How to trade crypto: Simple trading strategies

What you'll learn

  • The Importance of time
  • Allocating discretionary income
  • Have a clear objective
  • Cost Averaging as trading strategy

Learn crypto’s section on how to trade cryptocurrency provides a basic foundation for anyone new to the subject. Trading is about trying to quantify and manage risk. Cryptocurrency markets are inherently risky because they are immature but the same types of approach used in traditional trading can be applied. 

We’ve introduced the ideas behind Technical Analysis - studying short term volume and price movement -  and Fundamental Analysis - analysing broader adoption metrics and influences. 

Once you’ve absorbed this information, along with the basic mechanics of where crypto prices come from and the role exchanges play in offering trading, you’re left with the difficult decision on whether trading cryptocurrency is something you want to pursue, and if so, what approach to take?

The answer to that question should come down to the amount of time you can reasonably dedicate and the amount of money you can reasonably afford to invest.

The Importance of Time

Everyone will be familiar with the phrase ‘practice makes perfect’. The celebrated author, Malcolm Gladwell, popularised the idea that mastering a skill takes 10,000 hours of practice, along with innate skill. 

Though Gladwell’s idea has been challenged, there is a definite correlation between time and success in trading cryptocurrency. You have to commit the time to simply understand the basics, but that simply is step 1. Experienced traders take years to refine their skills - which is an open-ended process - and that is doing it as their full time job.

You’ll need to find time to undertake the actual research to establish a trading decision, and when boiling this down to the time involved, and your personal circumstances, it may become immediately clear what path to take.

Your lifestyle will be an important factor in this. If you are in full time employment, have a family, or a busy social life, where will you find the time to learn, do the required research and monitor your trades? 

Trading lifestyles are notoriously anti-social. The constant pressure of market volatility and processing new information can create stress and impact sleep, which in turn may lead to poor decision-making. 

This consideration alone may be enough to guide your approach, the second key component will be your discretionary income.

Allocating Discretionary Income

How much time you spend in thinking about trading will of course be relative to how much money you want to invest. Before thinking about allocation, you should always follow these golden rules:

  • Never invest money you cannot afford to lose
  • Don’t invest using a credit card or debt such as student loans or re-mortgaging
  • Don’t rely on unqualified trading advice
  • Commit only a small proportion of your discretionary income
  • Be prepared to see your investment decline
  • Have an idea in your head of what you are trying to achieve

Discretionary Income is money left over after income tax and essential living expenses are taken care of. This is money that might be invested or saved. 

There is no specific rule for how to allocate your discretionary income though there is agreement that it should be spread across a spectrum of assets by risk.

The largest proportion should be for the least risky - savings and indexed share funds - and the smallest proportion for the most risky. 

Given that cryptocurrency is inherently risky, you should only consider allocating a small proportion, perhaps 5% or less, of your discretionary income.

There are many people who feel very strongly about crypto and you may see Tweets or Instagram updates talking about going ‘all in’. It would be extremely inadvisable to allocate 100% of discretionary income.

Depending on how much your discretionary income amounts to, you can decide what approach, if any to take, but bear in mind that there are fees associated with depositing funds with exchanges. Trading small amounts might also lead you toward trading obscure and risky cryptocurrencies, seeking huge returns.

Be Clear Of Your Objective

It may seem like a silly question, but a crucial part of trading and investing decision making is having a clear idea of why you are doing it. Making money isn’t a specific enough answer.

To start with there are other things you can do with your money to derive a return, so what you intend to make from trading cryptocurrency needs to justify the comparative risk. 

This will start with the options of leaving your money in a Fiat savings account or some basic index tracker fund but the premise of Learn Crypto is that cryptocurrency represents sounder money than fiat. So, once you’ve done research and accept that premise, you should be comparing against non-fiat opportunities.

This can include things like precious metals, collectibles, property and art. Bear in mind that the returns from these options might not seem as sexy as crypto, but that is because the risk involved is far less.

If you are satisfied that crypto represents the best risk-adjusted investment for a portion of your discretionary income, the section on earning cryptocurrency walks through the risk spectrum. 

You’ll see that passive interest can generate 5% return for Bitcoin, higher for other coins, which is a good benchmark to start from - though this includes counterparty risk - which is why we include it below in potential strategies.

Making a reasoned assessment of the return you intend to generate also serves the important purpose of quantifying your ambition. As you navigate the crypto world you’ll see a lot references of ‘to the Moon’ or ‘Diamond Hands’ suggesting that hodlers see crypto as something they aren’t considering selling.

That is fine if, for example, you think the fiat system is imminently going to collapse but that is very unlikely. In all likelihood we’re going to need fiat for a while yet, and its relevance is illustrated by the fact that crypto’s value is expressed in fiat terms. So a crucial part of any trading or investing strategy is an exit point. 

This is self-evident for short-term trading (as we’ll see in the next article) but for those that invest for the longer term - the Hodlers - it's worth deciding in advance if and when you take profit (should you make any) off the table.

It is great watching numbers go up during a bull market, you may even feel slightly disconnected from reality, but as soon as the market turns, and markets inevitably go through cycles, you may feel uncomfortable at not realising some profit. 

