencies.
You’ll frequently use technical analysis in day trading to choose which assets to trade. You can decide to trade a variety of assets to attempt and increase your returns because the earnings in such a short time can be rather small. However, some people might just exchange one pair for a long time.
Clearly, this is a very active trading approach. Although it includes a substantial level of risk, it may be quite lucrative. Day trading is therefore typically more suitable for seasoned traders.
Swing trading uses a wider time horizon than day trading; holdings are often kept for a few days to a few months. The goal is still to profit from market patterns.
Finding an item that appears inexpensive and has the potential to appreciate in value will frequently be your objective. If you wanted to make money, you would buy this asset and sell it when its value increased. Alternately, you may try to identify assets that are overpriced and are likely to lose value.
Then, in the event that you wanted to repurchase them, you could sell some of them for a high price.
Many swing traders employ technical analysis, just as day traders. Fundamental analysis, however, may also be an effective tool because their technique unfolds over a longer time frame.
Swing trading is usually a more approachable strategy for new traders. mostly because it is less stressful than frantic day trading. In contrast to the latter, which demands quick decisions and prolonged screen time, swing trading gives you the freedom to take your time.
Trading positions (or trends) is a long-term tactic. Traders buy assets to hold for a long time (generally measured in months). They intend to turn a profit by reselling those assets in the future for more money.
The reasoning behind the trade is what separates position trades from long-term swing trades. Position traders try to profit from the market’s overall direction by focusing on patterns that can be seen over long time frames. On the other hand, swing traders generally try to forecast “swings” in the market that don’t always correspond with the larger trend.
Position traders frequently choose fundamental analysis, merely because their desire for time allows them to observe fundamental events unfold. But that doesn’t mean technical analysis isn’t employed. The use of technical indicators can warn position traders of the likelihood of a trend reversal even while they operate on the premise that the trend will continue.
Position trading is a great approach for beginners, just as swing trading. Once more, the lengthy time horizon offers them plenty of time to think things through before making a choice.
Scalping occurs over the shortest time spans of all the methods mentioned. Scalpers generally join and exit positions quickly, trying to take advantage of slight price changes (or even seconds).
They typically employ technical analysis to try to forecast price fluctuations and take advantage of bid-ask spread and other inefficiencies to profit. Due to the short time periods, scalping trades sometimes result in earnings that are below 1%. However, since scalping is a game of numbers, a series of little profits can pile up over time.
Scalping is definitely not a beginner’s tactic. Success depends on having a thorough understanding of the markets, the trading platforms you use, and technical analysis. Nevertheless, skilled traders can make a lot of money by seeing the appropriate patterns and profiting from short-term volatility.
The terms diversification and asset allocation are sometimes used interchangeably. The maxim “don’t put all your eggs in one basket” may be familiar to you. Putting all of your financial eggs in one basket provides a single point of failure for you. You run the same danger if you put all of your savings into one asset. You would instantly lose your money if the asset in question was the stock of a certain firm, and that company later went bankrupt.
This applies to asset classes as well as to individual assets. You would anticipate that every stock you own will decrease in value in the event of a financial crisis. This is due to their strong correlation, which means that they all frequently exhibit the same pattern.
Simply stocking your portfolio with dozens of various digital currencies is not good diversification. Think about a scenario in which governments all around the world decide to outlaw cryptocurrency or quantum computers manage to crack the public-key cryptography protocols we employ. All digital assets would be significantly impacted by either of these events. They belong to the same asset class as stocks.
Ideally, you should distribute your riches among several social classes. This will prevent the performance of one investment from negatively affecting the other investments in your portfolio. Harry Markowitz, a Nobel Prize laureate, developed the Modern Portfolio Theory to do this (MPT). The theory essentially argues that integrating uncorrelated assets will reduce the volatility and risk involved with investments in a portfolio.
A financial framework called the Dow Theory is based on the theories of Charles Dow. The Dow Jones Transportation Average (DJTA) and Dow Jones Industrial Average were the first US stock indices, and Dow created the Wall Street Journal (DJIA).
The Dow Theory might be seen of as an amalgamation of the market ideas Dow provided in his books, despite the fact that Dow never formalized it. The following are some salient conclusions:
The efficient market hypothesis (EMH), which holds that markets reflect all of the information available on the pricing of its assets, was supported by Dow.
