By holding cryptocurrencies through market fluctuations, traders can gain from price appreciation over time. The HODLing strategy enables traders to reduce the impact of short-term volatility on their trades and capitalize on major market trends.
This article discusses how to use the HODLing long-term strategy for crypto trading.
*This is an example only to enhance a consumer's understanding of the strategy being described above and is not to be taken as Blueberry Markets providing personal advice.
What is the HODLing strategy?
The HODL (hold on for dear life) strategy is mostly used by crypto traders to purchase and hold cryptocurrency in the long term. Regardless of market fluctuations, traders following this strategy hold onto their trading positions as they anticipate that the process will move in their favor over time. Traders need to maintain patience, as panic selling during downturns is not a choice when using the HODL strategy.
How to use HODLing in crypto trading?
Research and select the cryptocurrencies.
The first step is to research cryptocurrencies and choose those with long-term potential. Traders need to consider factors like the project's technology, team, use case, community support, market adoption, and more.
Establish an investment plan
Since the HODL strategy is a long-term strategy, traders must ensure that they set goals and timelines for the long haul. Traders can determine the percentage of their portfolio they want to allocate to cryptocurrency and leave it aside for a few months or years to reap gains. Only invest the money the trader can afford to lock up for an extended period of time.
Open a CFD account
Cryptos can be traded directly or via a contract for difference (CFD). Cryptocurrency CFDs can be traded by funding the trading account with capital intended for the same.
Set up a HODLing position
Calculate the position size for each trade based on risk tolerance and capital. Initiate a long crypto position and hold it over the long term until the position aligns with the long-term investment goals.
Limit exposure as a risk management technique
Next, protect oneself against losses by using stop-loss orders and avoiding over-leveraging. Regularly monitoring account balance and maintaining sufficient margin ensures traders can follow the HODL strategy without issues.
Maintain the HODL position
Periodically assess the performance of the HODLing positions. While the strategy is long-term, it's crucial to remain vigilant about market conditions and make informed decisions.
Manage overnight costs
There might be overnight fees or swap charges when one holds crypto CFD positions for extended periods. These costs can accumulate over time and impact overall gains. Evaluate whether the potential gains from holding a position outweigh the costs associated with maintaining it.
Indicators to strengthen holding strategy signals
Bollinger bands
Bollinger bands consist of three bands that expand and contract based on market volatility. They help traders identify market trends and reversal points. When used in conjunction with the HODLing strategy, they confirm purchase opportunities as bands widen. When the price moves near the upper band, it may indicate a strong upward trend, reinforcing the decision to hold. Conversely, if the price reaches the lower band, it indicates a weakening trend, suggesting reevaluation.
Average true range
The Average True Range (ATR) calculates the average price range between high and low prices in a time period to assess market volatility. It indicates the degree of price movement rather than the price direction. When the ATR is high, it suggests more volatility, which indicates a decision to continue holding a position in an upward trend and vice versa.
Volume indicators
Volume indicators analyze the number of crypto CFDs being traded to understand the overall market trend. They validate the current strength of a crypto CFD with high volumes and suggest that traders should keep holding onto their current positions, and vice versa.
Chaikin money flow
Chaikin Money Flow (CMF) is a volume-weighted indicator that measures the long and short pressure in the market. It combines the market volume with price movement to understand the market trend's strength. Positive CMF values indicate long pressure, supporting the trader's decision to hold in an uptrend and vice versa.
Advantages and risks of using the HODLing strategy
Advantages
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Long-term growth potential: HODLing strategy allows crypto CFD traders to gain from the long-term appreciation of cryptocurrencies, which leads to substantial gains as the asset's value increases over time
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Reduced transaction costs: By avoiding frequent trading, HODLing minimizes transaction fees and spreads, which can accumulate with frequent trading
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Emotional discipline: HODLing strategy makes a trader more disciplined, reducing impulsive decisions driven by short-term market fluctuations and focusing on long-term value
Risks
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Market volatility: Cryptocurrencies are volatile, and holding assets through market downturns can result in significant losses if prices drop substantially
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Opportunity cost: By holding onto crypto CFDs in the long run, traders might miss out on other investment opportunities or gains from assets with better short-term performance
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Lack of flexibility: The strategy can limit the ability to adapt to changing market conditions, resulting in missed chances to rebalance the portfolio or capitalize on new trends
Top tips to trade with the HODLing strategy
Analyze project fundamentals and technology
Investing in crypto projects with strong fundamentals and innovative technology increases the chance of long-term gains. Traders should ensure they read about each project well before investing since they must hold onto the cryptocurrency for a long time.
Choose currency pairs with long-term potential
Traders should select cryptocurrencies with proven long-term growth results based on market adoption, historical performance, and ongoing market trends. Cryptocurrencies with real-world applications are usually appropriate to start with the HODL strategy.
Limit trading frequency
Reduce the number of trades to minimize transaction fees and avoid emotional decision-making. Frequent trading in the HODLng strategy increases trading costs and should be avoided.
Reinvest gains to compound gains over time
Reinvest any gains from the trade to purchase more of it as time passes. Reinventing enables traders to benefit from compounded growth, improving wealth accumulation in the long term.
Diversify across multiple cryptocurrencies
Traders should spread their investments across different cryptocurrencies to reduce market risk. Diversification improves the chances of gaining from multiple growth opportunities at a single time over the long term.
Navigating short-term market volatility with the HODL strategy
The HODL strategy is ideal for investors seeking to gain from the long-term growth of cryptocurrencies by holding assets through market fluctuations avoiding frequent trading costs and emotional decisions. However, it may not suit those who prefer short-term gains or need flexibility, as it exposes investors to significant volatility and can lead to missed short-term opportunities or necessary portfolio adjustments.
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.
