Foreword

There are many ways to make profits from digital currency transactions. Trading strategies help integrate relevant techniques into a coherent framework so you can follow the rules. In this way, one’s digital currency trading strategy can be continuously monitored and optimized.

When developing a trading strategy, there are two main schools to consider: Technical Analysis (TA) and Fundamental Analysis (FA). We will differentiate between trading scenarios where different strategies are applicable, but it is important to understand the differences between these concepts before delving further into this article.

There are many types of trading strategies and it is difficult to describe them in full detail. We will select the most common ones to introduce. This article mainly focuses on digital currency trading strategies. However, such strategies can also be applied to other financial assets such as Forex, stocks, options or precious metals like gold.

Want to tailor a trading strategy for yourself? This article will review the basic knowledge of speculating in the digital currency market. With a solid and reliable trading strategy, you'll be more likely to achieve your trading and investing goals.

What is a trading strategy?

We define a trading strategy as a comprehensive plan covering all trading activities. Traders create this framework that guides all their trades.

In addition, a careful trading plan can eliminate many unnecessary decisions and help reduce financial risks. Although developing a trading strategy is not a necessary part of trading, it can sometimes save assets and avoid financial losses. If something unexpected happens in the current (and future) market, a trading plan will guide traders to take responses based on different situations and avoid being carried away by personal emotions. In other words, formulating a trading plan can prepare you for a rainy day and develop comprehensive strategies for possible outcomes. It prevents traders from making impulsive decisions that could lead to huge losses.

For example, a comprehensive trading strategy might cover the following:

• The asset classes to be traded
• The settings that need to be implemented
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• Tools and indicators used 
• Buy and sell trigger prices (stop loss points set)
• Decision of position size  Factors
• A way to record and measure portfolio performance

A trading plan can also include other basic principles and even details that are easily overlooked. For example, a trader can set it up not to trade on Fridays, or to avoid completing trades when they are too exhausted to think rationally. You can even create a trading schedule and set it up to only trade on certain days of the week. Will you be keeping an eye on the price of Bitcoin over the weekend? You can choose to always close your position before the weekend. Such personalized operations can be set up in the trading strategy.

Developing a trading strategy can also include validation through backtesting and forward testing. For example, you can conduct simulated trading on the Binance Futures testnet.

In this article, we mainly discuss two trading strategies: active trading and passive trading.

You will quickly realize that the definition of a trading strategy is not very strict and there may be overlap between different strategies. In fact, a hybrid approach that incorporates multiple strategies is a smart investment approach.

Active trading strategy

Active trading strategy requires more time and energy. It is called "active" because this type of strategy requires continuous monitoring of market dynamics and frequent portfolio management.

Day trading

Day trading is probably the most well-known active trading strategy. The public generally believes that all active traders must be day traders. This is actually a common misunderstanding.

Day trading involves buying and selling within the same day. Therefore, the goal of day traders is to profit from intraday price movements (i.e., price changes within a single trading day).

The term "day trading" comes from the traditional market, where trading activities are only open during certain times of the day. Therefore, day traders in traditional markets never hold positions overnight and are therefore suspended from trading during this period.

On the contrary, most digital currency trading platforms are open around the clock. Therefore, in the digital currency market, day trading strategies are used in a slightly different context. It usually refers to a short-term trading method in which traders complete purchases and sales in 24 hours or less.

Day traders often use price action and technical analysis to construct trading ideas. In addition, they can use a variety of other techniques to uncover market inefficiencies.

Day trading of digital currencies can significantly increase profits for some people, but it is often stressful, very demanding and can involve extremely high levels of risk. Therefore, day trading is more suitable for experienced and advanced traders.

Swing trading

Swing trading is a long-term trading strategy, which means holding a position for more than one day, but Usually no more than a few weeks or a month. In some ways, swing trading is somewhere between day trading and trend trading.

Swing traders often actively exploit bands in volatility, which can take days or weeks to show results. In the process of constructing trading ideas, swing traders may combine technical and fundamental analysis. Changes in fundamentals often take a long time to manifest, which is where fundamental analysis comes into play. Even so, chart patterns and technical indicators can still play an important role in a swing trading strategy.

For beginners, swing trading may be the most convenient active trading strategy. A significant advantage of swing trading compared to day trading is that it takes longer to show results. But this process is not so long that it makes it difficult to track swing trading.

In this way, traders have more time to think about whether the decision is wise. In most cases, they have ample time to react to changes in the deal. In swing trading, decisions do not need to be too hasty and will be more rational. Day trading usually requires investors to make decisive decisions and execute quickly. It may be difficult for beginners to adapt to this fast-paced trading activity.

