How to trade crypto: Active Trading Strategies

What you'll learn

  • News & Information based trading
  • Momentum/Position Trading
  • Day/Swing Trading
  • How to use a Trading Journal

Trading crypto comes down to managing risk. Learn Crypto has dedicated seven previous articles to explaining why trading crypto is risky, with the previous article - looking at simple crypto trading strategies - underlining the importance of matching your risk appetite, experience, free-time and commitment to the appropriate type of crypto trading strategy.

For most beginners that should start with suggested simple trading strategies, using variations on Cost Averaging, which are relatively passive (so you don’t need to be constantly monitoring your trades and responding to changes in the market).

If however, you have the time, risk appetite and commitment, there are, of course, more complex trading strategies. The aim of this article is to introduce the main types - with the pros and cons - then introduce some general best practice for someone looking to begin active crypto trading such as keeping a Trading Journal.

News/Information Based Crypto Trading

Though the market capitalisation of all cryptocurrencies is approaching $2trillion, the industry is still very immature. Much of that $2trillion is perceived future value rather than projects or businesses generating revenue today. Perceptions shift on news so the crypto market is heavily influenced by information as it emerges and is interpreted.

The crudest example is the upward move in Bitcoin’s price on February 20th, 2020, as it reacted to news that Tesla had added $1.5bn of BTC to their balance sheet. 

As explained in our blog post on the ten most dramatic moments in crypto, BTC rose $9k in 24hours, with the majority of that increase within the first hour of news breaking. 

There is no simple way to be on the right side of this kind of news. As the saying goes ‘those who know are telling and those who tell don’t know.’ Crypto is a speculative asset, and speculation literally means that there is a mix of conflicting ideas and expectations around future adoption.

That speculation increases during a bull market but as some feel Bitcoin is in an even higher state of price acceleration - what has been termed a super cycle - the level of noise and rumour is increasing by the day. In this situation a sensible trading strategy is to buy the rumour and the sell the news.

This literally means to ride the wave of early speculation, which has the biggest impact on price. That way you are protected from the possibility that it is just a rumour, as well as the impact of profit taking which happens soon after any rumour is confirmed in the news. 

You can put yourself in the best position to receive news as it breaks by developing a reliable source of information; following people on social media with reliable track records of breaking early news.

$9,000

How much Bitcoin's price increased within 24hrs of Tesla's announcement of a $1.5bn BTC investment

The ‘Tesla Candle’ - as it has now become known - is really an outlier. The impact of news is generally far more modest, but still presents significant opportunity. Sophisticated traders will be scraping and filtering massive amounts of data from Twitter or Reddit and running trading algorithms against that information. 

Another good example of the value of news, but which doesn't require you to be ahead of the curve is the so-called 'Coinbase Effect'. Cryptocurrencies listed on Coinbase saw an average 91% increase in value in the first five days of their listing according to research by Messari.

The huge influence and customer base that Coinbase has means their decision to list a coin almost guarantees a huge surge in interest and liquidity. The same is true, but to a lesser extent when coins are listed on other exchanges, so it is your job to monitor that.

By curating valuable news sources you can put yourself in the best position to take advantage. This might just mean having Google Alerts set up, but the most effective approach to news/information based trading for someone just getting started is to specialise in a few niche cryptocurrencies. 

Cryptocurrencies listed on Coinbase saw an average 91% increase in value in the first five days of their listing

Get to know the people behind the project, find their social accounts and pay close attention to what they post. You may just pick up some nuggets of information with enough lead time to trade that news, but make sure you know how and where to trade the coin, and that there is enough liquidity.

Pros

  • Finding news doesn’t require technical knowledge
  • No specific barriers to entry
  • Isn’t necessarily time intensive
  • Allows specialisation

Cons

  • Distinguishing genuine news from rumour is difficult
  • Markets react instantly so timing is very difficult
  • It still requires a technical assessment of how much a piece of news will move a market

Momentum/Position Trading

Another crypto trading strategy that is suitable for someone who is just getting started, and may lack the technical understanding and time commitment, is Momentum Trading - also known as Position Trading.

Momentum Trading is essentially a more sophisticated version of hodling. A hodler will buy and hold - that is it. Momentum or Position Trading will be looking for entry points based on significant points of momentum change in the market. This might mean identifying the start/end of specific cycles. 

