Understanding Key Crypto Trading Strategies: Active Vs Passive Approaches

Introduction

When you have made the decision to invest in cryptocurrencies, you are offered various options by exchanges. These options are trading strategies that help you streamline your planning and purposes to benefit you. Every strategy makes use of some required data that comes either from technical analysis or fundamental analysis. Sometimes, a strategy may employ both kinds of data gathering techniques for better results.

What is Trading Strategy?

It is useful to understand what exactly a trading strategy is. It can be viewed as a detailed plan that helps and guides your actions before, during and after the trading. Although it cannot be said that you cannot trade without a strategy, it is always better to have one. The strategy will help you react wisely when something unpredictable happens, which frequently happens in the crypto market.

Things to Consider in the Selection of Strategy

A trading strategy is also a personal rulebook for you. There are a few mandatory and a few optional things in any strategy. The mandatory things include choosing the coin that you want to trade; choosing the setup of your trade i.e. whether you want to go long or short, and what your entry and exit points are going to be; how much leverage you will use – if at all; what kind of analysis and associated indicators are required for the kind of trade you want; and how you will manage the risk of volatility in the market.

The optional things are also worth considering while devising your trading strategy. You can decide not to trade when you are tired, or unwell. You might choose not to trade on weekends. This is so because war-like events usually happen at such times as the rulers select weekends so that market may not be disturbed. But Crypto market is open 24/7, so it always gets hit regardless of the time and day of an event.

Finally, you should backtest the strategy by applying it to a past price action. You can also test the strategy through mock trading or paper trading. This saves you from risking your real money.

Factors affecting the Selection of Strategy

The selection of a trading strategy depends on a number of factors. You have to decide how much time you can spare from your daily routine to monitor your trades. The amount of investment is of paramount importance when it comes to choosing a trading strategy. You also need to decide when you want to take a profit, or when you need your investment back, or whether you can afford to lose everything that you are putting in. The type of trading strategy you choose is also dependent on your knowledge, experience, and emotional health.

Types of Crypto Trading Strategies

The available trading strategies may be categorized into active and passive. Active strategies keep you stuck to your screens and emotionally excited. Obviously, more screentime and emotional excitement are not sustainable for extended periods of time. As we move down the ladder of activeness, either come to less active or out and out passive strategies, in which you do not need to monitor the market as often.

Active Strategies

Scalping

The shortest of all the trading strategies is scalping, which may be as short lasting as a few seconds. It is a high-frequency trading that exploits inefficiencies of the market or liquidity gap. This kind of trade is usually performed in a high liquidity coin where entry or exit is smooth. The coins with low market cap can be manipulated easily, to they undergo insane pumps and dumps, which can wreak havoc with your trade. Moreover, it is not suitable for beginners. Leverage is usually high, so liquidation price is very close to the entry price.

Day Trading

A bit longer than scalping, day trading involves entering and exiting from a position on the same day. The term originates from traditional market where trading is generally done for a few hours during the daytime and traders open and close their positions during those hours. In the cryptocurrency market, day trading refers to the strategy that continues for less than 24 hours. You need to do intense technical analysis to find patterns on 1D timeframe. Just like scalping, this strategy also needs monitoring continuously. That’s why it is almost as stressful as scalping.

Swing Trading

Upping the ante, you hold your positions open for weeks but usually not months in swing trading. This strategy enables you to make use of the rising and falling trends, which take time to unfold fully. The cryptocurrency market is more volatile than any other market, and swing trading is meant to earn money from this volatility. Where scalping and day trading keep you stressed and engaged, swing trading keeps you relaxed and provides you with enough time to maneuver your strategy as per situation. Both technical and fundamental analysis are used to carry out this strategy.

Trend Trading

If you want to make use of fundamental analysis and associated indicators, you need to either use trend trading strategy or do spot trading. Trend Trading involves following the trends on bigger time scales like 3D or 1W, so this kind of strategy needs opening a trade and waiting for a few months to reap the rewards. Generally moving averages are followed if technical analysis is to be used. If you utilize fundamental analysis, a new partnership or ETF approval can drive you to take a trend trading position.

Passive Trading

Spot Trading

If you feel you cannot afford to be liquidated, or you do not have the courage to see your wallet balance swing wildly, spot trading is the strategy for you. You invest a certain amount in return for which you get a specific number of coins that you can hold to sell in future at a higher price. Spot trading is usually based entirely on fundamental analysis unless you buy a coin for holding for a little time. One thing that you must keep in mind is that not every coin is for holding. Many coins are delisted due to various reasons, and when the announcement for delisting is made, the coins usually fall headlong, and you do down with the ship.

Index Investing

A crypto index is a token that tracks the combined performance of a group of crypto assets, often from the same sector (like privacy coins or utility tokens), using reliable price data provided by blockchain oracles. This facility is available on centralized as well as decentralized exchanges.

Conclusion

As in any other field of life, you must think before you leap. With a trading strategy up your sleeves, you are shielded from sudden losses. Depending on the availability of time, amount of knowledge and experience you have, active as well as passive strategies are at your disposal. Choosing the right strategy with proper analysis helps you achieve your targets and saves you from piling regrets.