Trend trading

Trend trading is sometimes called "position trading". This strategy is aimed at holding positions for an extended period of time, usually no less than a few months. As the name suggests, trend traders try to profit from directional trends. A trend trader may buy long positions in an uptrend and short positions in a downtrend.

Trend traders often use fundamental analysis, but not always. Even so, fundamental analysis still takes into account events that may take longer to play out, and this is exactly the kind of change trend traders try to take advantage of.

Trend trading strategies assume that the underlying asset will continue to move in the direction of the trend. However, trend traders must be alert to the possibility of a trend reversal. Therefore, they can also incorporate moving averages, trend lines, and other technical indicators into their trading strategies in an effort to increase their trading success rate and mitigate financial risks.

Trend trading is also ideal for beginners if they can properly conduct due diligence and risk management.  

Ultra-short-term trading

Ultra-short-term trading (commonly known as "scalping") is currently the fastest One of the fastest trading strategies. Ultra-short-term trading does not take advantage of large changes or long-lasting trends. This strategy focuses on repeatedly taking advantage of small changes in the market. For example, profiting from ask-ask spreads, liquidity gaps, or other inefficiencies in the market.  

The core idea of ultra-short-term trading is to avoid long-term positions. It is even more common for ultra-short-term traders to open and close positions in just a few seconds. Because of this, ultra-short-term trading is often associated with high-frequency trading (HFT).

If traders find that market inefficiencies are recurring and profitable, ultra-short-term trading can be a very profitable strategy. Every time an inefficiency occurs, a small profit can be made. These profits accumulate over time and eventually become a considerable amount of income. In highly liquid markets, where buying and selling transactions are relatively smooth and predictable, ultra-short-term trading can often yield ideal returns.

Ultra-short-term trading is an advanced trading strategy that is relatively complex and is not recommended for beginners. This trading strategy also requires a deep understanding of market mechanisms. In addition, ultra-short-term trading is more suitable for large traders (whales). Trading larger positions is more valuable as their target profit margins are typically smaller.

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Passive investment strategy

Passive investment strategy reduces the difficulty factor and manages investments The time and effort involved in combination are significantly reduced. While there are differences between trading strategies and investing strategies, the ultimate goal of trading is to make a profit by buying and selling assets.

Buy and hold

“Buy and hold' is a With a passive investment strategy, traders can buy assets that they plan to hold for the long term, regardless of market fluctuations.

This strategy is usually used in long-term investment portfolios. The approach is to enter the market directly without considering the timing. The core idea of this strategy is that as long as the investment cycle is long enough, the timing or price of entering the market does not matter.

Buy and hold strategies almost always use fundamental analysis and generally do not focus on technical indicators. When executing this strategy, you don't need to monitor your portfolio's performance frequently, just occasionally.

Although Bitcoin and digital currencies have only been around for more than ten years, the “long-term holding (HODL) imagination created by them is similar to “buy and hold” Strategies are very comparable. However, digital currencies are an extremely risky and volatile asset class. While buying and holding Bitcoin is a well-known strategy in the digital currency world, this strategy may not apply to other digital currencies.

Index investing

Index investing usually means buying exchange-traded open-end index funds ( ETFs) and index funds. However, such products also exist in the digital currency market, and are involved in centralized digital currency trading platforms and decentralized finance (DeFi) trading activities.

The idea behind a digital currency index is to take a portfolio of digital currency assets and create a token that can track their combined performance. The portfolio can be composed of tokens from similar sectors, such as privacy tokens or utility tokens. Alternatively, it can also be composed of other products, as long as the price source is reliable. As you can imagine, most of these coins rely on blockchain oracles.

How can investors use digital currency indexes? For example, instead of choosing a privacy coin, they could invest in a privacy coin index. In this way, they are equivalent to betting on the development of the entire field of privacy tokens, rather than placing all their risks on a certain token.

Tokenized index investing is likely to become increasingly popular in the coming years. It provides an easier way to invest in the blockchain industry and the digital currency market.

Conclusion

Design a digital currency trading strategy that not only meets financial goals but also highlights your personal style Not an easy task. We have just introduced some of the most commonly used digital currency trading strategies. We hope you can be inspired to find the solution that suits you best.

To determine which strategies work for you and which ones don’t, you should try each trading strategy and track its returns without violating the rules you set. You can also create a trading log or worksheet to help you comprehensively evaluate the effectiveness of various strategies.

It is important to note that traders do not have to follow the same trading strategy all the time. As long as you have sufficient data and trading records, you should have the flexibility to adjust and modify your trading methods. In other words, personal trading strategies should be continuously revised and developed as trading experience continues to accumulate.

Traders can also benefit from splitting their portfolio into different parts for different trading strategies. This way, traders can continuously track the performance of each strategy while implementing appropriate risk management.

For more information about portfolio management, check out Asset Allocation and Diversification Explained.