What is a Trading Strategy?
A trading strategy is a comprehensive investment plan that consists of goals, procedure, and risk management strategies. Investors can create a rough framework of the trading strategy based on their requirements, trading plans, budget, and terms to devise a suitable trading strategy to suit their interests.
Trading strategy is not mandatory for investors but it can work like a framework or flowchart that help the investors navigate through their trading journey and retrace their steps at any given time.
A trading plan assists the investors make decision based on reason and logic and avoid emotional influences on account of pressure from the trading markets. At the same time, investors have a drawn out plan at their disposal that they can edit, update, and change at any given time.
Furthermore, trading strategy allows the investors to access different areas of investment and add or subtract them based on their success rates.
Components of a Trading Strategy
Here are some important components of a trading strategy mentioned as under:
- The criteria for adding an asset or token in the portfolio.
- The duration of trading either long-term or short-term positions etc.
- The type of trading position such as long, short, or derivatives etc.
- The factors to create, increment, decrement, or dissolve a trading position.
- Stop loss and take profit thresholds.
- Technical and fundamental indicators to consider for trading analysis.
- The method to document and measure the performance of various assets in portfolio.
- Trading hours, resources, and references.
- Back testing and forward testing methods for verification and upgrading.
- Risk management strategies, research, and other information collected for a given virtual currency.
Types of Crypto Trading Strategies
There are two main types of crypto trading strategies mentioned as under:
Active Trading Strategies
Active trading strategies require active time and efforts invested for the trading process. Here are some subtypes of this option:
Day trading positions are held for less than 24 hours. It is a short-term trading strategy where investors use technical analysis to monitor price changes in cryptocurrencies.
Day traders can create multiple trading positions within a day to profit from the intraday price movements. Day trading is a high risk trading strategy that requires market insight and experience before proceeding.
Swing trading positions are held longer than 24 hours. Traders in this strategy monitor the price volatility of cryptocurrencies over various days or weeks.
Traders in this system use a combination of technical and fundamental market analysis. Swing trading is considered ideal for beginners since it is not as urgent or risk prone as Day trading.
Trend Trading is also called position trading where investors can hold their positions for long-term as far as a few months. Investors focus on directional tends in the spot markets and enter a long position during an uptrend and short positions while downtrend is taking place.
It is also a beginner friendly trading strategy as it uses fundamental analysis for the most part. However, investors must include indicators to point out trend reversal signs as risk management strategy.
Passive Trading Strategies
Passive Trading Strategies is a passive investment approach where investors can hold the trading position for long durations. Here are some popular passive trading strategies:
Buy and Hold
Investors can purchase the most trending assets in a market and hold their positions for long-term. In this type of trading strategy investors intend to take advantage of the compounding effect.
This is a long-term trading strategy where investors use fundamental analysis to find growth assets that can generate considerable profits in the future.
Indexing investment is a method of picking the top performing assets in a given market. Traditional stock markets have defined indexes such as S&P 500 and Dow Jones.
However, cryptocurrencies are decentralized therefore there are no official indexes for them at present. Investors usually refer to crypto-based ETFs.
A crypto trading strategy is a proper way to approach investing rather than going ahead without a plan. Trading strategies allow investors to define goals, ascertain results, and make practical decisions.