Market trends: Dow, who distinguished between primary, secondary, and tertiary trends, is frequently credited with developing the concept of market trends as we know them today.
The three phases of a major trend are accumulation, public participation, and surplus & distribution, according to Dow.
Cross-index correlation: According to Dow, a trend in one index could only be confirmed if it could also be seen in a different index.
The significance of volume: A trend must also be supported by a significant amount of activity.
Trends are valid until reversal; once a trend is established, it persists until a clear reversal takes place.
It’s important to keep in mind that this is just a theory and may not be accurate. However, the theory continues to have a significant impact, and many traders and investors include it in their methods.
Eight waves, each of which either a Motive Wave or a Corrective Wave, make up the Elliott Wave pattern, which is often easy to spot. Three Corrective Waves would go against the general trend, and five Motive Waves would follow it.
The designs also possess a fractal quality, allowing you to enlarge a single wave to reveal a different Elliot Wave pattern. The pattern you’ve been investigating could also be a single wave of a larger Elliot Wave cycle if you zoom out, on the other hand.
Reviews of Elliott Wave Theory are conflicting. Due to the fact that traders can identify waves in a variety of ways without breaking the criteria, some claim that the process is excessively subjective. The Elliott Wave Theory shouldn’t be regarded as a precise science because, like the Dow Theory, it isn’t always accurate. However, many traders have found considerable success by fusing EWT with other technical analysis instruments.
Charles Wyckoff created the vast trading and investment system known as the Wyckoff Method in the 1930s. His work is widely considered as serving as the foundation for contemporary technical analysis methods on a variety of financial markets.
The three essential laws that Wyckoff proposed are the rules of supply and demand, cause and effect, and effort vs. result. He also developed the Composite Man hypothesis, which strongly resembles Charles Dow’s analysis of major trends. For cryptocurrency traders in particular, his work in this field is invaluable.
Practically speaking, the Wyckoff Method itself is a five-step trading process. It can be divided into the following:
1- Find out the trend’s current state and future direction.
2- Determine strong assets: are they edging away from the market or toward it?
3- Identify resources with sufficient Justification: Is there a good enough reason to take the job?
4- Does the possible gain outweigh the risks?
Determine the movement’s propensity: Do indicators like Wyckoff’s Buying and Selling Tests suggest a potential movement? What do the volume and pricing imply? This asset is it prepared to move?
When entering, consider how the assets are performing compared to the overall market. When is the ideal time to apply for a job?
Despite being developed about a century ago, the Wyckoff Method is still quite useful today. The foregoing should only be viewed as a very brief summary because Wyckoff’s research has a very broad reach. It is advised that you delve deeper into his work because it offers crucial technical analytical information.
Unsurprisingly, the “buy and hold” strategy entails purchasing and holding an asset. Investors buy the asset and then leave it alone for a long time, regardless of the state of the market. HODLing, which generally refers to investors who prefer to purchase and hold for years instead than actively trading, is a good example of this in the cryptocurrency market.
For those who prefer “hands-off” investing, this can be a beneficial strategy because they won’t have to worry about short-term swings or capital gains taxes. On the other hand, it calls on the investor to exercise patience and makes the assumption that the asset won’t become completely worthless.
One could think of index investing as a “buy and hold” strategy. The investor, as the name suggests, aims to gain from the movement of assets inside a particular index. They might achieve this by investing in an index fund or buying the assets outright.
This tactic is passive once more. Without the strain of active trading, individuals can also profit from diversification across a variety of assets.
Any method could be used in paper trading, but the trader is merely acting out the purchase and sale of assets. This is an option you might take into consideration as a novice trader (or even as an expert trader) to test your abilities without risking any of your own money.
For instance, you might believe you’ve found a reliable method for predicting Bitcoin price declines and want to try making money off of them before they happen. However, you can decide to paper trade before putting all of your money at danger. This can be accomplished by simply noting the price when you “open” your short position and once more when you shut it. You could also use a simulator that looks like common trading interfaces.
The biggest advantage of paper trading is that you may experiment with different techniques without risking your own money. With no risk, you can simulate how your actions would have gone. Of course, you must be conscious that paper trading simply provides you with a distorted view of the real world. When your money is at stake, it’s difficult to duplicate the true emotions you feel. If you don’t account for them for certain platforms, paper trading without a real-world simulator could also offer you a false impression of associated costs and fees.