Trading, especially with digital assets, is becoming increasingly popular as it has proven to be the most profitable. There are many different strategies you can use to earn money in cryptocurrencies, and this article will give you an insight into these various techniques so that you can more easily decide which one best suits your needs, personality, and circumstances.
Before we dive into the different types of crypto traders, you need to understand that all (trading) strategies fall into two basic categories based on the time frame in which we expect the value of assets to increase. You may now be wondering, what are these two fundamental categories?
Two Basic Categories of Trading
All strategies can be classified into short-term or long-term categories.
Most long-term traders use fundamental analysis to assess whether a particular asset is undervalued, and thus buy coins when they are cheap, betting that the price will rise in the future and catch up with its fundamentals. Traders then wait through various market phases before selling the coin when it is overvalued.
Short-term trading, on the other hand (as the name suggests), is aimed at generating profit in the short term. Short market price movements are typically calculated based on technical analysis (since fundamentals generally don’t change overnight). Short-term trading also has an advantage over long-term trading in the sense that traders can exploit short-term volatility to increase profits.
It is important to note that managing your emotions and truly understanding short-term market movements is really hard work that requires a great deal of time, preparation, and experience. Instead of maximizing profits, the vast majority of people who try to profit from short-term volatility actually lose money. For example, a study of eToro day traders showed that nearly 80% of them lost money over a 12-month period. There are many more studies showing comparable results.
Scalper Trader
The first type is the Scalper trader, who makes dozens or even hundreds of trades per day in order to “scalp” a small profit from each trade by exploiting the bid-ask spread or short-term price movements. One could say this is the most ‘impatient’ type of trader, as they sell coins in a very short period of time.
Day Trader
The second type is day traders, who buy and sell a coin within the same day. They are probably the most dedicated to trading, as they must constantly monitor the markets and keep an eye on market trends and their impact on prices. Day trading can be extremely profitable, as day traders typically make their living from trading, but it requires a great deal of practice, knowledge, experience, and emotional control to become a master in this field.
In this context, we can explain the acronym FOMO, which is quite common among day traders.
Because the cryptocurrency market is still a very volatile market, every trader will sooner or later watch the crazy price surge of a particular project and then jump in to buy that coin out of fear of missing out on a profit opportunity. If this has ever happened to you (and it probably has), you have experienced FOMO, which is essentially short for ‘fear of missing out’.
Because cryptocurrency trading is still heavily influenced by emotions, FOMO still has a significant impact on prices. To overcome market fluctuations, it is essential to sense the emotions, which can be achieved by reviewing a huge number of Twitter posts and news from the crypto sphere, but this can be an extremely inefficient and time-consuming process.
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Swing Trader
The third type is called Swing traders, who try to catch a trend and want to capture short-term to medium-term gains on a coin over a period of a few days to a few months. Swing traders typically use technical analysis to identify good trading opportunities based on price trends and patterns, combined with some fundamental analysis. The longer the time frame in which you intend to hold coins, the more important fundamental analysis becomes alongside technical analysis.
What is technical analysis?
Technical analysis involves using real-world data to predict the future of the market. It includes reviewing past statistics of the relevant cryptocurrencies, including factors such as volume and movement.
Another common method is fundamental analysis, which involves evaluating the intrinsic value of a cryptocurrency. Technical analysis, on the other hand, examines patterns and analytical charting tools to identify the strengths and weaknesses of a cryptocurrency, taking them into account for future patterns. Traders in more traditional assets, including stocks, commodities, currencies, futures, and forex, also use technical analysis. The process of applying technical analysis to any of these assets will be remarkably similar to the process of applying it to cryptocurrencies.
NOTE: Swing trading is the most welcoming trading style, which is the easiest to master due to the higher support and resistance of the time frame. They tend to hold better than at a lower time frame. Additionally, there is no need to react too quickly to trades. Consider starting here first if you want to trade, but if you still want to generate profit, consider position trading.
Position Trading
Position trading is like a scaled-down version of swing trading or a trading version of investing. Here you will try to build/take a long position at a low price or a short position at a high price and then hold that position for weeks, months, or even years.
This is the simplest form of trading, but it also requires a great deal of discipline. Think of someone who has been long on Bitcoin from $5,000 or short from $12,000 (the current BTC price is $44,100). A disciplined position trader has potentially weathered all the ups and downs (although they may have exited some of their positions or reopened positions, or may have exited entirely).
What are long and short positions?
These two terms reflect whether a trader believes the value of a cryptocurrency will increase or decrease.
Cryptocurrency traders often use industry-specific jargon that newcomers don’t fully understand. Although “longs” and “shorts” are not the most technical terms – in fact, they are at the core of trading – we will explain both concepts.
In short, long and short positions reflect two possible price directions needed to generate a profit. In a long position, a crypto trader hopes that the price will rise from a certain point. In this case, we say the trader “goes long” or buys the cryptocurrency. Conversely, in a short position, a crypto trader expects the price to fall from a given point – meaning the trader “goes short” or sells the cryptocurrency.
