A beginner’s guide to crypto trading strategies

Do you know your day trading from your HODLing? Your short positions from your long positions?

The world of crypto investment can be a confusing place. It’s still a new arena – not yet a teenager – and even those who have been around since the beginning have to deal with the occasional curveball.

Here are a few of the most common strategies we’ve seen people employ when investing and trading in crypto. Which one works for you will depend on a variety of factors – your tolerance for risk, the time you want to commit, and so forth. It comes down to individual circumstances. Just because it’s worked (or not worked) for someone else, doesn’t mean it will necessarily have the same impact for you.

The key is to do as much research as possible. We always encourage you to do your own research into what works best for you and, even more importantly, never invest money that you cannot afford to lose.

The legal stuff. The content of this article is for information purposes only and is not investment advice or any form of recommendation or invitation. Luno always advises you to obtain your own independent financial advice before investing or trading in cryptocurrency.

HODLing

HODL is a word derived from a fortuitous misspelling of “hold” by a poster on the Bitcoin Talks online forum. It’s also sometimes used as an acronym for ‘Hold On for Dear Life’.

Simply put, HODLing is when you buy a lump sum of cryptocurrency and store it securely for potential long-term, long-range, and long-odds growth. HODLing is a basic strategy with little nuance, but it has proven effective for many when you consider Bitcoin’s meteoric rise in value since its inception. For example, 1 Bitcoin for $410.58 on 11 March, 2016 was worth $5165.25 on 13 March, 2020 – a return of almost 13X.

There are also risks with HODLing, as it does limit your options. If you don’t time the bottom of the market and the market drops, you can only really wait and watch or cut your losses, which can be nerve racking. This is why you should never invest more than you can afford.

Dollar-cost averaging

This is a variation on HODLing that mitigates against some of the risks inherent in that particular strategy. The goal is to make regular investments of the same amount at repeated intervals, regardless of the day-to-day price. This strategy hedges against major market movements up or down, and takes a long-term position over several months or even years, thereby helping you to avoid mistiming the market.

Day trading

Day trading offers a great deal more nuance than HODLing, but also requires a far greater time investment.

It is focused on short-term investment – you buy cryptocurrency at what you consider a low price based on anticipated short-term movements, in expectation that the price will move in your favour and you are able to sell your investment at a profit (although sometimes the price does the opposite of what you were expecting). There are a variety of tactics you can employ to try and predict these movements based on different kinds of analysis.

The “day” aspect of day trading relates to the short-term nature of the position you take. This usually relates to a few hours.

For example:

1. A big US bank is going to be using XRP for their international payments. Jimmy thinks that this means the price of XRP will increase in the next few minutes.
2. He buys 1000 XRP at a price of $0.20 for a total of $200.
3. Other people see the same news and also try to buy XRP, causing the price to go up.
4. An hour later, the price of XRP has risen to $0.25 and Jimmy has decided he wants to sell to make a quick profit.
5. Jimmy sells all 1000 of his XRP for $250, totalling $50 profit.

Swing trading

Swing trading cryptocurrency is similar to day trading, but you hold your positions longer than a single day – until the market trend (or swing”) you are seeing runs its course or shows signs of a reversal.

This strategy requires less time and attention, but you still need to catch trends the moment they form. The extra time you are holding your position may allow for a greater price shift and therefore may result in higher profit than with day trading. Be careful however, as the price may swing against you resulting in you losing more.

Scalp trading

Scalp trading is when you take a position for much shorter periods of time, whether seconds or minutes. The gains here are much smaller and require more focused attention, but because you can make so many of these types of trades per day, they have the potential to be more profitable than the longer term strategies.

Automated trading

Those attracted to the idea of short-term trading strategies (like day or scalp trading) but lacking either the time or patience to actually do it, can also automate their trading processes to react to changeable market conditions on their behalf.

This is done using trading bots, which is software that handles your trades for you. On the plus side, it can do your bidding while you sleep. You also have some control over what it trades – from basic stop losses to trading more complex price movement indicators.

On the downside, a trading bot is not artificial intelligence. It will not think for you. It will not figure out the best strategies to give you the most profitable trades. A trading bot is only as smart as the person who built it and it will only expect a set of actions to perform and will repeat those actions, nothing more.

These are just a few of the most common strategies we’ve seen employed at Luno, but there are many more out there. Find the one that works best for you and make sure to thoroughly research the market so you’re armed with all the information you need to make good financial decisions. And remember, there are many different kinds of analysis out there, but none of them are foolproof.