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Cryptocurrency trading: a combination of the right strategy and good execution

According to a recent report, there are now about 51 million active crypto traders in the world. That’s almost 0.6% of the world’s population! By comparison, there are almost 2 times fewer software developers in the world – only 25 million.

After hearing this, we couldn’t help but wonder the following: what proportion of these 51 million people rely on effective trading strategies when trading cryptocurrencies? Probably not a very large proportion. And that means that a huge number of people would really benefit from learning a variety of trading strategies and methodologies.

In this article, we provide examples of entry-level strategies and discuss the importance of following the right process when making decisions in cryptocurrency trading.

Top 3 Underrated Strategies for Trading Cryptocurrencies

You probably know about the kinds of trading strategies commonly used when trading cryptocurrencies. There are a lot of them, and most of them, unfortunately, are completely useless. So what are the best parameters to pay attention to when choosing the right strategy? One thing is for sure: don’t overcomplicate things. Simplicity is the key factor, and the simpler your strategy, the easier it is to learn (if it works, of course).

Simple Moving Averages (SMA)

Here is an example of this strategy:

Time Period: 4 hours

Moving Averages: 200-, 12- and 26-period Exponential Moving Averages (EMA).

When the price is below the 200 EMA, you should trade bearish (sell only), and vice versa, when the price is above you should trade buy only.

Whenever the 12-period EMA falls below the 26-period EMA, a sell signal is generated and you must sell (or exit an existing long position). When the 12-period EMA “breaks” the 26-period EMA, you buy (or close an existing short position). It is also considered good practice to place a stop loss below the previous “bottom” of the price.

This strategy is an excellent simple indicator of convergence (convergence) and divergence (divergence) between medium-term and short-term price behavior (Momentum). It shows when the price is accelerating either up or down.

An example of successful use of this trading strategy:

 

 

 

Interaction of RSI and MACD Indicators

The two most commonly used indicators, the Relative Strength Index (RSI) and the Moving Average Convergence-Divergence (MACD) can be very effective when used together.

But as with any other strategy, you need to understand exactly how the indicators work in order to use it successfully.

RSI is calculated in 2 steps using the following formula:

phormula

The Average gain or loss used in the calculation is the average percentage gain or loss of the price over the hindsight period. The formula uses positive values (modulus) for losses. To calculate the second part of RSI, it is necessary to have the same amount of data as selected in the period of this indicator. Further, the second part is calculated by the formula:

 

 

“The MACD is calculated by subtracting the long-term EMA (26 periods) from the short-term EMA (12 periods)” (Source: Investopedia).

So the MACD has three elements: exponential moving averages with 12 and 26 periods and the arithmetic difference between them.

Both RSI and MACD are oscillators, meaning that both indicators calculate their values based on price.

These indicators are best used in conjunction with each other. This means that if both indicators give the same signal, either to buy or to sell, then you follow that signal; otherwise, you do not.

 

The above example vividly shows how the trader entered the trade when the MACD gave a bullish signal, setting the stop loss below the previous low, and the RSI was below the upper zone (<70). Once the RSI crossed 70, he exited his position and closed the trade. The trader could have just minimized the risk (closed part of the position) when the RSI reached 70, but by closing the position the trader guaranteed a successful trade.

Gradual position averaging

Being the only long-term strategy on our list, this is also the easiest trading technique. Essentially, you simply buy a fixed amount (or sell by opening a “short”) of the cryptocurrency that you think is the most promising. By doing this with a certain frequency (every 2 weeks, for example), you gradually improve the average entry price of the position.

This strategy has two distinct advantages: you don’t have to worry about daily price fluctuations, because you are buying for the long term. So, if the market goes down, you simply improve your average buying price.

A good example is buying Bitcoin every week during the first quarter of 2019, when the price was between $3.3k and $4.3k. A few months later, the price reached $10k+.

Probably the most underappreciated aspect of trading is following your strategy correctly. While having an effective, well-tested strategy for trading is a must, it is equally important to always remember to always play by the rules established by that strategy.

Many traders suffer from emotional trading. This phenomenon is known among traders as the most challenging aspect of trading. It includes such things as:

  • Chasing losing trades – extending your predetermined stop losses to “give the trade a little more time”
  • Using excessive leverage while on a losing streak
  • Entering into a position before the actual signals of the indicators used are triggered
  • Premature closing of winning trades

So, what should you pay attention to when making decisions? How to analyze the correctness of your actions? Here is a list of questions that you should definitely ask yourself from time to time:

Did I make this trade because my strategy told me to, or was it just emotion?
Do you consider trading commissions when setting stop-losses?
Is it worth lowering your trading leverage?
“Overtrading. If you’re making 5-10 trades a day, that’s probably too much. Even with a profitable strategy, commissions will “eat up” your entire PnL.
Also, a good practice is to keep a trading journal – novice traders who make notes of their trades for periodic analysis very often get better results.

 

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