Cryptocurrency trading strategy - basic cryptocurrency trading strategies for trading in Singapore

Cryptocurrency trading strategy

July 20, 2021

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What is cryptocurrency trading

Cryptocurrency is an encrypted, unregulated digital asset used as a counterpart to currency in exchange transactions. Cryptocurrency has no physical form; it exists only on an electronic network in the form of data. An exchange through cryptocurrency on a trading platform is called cryptocurrency trading. 

A cryptocurrency market is a platform where one digital currency is traded and exchanged for another or for various world currencies. In addition to mining, the original method of creating cryptocurrencies, trading cryptocurrency is considered as one of the ways to obtain them.

Crypto markets are a kind of analogue of trading exchanges, such as Forex, for example. Each participant, investing real money, has the right to perform transactions related to the analysis of bets, receive signals, engage in the sale and exchange of bitcoins and other popular types of currencies for real money.

Cryptocurrency accounting is called blockchain, and it is maintained collectively by all participants in the network who have the currency in question. Each cryptocurrency is programmed and identified using a complex code.

Notable cryptocurrencies

To date, there are about 6,000 cryptocurrencies. Below are some of them - the most notable ones. 

Ether - is the world's second most successful cryptocurrency, an open-source software platform based on blockchain technology. The platform allows developers to create and deploy decentralized applications such as Status or Metamask.

Litecoin - is a mathematically secure decentralized cryptocurrency that was developed as a complement to Bitcoin.  The differences from Bitcoin are that transaction confirmation comes faster and the system guards its users more securely.

Ripple is the world's fourth most capitalized cryptocurrency with a daily trading volume of over $16 billion. It has gained popularity due to its speed and low transaction cost, and its issuer, Ripple, is known for its partnerships with major banks. 

Bitcoin is the world's most popular cryptocurrency. Its most important principle is complete decentralization, it has no central administrator, it is not subordinate to financial regulators and banks. This makes bitcoin radically different from any other unit of payment in the world.

Bitcoin Cash - is an open-source coin, was launched in August 2017 as a result of the hardfork of the Bitcoin blockchain. A hardfork is essentially a blockchain divided into two parts, each of which becomes its own cryptocurrency with its own unique blockchain.

Stellar - is a decentralized peer-to-peer network that is often considered a major competitor to Ripple XRP, even though these systems offer different solutions to the same problem: payments. The difference is that XRP appeals to banks, while Stellar (XLM) is a form of payment developed from the ground up for the masses. Quick and inexpensive everyday purchases are what Stellar is good at.

Cardano - is a decentralized platform that allows people to transact across borders and deploy smart contracts and decentralized applications (dApps). Cardano was launched in 2017 to restore confidence in the economy by integrating technology, as well as provide individuals without bank accounts with access to financial services.

IOTA - is a decentralized distributed ledger. It was created specifically for the "Internet of Things," a unique type of network used to exchange value and data between people and computers. IOTA does not use blockchain - at least not in the way that most other projects do. IOTA had a vision for a different type of blockchain, and began developing its own system of validator nodes called Tangle. IOTA's own cryptocurrency network is MIOTA.

NEO - is a large-scale blockchain project that was conceived as a "smart economy" with the ability to digitally identify and automate business processes, which also launched a cryptocurrency of the same name. Unlike cryptocurrencies that were modeled on bitcoin (their main task is to act as a means of payment), the Chinese cryptocurrency NEO followed the path of Etherium - the developers created an entire ecosystem, not just a coin to pay for goods and services.

Monero - is a private, secure and untraceable cryptocurrency launched in 2014 as a fork of ByteCoin. Monero is designed to be impenetrable and as private as possible, while being built on a blockchain and on open source code. 

Types of cryptocurrency trading analysis

There are two types of trading analysis distinguished:

  • Fundamental analysis of cryptocurrencies involves a deep dive into the available information about a financial asset. For example, one can consider its possible uses, the number of users or the team behind the project. The goal is to conclude whether the asset is overvalued or undervalued. The information obtained can then be used to open trading positions.
  • Technical Аnalysis is a set of tools for predicting probable price changes based on patterns of price charts and price movement in the past in similar circumstances. The basic basis of technical analysis is the analysis of price charts and stock charts. Technical analysis uses many charts to display prices over time. The analysis itself is based in part on mathematical and statistical calculations.