The most obvious are bull/bear cycle or halving periods, but can include calendar based cycles - such as the significance of March and the end of the financial year translating into price declines, as contrasted by the gains that tend happen in April. This image from Coin Telegraph tells that story. or anything from political cycles (due to elections), weather and its impact on hydro-electric mining.

Bitcoin Monthly Price Change


Ark are a good example of an investment firm that are specifically focused on taking positions within emerging technologies.

Pros

  • Potential for significant Return on Investment (ROI)
  • Passive/Not time sensitive
  • Fundamental analysis ore intuitive than Technical Analysis based strategies

Cons

  • Requires funds to be locked up for long periods
  • Risk of significant losses as doesn’t suit a Stop-loss approach

Day/Swing Trading

Within traditional stock markets Day Trading relates to trading within the specific hours that markets open and close. Of course crypto markets never close, they trade 24/7/365, so the concept of Day Trading really means someone who is actively trading the markets on a day-to-day basis, opening short term positions, based on Technical Analysis of price movement. The aim is to capitalise on small swings in price that don’t reflect fundamental changes in the underlying market, rather movement within trends.

Swing Trading requires a good grasp of technical indicators, very clear trading plans and the discipline to wait for the right opportunities, rather than simply trading what is in front of you. Swing doesn't require a conviction in crypto's fundamental value, rather a belief in the accuracy of technical indicators.

Pros

  • Doesn’t require continual commitment so can suit hobby traders
  • Focuses on small gains/loses so you are less likely to get rekt
  • Doesn't require understanding of how crypto works

Cons

  • Requires a grasp of technical indicators and how to recognise them
  • Needs a lot of discipline
  • Unlikely to provide the same kind of returns as longterm hodling

Having €1,000 worth of Bitcoin in your Hard Wallet doesn’t really need a spreadsheet, but as the frequency of your trading increases and the time which your trades are open for decreases, you need to put a lot more effort into planning and documenting what you do.

This might start with a spreadsheet for Dollar Cost Averaging ( as advised in a separate article) but as your trading becomes more sophisticated should eventually turn into a Trading Journal.

What is a Trading Journal?

A Trading Journal is both an objective record of your trading decisions (numbers & dates) as well as a subjective record of why you made them and how they panned out. 

If you are serious about cryptocurrency trading you must be willing to keep a Trading Journal that is entirely honest. It is too easy to simply screen out the failures and just hang on to successes, but that is a guaranteed way to get rekt.

Keeping a Trading Journal requires a systematic approach to each trade that you make, split between Objective and Subjective categories. The objective elements are suited to a spreadsheet format, while the Subjective are more like annotations.

Objective Elements of a Trading Journal

  • What currency pair you are trading
  • Your entry price & date/time
  • Your exit price & date/time
  • Your target exit price & the difference with Exit
  • Trade duration
  • The type of trade - spot or limit; long or short
  • Trade size & proportion of your capital
  • Profit/loss from trade
  • A clear logic for making the trade
  •  A measure/index of risk & a confidence level/index for the trade

Subjective Elements of a Trading Journal

The subjective analysis of your trades can be in an annotation form, and record things like how you well feeling, and how much sleep you got the previous night, to notes about things you feel you got wrong and trading skills you should spend time learning about or improving. 

When you are at the point of maintaining a trading journal you are showing that you have the discipline to take cryptocurrency trading seriously and are prepared to keep yourself honest. There is no point just recording your successes. If you aren’t willing to record your losses, then active crypto trading isn’t for you.

Knowing what separate active and passive trading is an essential part of the learning process for crypto trading, but what we’ve covered so far only considers the actions of an individual manually trading in either a passive or active sense. What we mean by manual trading is physically inputting trades into an exchange interface but the majority of the crypto trading that happens on a day-to-day basis isn’t from individuals sat at home in front of their keyboards. 

The next article looks at how the significant opportunities within crypto trading have attracted institutional investors, hedge funds and sophisticated trading desks. This is an essential part of the evolution of crypto, and in many ways a prerequisite to price stability and broader adoption, but it is a long way from the cypherpunk mailing list where Bitcoin was born, and is important for anyone serious about investing in, or trading crypto, to understand.

Next step: How to place a trade?

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