Tip: For longer term investment set a price target then consider a 15/10 rule, cashing in 10% for every 15% gain.

If you cannot envisage yourself selling then think about other ways your investment can provide a return. You might apply the risk spectrum approach in turn to your crypto portfolio, keeping the bulk securely on your hard wallet, a portion earning return through Defi/Cefi and then taking greatest risk with the smallest proportion 

To help here are some suggested cryptocurrency trading strategies, starting with the least complex and requiring only small, regular amounts. 

Cost Averaging

We’ve written elsewhere about Cost Averaging in our section on how to earn crypto. Cost Averaging - sometimes called Dollar Cost Averaging - simply refers to making equally sized, regularly recurring trades, instead of one lump sum.

The attraction of cost averaging is that it can help mitigate concerns around volatility and choosing an entry point. Regular trades over time will smooth the ups and downs. 

You do of course need to do the Fundamental Analysis to make a judgement about the long term viability of your chosen cryptocurrency, but thereafter your investment path is neatly mapped out.

Cost Averaging works best when pursued over a long enough period of time to benefit from both a down cycle and an up cycle. 

DCA is not risk free, during down cycles you will see the value of your investment decline, potentially below your original investment, with no certainty it will recover.

There is no guarantee future price movement will reflect historic, so you still need to do the Fundamental Analysis to establish that you are prepared to take the associated risk with the conviction to pursue regular purchases, seeing your investment declining over an extended period, known as a bear market.

Create a spreadsheet planning your investments out, then filling in the details of each regular purchase. You might want to include these fields:

  • Date
  • Investment Detail
  • Amount investment (€)
  • Cumulative Amount Invested (€)
  • Purchase Price (€)
  • Crypto Value
  • Crypto Cumulative Value
  • Portfolio Value (€)
  • P&L

Cost Averaging with Passive Returns

To add some yield to your Cost Averaging investment, you can combine it with a service that pays interest. This can be either Soft Staking - with no commitment - or Hard Staking, where you get higher returns but funds are locked up for a minimum period.

This isn’t risk free, as the providers of passive interest service expose you to what is known as ‘counterparty risk’. The risk they may fail or get hacked, which risks your funds as currently none offer asset insurance. Remember, there is no free ride.

Tip - Adapt your DCA sheet to include the value of interest.

Cost Averaging Using Technical Indicators

Once you’ve established a routine of Cost Averaging, becoming comfortable with the mechanics and record-keeping, one option is to segue into trading by using technical indicators to adjust your regular investments. 

Your goal should be to adjust your allocation down during periods when the market is overbought and the reverse when the market is oversold.

There are a variety of indicators you might employ to do this, you’ll need to do the adequate research to decide which you think is best. You might use Standard charting tools  like Moving Averages, Relative Strength Index (RSI) or Bollinger Bands.

You might also rely on an external indicator to inform the adjustments, which you feel correlate with price, such as the US Dollar Index (DXY). 

The DXY is a measure of the value of the US Dollar relative to a basket of currencies of major trading partners. It tends to have an inverse relationship with Bitcoin and the wider crypto markets, as dollar weakness pushes investors to look for assets that are a better store of value, such as Bitcoin.

Any indicator or model can be used, it just depends on the value you feel it holds. The Stock-to-flow model created by Crypto Influencer, Plan B, is another popular tool. As price moves above and below the price predicted by his model, you might adjust your DCA purchases.

TIP - Where you deviate from your regular purchases make sure to indicate this in your records, along with the rationale used.

Lump Sum Hodling Using Fundamental Analysis

Cost Averaging is an excellent first step into investing in cryptocurrency, which can gradually lead into trading type decisions. It does however, have a few downsides. It takes a significant time to build a position and you will never benefit from investing at the bottom of the market.

If you decide you want to wait to get investment exposure you can invest a lump sum, rather than the drip-feed of Cost Averaging, but your risk is concentrated in that one trade.

Both DCA and a lump sum investment strategy require Fundamental Analysis, but given the increased exposure of a lump sum you should certainly ensure you have done your research, on top of following the golden rules..

Fundamental Analysis is more relevant if you are committing a significant amount of savings. You need to make a reasoned judgement on the long term prospects of the specific cryptocurrency, accepting that it may take years to realise a profit if at all. Your lump sum may simply decline in relative value over time..

Lump Sum Hodling Combining Fundamental & Technical Analysis

If you satisfy yourself that you are comfortable with a passive long term investment decision based on Fundamental Analysis, you still have to decide on a price entry point.

If your analysis suggests significant long term gains, then you may feel that the marginal gain from establishing an optimum entry point isn't worth the consideration.

You can however, use Technical Analysis to decide an optimal point to make the lump sum purchase - using Technical Indicators as described above - and then sit back and hope your Fundamental Analysis is accurate over the longer term.

What we have described here are simple crypto trading strategies for beginners, ideal for those without the means or desire to spend time doing Technical Analysis.

The next article will look at trading strategies that are far more involved.

Next step: Active trading strategies

Go to next step