If you trade cryptocurrencies, you have probably encountered such concepts as "bear market" and "bull market. Bull and bear markets have a huge impact on investor sentiment and behavior. But first, let's get to the bottom of what these markets are.

What is a bear market? 

"A bear market is characterized by a decline in market activity and a sharp fall in prices.

Some experts believe we can speak of a "bear market" when prices drop 20% in 60 days or more. The 20% figure is quite subjective, and downward trends are sometimes not so easy to spot. Analysts usually use a variety of tools and systems to identify less obvious bearish trends.

A bear market is often associated with a slowdown in economic development, which includes high unemployment, low income, low commercial profits and insufficient productivity.

What is a bull market? 

A bull market is the opposite of a bear market. Such a market is characterized by rising prices and prevailing optimistic sentiment among investors.

In a bull market, investors are more confident about tomorrow because they expect prices to continue to rise for some time (although it is actually quite difficult to predict trends).

To track the market changes traders use trading platforms and technical indicators on these platforms. 

List of main technical indicator

Moving average (MA) shows the average value of the instrument price for a certain period of time. The calculation of the Moving Average mathematically averages the instrument price for a given period. As the price changes, its average value either increases or decreases. There are several types of moving averages: simple (it is also called arithmetic), exponential, smoothed and weighted. The only thing which distinguishes different types of Moving Average from each other is different weight coefficients which are assigned to the latest data.

MA Indicator on IQ Option platform
MA Indicator on IQ Option platform

Exponential Moving Average (EMA) - is an indicator defined by adding a certain percentage of the current closing price to the previous moving average. When using exponential moving averages, the most recent closing prices have more weight.

Stochastic oscillator - is a technical analysis indicator, which displays the percent ratio of the closing price and the maximum extremums for a certain period of time. In simple words, the Stochastic allows you to determine when the trend reverses and prompts you when to open a deal.

Moving average convergence divergence (MACD) - is the so-called trend oscillator, which combines the properties of both a trend indicator and an oscillator. MACD is calculated using moving averages. The aim of the indicator is to simplify the visual perception of signals produced by moving averages, to reduce the lag and to eliminate a number of drawbacks inherent to conventional trend indicators.

Bollinger bands - is one of the tools of technical analysis which reveal an abnormally sharp deviation of price from the current trend indicated by the moving average. The lines above and below the moving average serve as a kind of support or resistance for the price chart.

Bollinger bands indicator on IQ Option platform
Bollinger bands indicator on IQ Option platform

Relative strength index (RSI) - is one of the most important and best-known indicators, which is used by traders around the world. By its nature, the RSI indicator is an oscillator, i.e. fluctuates in a certain zone, limited by the maximum (100) and minimum (0) value. This indicator reflects "momentum" - the speed and amplitude, with which the price movement changes; how much the price changes in the direction of its movement. In other words, the RSI indicator shows the strength of the trend and the probability of its change.

RSI Indicator on IQ Option platform
RSI Indicator on IQ Option platform

Fibonacci retracement - is an auxiliary technical analysis tool that draws Fibonacci levels automatically as the price moves. With this indicator, you can easily determine correction levels on any timeframe and currency pair, since Fibonacci levels are equally effective on all types of charts and assets.

Ichimoku cloud -  is a universal tool of technical analysis, with which you can determine the direction of the trend, support and resistance levels and find the best place to enter the market.

Standard deviation is used to measure market volatility and determine the trend. This indicator characterizes the size of price fluctuations relative to the moving average. More often the indicator is used as a component of other technical indicators.

Standard deviation indicator on IQ Option platform
Standard deviation indicator on IQ Option platform

Average directional index - is an indicator which can be used to determine if there is a price trend (trend), the best time to open buy and sell orders, and when to take profit.

Basic cryptocurrency trading strategies

There are many cryptocurrency trading strategies, the main of which are combined into two groups - active and passive trading strategies. 

