How to Build Your Own Crypto Trading Strategy

Having a crypto trading strategy in place tames the crypto market volatility by helping traders outline when to enter/exit the market and not merely chase quick gains. It also helps traders identify cryptocurrencies with strong fundamentals and removes emotional biases.

In this article, we will discuss how traders can build their own crypto trading strategy.

What is a crypto trading strategy?

A crypto trading strategy is a well-defined approach a trader takes to trade cryptocurrencies to make a gain. It outlines the rules and guidelines they follow to make crypto trading decisions. There are many different strategies, each with its own set of pros and cons, and the best choice for a trader depends on their risk tolerance, investment goals, and available time.

Some common crypto trading strategies:

Hodl (Hold On for Dear Life): This is a long-term strategy where traders purchase and hold cryptocurrencies for an extended period, believing in their long-term potential.
Day trading: This involves making multiple crypto trades within a single day, capitalizing on short-term price movements.
Swing trading: This strategy holds crypto positions for days or weeks, aiming to gain from larger price swings.
Dollar-cost averaging (DCA): This involves investing a fixed amount of money into a specific cryptocurrency at regular intervals, regardless of the price. This helps average out the cost per coin over time.

Step wise guide to build a crypto trading strategy

Understand cryptocurrency market dynamics

Before building a crypto strategy, consider the three most important aspects of the market –

Volatility: Acknowledge the inherent price swings in the crypto market and adjust the strategy accordingly. Employ techniques like stop-loss orders to limit potential losses during sudden price drops.
Liquidity: Research the trading volume of the chosen cryptocurrencies to ensure smooth entry and exit points. Prioritize cryptocurrencies with a high trading volume to ensure smooth entry and exit points at the desired prices and use limit orders instead of market orders, especially for less liquid coins, to have more control over the execution price.
Regulations: Stay updated on evolving regulations that might impact the chosen coins or trading methods. Understand how new regulations might affect the price and overall market sentiment of the chosen cryptocurrencies.

Define crypto goals and targets

A trading strategy should revolve around the crypto goals and targets that a trader has in mind, which depends on the time-horizon of the investment period –

Short-term (scalping/day trading): If traders are aiming for small, frequent gains by capitalizing on short-term price movements, they should define daily/weekly gain targets and stop-loss levels.
Mid-term (swing trading): If traders are targeting moderate gains by holding positions for days or weeks based on technical analysis, they should set clear entry/exit points based on indicators and risk management.
Long-term (hodling): For long-term holding goals, traders should invest in projects with strong fundamentals and practical use cases.

Choose a trading style that suits the crypto dynamics

Traders can choose from different trading styles that suit their crypto trading goals –

Technical analysis: Rely on technical indicators and chart patterns to identify trading signals specific to the crypto market (such as RSI for overbought/oversold conditions).
Fundamental analysis: Research project whitepapers, team backgrounds, and adoption rates to identify undervalued cryptocurrencies with long-term potential.
Hybrid analysis: Combine technical and fundamental analysis together to get more accurate crypto market signals.
On-chain analysis: Analyze on-chain data like transaction volume and active addresses to gauge investor sentiment and potential price movements.

Understand the crypto market cycle

The cryptocurrency market exhibits recurring patterns in price movements known as market cycles. These cycles, categorized into four phases, significantly impact investment decisions.

Accumulation: Prices consolidate after a dip, potentially signaling future growth (opportunity to purchase).
Markup/hype: Positive sentiment drives prices up, fuelled by investor interest (potential for short-term gains, but beware FOMO and inflated prices).
Distribution/blow-off: Market exuberance peaks, prices surge beyond intrinsic value (potential gain-taking for experienced investors).
Correction/bear market: Prices fall sharply, fear sets in (opportunity to purchase undervalued assets through dollar-cost averaging).

Develop crypto trading rules

Crypto trading rules such as defining specific technical or fundamental indicators that trigger trading decisions and setting strict stop-loss levels to limit potential losses on each trade helps traders make informed crypto trading decisions. It is also suggested to allocate a calculated percentage of the capital to each trade based on the risk tolerance and confidence in the signal.

Choose the cryptocurrencies

Crypto traders should not blindly chase the latest trends. They need to dedicate time to comprehensively researching each cryptocurrency they consider adding to their portfolio. This research should encompass project analysis, assessing team qualification and the core technology behind the coin for its potential for scalability in the future.

Leverage on-chain analysis

On-chain analysis involves examining the data stored on a blockchain ledger. This data includes details like transaction volume, active addresses, whale movements in the crypto market (activity of large cryptocurrency holders) and more. This on-chain data provides valuable insights into network activity, investor behavior, and potential future trends.

Identify DeFi opportunities

Traders can explore decentralized finance (DeFi) protocols like staking or lending to generate passive income on their crypto holdings.

Staking means locking up holdings for a certain period lets crypto traders contribute to the validation of transactions on the blockchain network. In return, they can earn rewards in the form of additional cryptocurrency.
Lending means crypto traders can act as a peer-to-peer lender, depositing crypto holdings to a lending pool. Borrowers then access these funds, paying an interest rate. This allows traders to earn interest on their crypto assets without having to actively trade them.

Integrating DeFi into one's crypto strategy allows traders to have greater control over their crypto assets and take advantage of the ongoing innovation in the crypto space with new protocols and opportunities.

Take advantage of market price discrepancies

Look for opportunities to purchase cryptocurrencies on decentralized exchanges (DEXs) at lower prices compared to centralized exchanges (CEXs) for arbitrage opportunities.

Consider halving events

To further refine crypto research, traders should consider the impact of halving events, particularly for Proof-of-Work (PoW) blockchains like Bitcoin. These pre-programmed events cut the block reward for miners in half roughly every four years.

While the immediate impact might be limited, some analysts believe halvings can influence long-term price appreciation due to the reduced supply of new coins entering the market. Factoring in potential halving cycles can help traders assess a PoW cryptocurrency's long-term growth potential within the investment strategy.

Stay updated with crypto’s continuous learning and adaptation

The crypto market is constantly evolving. Stay informed about emerging trends, regulatory changes, and technological advancements and continuously learn and refine your trading strategy based on new information and market experiences.

Building a crypto trading strategy provides structure in the volatile crypto market but involves significant risks. Market volatility can lead to substantial gains or losses, and liquidity issues can complicate trades. Regulatory uncertainties can impact market sentiment and cryptocurrency values. Effective strategies require continuous learning to stay ahead of trends and technology. Emotional biases can lead to irrational decisions, so a well-defined strategy is essential.

In conclusion, while a comprehensive crypto trading strategy can provide a framework for informed decision-making, traders must remain vigilant and adaptable to the ever-changing landscape of the crypto market.

Disclaimer:

All material published on our website is intended for informational purposes only and should not be considered personal advice or recommendation. As margin FX/CFDs are highly leveraged products, your gains and losses are magnified, and you could lose substantially more than your initial deposit. Investing in margin FX/CFDs does not give you any entitlements or rights to the underlying assets (e.g. the right to receive dividend payments). CFDs carry a high risk of investment loss.