Active trading strategy is buying and selling assets based on short-term movements in order to profit from price movements on the short-term stock chart. 

Common active trading strategies can include the following strategies: 

  • Day trading - is a trading strategy that involves buying and selling a financial instrument several times during the day.
  • Position trading - is a style of trading in which an investor holds a position (long or short) for an extended period of time. In position trading, the time horizon extends from days or weeks to several years.
  • Swing trading - is a style of trading that attempts to capture profits on a stock (or any financial instrument) over a period of days to weeks.
  • Scalping - is a strategy, the essence of which is to make small trades in large numbers, that is, dozens or sometimes hundreds of quick trades throughout the day, each of which is designed to make a profit of a few pips.

Passive investment strategy involves less buying and selling and often leads investors to buy index funds or other mutual funds.

Buy And Hold - passive trading strategy, which is based on buying one or more cryptocurrencies and then holding them for a long period of time. In terms of position management, the strategy is very simple, all a trader needs is patience. 

Creating cryptocurrency trading strategy

To start trading cryptocurrency, you need to create your own trading plan based on the information given in this article. It depends also on whether you plan to do it short term or long term. Short term trading refers to active trading strategies, and long term trading refers to passive trading strategies respectively. В создании вашего торгового плана вам помогут данные об ордерах и о том, как они работают. 

Stop loss - is an instruction for a broker to automatically sell a stock when the quotations fall to a certain level. A kind of loss limiter. Stop loss insures the investor against too big losses. It is considered to be very dangerous to trade at the market without a stop-loss.

Take profit - is used as a counterbalance to Stop Loss and limits the amount of profit. The investor determines the price at which the broker will automatically sell the stock after it rises.

To manage the trading plan there are multiple buy and sell orders:

  • Sell limit - is above the available rate, when the trader is waiting for an instant jump of the price upwards and wants to take part in the agreement on the rebound, if such happens. The sell position will open independently when the Bid price reaches the specified position.
  • Buy limit - is used to enter the market without any problems, and to buy at a rate that is considered a profitable starting point. Thanks to this information, the investor is aware that the rates will rally upwards and overcome resistance levels.
  • Sell stop is a related type of order that stays below the current rate. The trader can enter into a sell transaction if the price in the direction from the top to the bottom will reach the required level (will break any important level).
  • Buy stop is an order to buy an asset when its market price rises to a specified level (set by the stop price). This order is used by traders when the trader expects the asset price to fall, but insures himself against a possible rise in price. A Buy  Stop Order is placed at a price that is higher than the current market price.

Dealing with technical patterns in trading begins with price action assessment. Before starting to work with charts and patterns, a trader should examine the current price dynamics (specifically, identify the trend). When the trend is identified, the trader can turn to the indicator to clarify the received signal for entry and spot price. 

Spot price is the current price of a security at which it can be bought/ sold at a particular place and time.

In contrast to traditional stock exchanges, the cryptocurrency market operates without interruptions or weekends. In other words, trading in digital assets does not stop for a minute. However, the time of day can affect the dynamics of the market, and this should be taken into account when trading. You have to choose your own trading time, but the activity of traders is highest when the US and China are actively trading. Professional market participants usually choose the time of the highest dynamics of currencies. But it is advisable for beginners to trade during periods of less volatility, when the market is dominated by one region or when the market is generally calm.

Before starting creating your trading plan you should learn the basics of money management and you should start with financial risk assessment.

Let’s consider some of risk types:

  • Market risk is the risk of an unwanted change in the value of an asset;
  • Credit risk - the risk that the cryptocurrency issuer will go bankrupt or fail to meet its payment obligations;
  • Operational risk - the risk of encountering a lack of ability to make transactions or deposit/withdraw assets

Traders who have just stepped on the path of crypto trading can use trading signals or even use them as a supplement to their strategy. 

Trading signals - is a service that allows its subscribers to receive recommendations for making trades on the market from signal traders. Unlike analytical reviews, a trading signal is a specific place and time to open and close a position. All a subscriber has to do is to open an order with corresponding parameters.