That said, in a bull market you will see more long than short positions, as more traders want to take advantage of rising prices. When the market is bearish, short positions generally outnumber long ones, but this is merely an observation and not a rule to follow. Professional traders and investors typically buy the dips and sell the rips – meaning they open long positions when the price pulls back from recent highs, and sell the cryptocurrency when the price is no longer resistant.
Position trading is similar to investing in that it is long-term, but it is not purely investing, as the ultimate goal is to make a killer long-term trade based on overall trends. In cryptocurrency, you will need to endure wild ups and downs, bear and bull markets, good and bad news.
Hodler
Investors who hold their coins and are not bothered by short-term volatility are known in the crypto community as hodlers. They have the most long-term oriented strategy. It involves buying an asset and letting its value grow over time without being disturbed (selling), even if the market value drops significantly. Being a hodler on one hand involves less day-to-day activity, but on the other hand requires a prolonged, research-intensive effort and a great deal of expertise in the field.
HODL is an acronym associated with such traders. The term “hodl” originates from a misspelling of the word “hold” (while others claim it is an acronym for “Hold on for Dear Life”). HODLers approach trading with a long-term strategy, holding their coins and not being bothered by the short-term volatility of cryptocurrencies. Although being a HODLer may seem easy because you don’t need to monitor crypto markets on a daily basis, it requires extensive research into the project you want to invest in. The analysis must be thorough, as it needs to confirm your hypothesis about the project’s strong fundamentals to ensure it will stand the test of time.
Arbitrage Trader
The last type is arbitrage trading, which is somewhat different from the others, as traders in this case do not bet on the appreciation (or depreciation in the case of short trading) of a cryptocurrency, but instead simply exploit price differences of the same coins across different exchanges or other types of market inefficiencies. For example, if a cryptocurrency is traded on multiple exchanges and is cheaper on one exchange, it can be purchased on the exchange where the price is lower and then sold on another exchange at a higher price. The difference in prices is the trader’s profit, however you must also account for fees (for buying/selling as well as for transactions).
Many crypto platforms offer an Arbitrage tool. What do these tools typically offer? An arbitrage tool allows you to track opportunities where the same token is traded at different prices on different exchanges (so you can profit by buying on the exchange where it is cheaper and selling on the one where the price is higher). Arbitrage opportunities can be filtered by trading pair, exchanges, and price difference. The number below the spread in individual arbitrage opportunities represents the liquidity at the price points for which arbitrage is possible. Greater liquidity means that arbitrage can be executed with higher amounts of funds, which also increases profit.
An equally interesting acronym: ICO
ICO, or Initial Coin Offering, is a way for blockchain projects to raise money for creating a new coin, application, or service. They are the crypto industry’s equivalent of an Initial Public Offering (IPO) of stocks. Interested investors can purchase an ICO to receive a new cryptocurrency token issued by the project. These tokens typically represent a stake in the project, and sometimes even have an additional utility connected to their product or service. Because ICOs are very loosely regulated, you need to be extremely cautious when participating (or before participating). Make sure to thoroughly read the project’s white paper and verify that the people behind the ICO are real and can be held accountable. Simply put, Initial Coin Offerings represent an investment opportunity that can either generate exceptional profits for you or leave you holding a worthless wallet.
How to Choose the Right Style for You
The right style for a person depends on the individual. Here are some general tips:
- Find a style that suits you, stick with it and master it well until you become profitable. Don’t change your style if it stops working, just adjust your style according to the current market conditions.
- Nothing will destroy your portfolio faster than turning into a top buyer or turning into a day trader at the bottom (because in these cases you are actually buying high / selling low).
- Actually, there is one thing worse than that, and that is not managing risk. Every style requires different risk management (the more trades you make, the smaller the positions). Although every style requires different risk management tactics, in all cases the idea is to limit your downside and give the asset enough room to work. Going all-in with 100x leverage on a single trade is essentially never the right move.
- Crypto trading is a sport at quite a high level. It’s hard to say there is a more difficult “hobby” when it comes to trading. Most people will fall flat on their face over and over again for months (if not years). Even worse, if you enter crypto during a bull market, you probably won’t fall flat on your face at first, and then you’ll be poorly prepared for the bad times.
- Expect pain and try to learn some lessons — if it seems easy, you’re likely in a bull market and need to prepare for the hard road ahead.
- Try to make your lessons not too costly by using risk management and avoiding switching a style that works just because it stops working for a few trades (for example, avoid suddenly becoming a day trader at the bottom or an investor at the top; also avoid a situation where you hit a few stops and then don’t take the next trade out of fear; statistically speaking, the next trade is usually the winning one, unless your strategy is flawed).
In summary, it is best to try different techniques to decide what works best for your personality, goals, and circumstances. You may also consider using multiple techniques simultaneously, which can be beneficial in the event of a downturn, as it provides a form of diversification, much like investing in multiple assets. Don’t miss the free webinar where a crypto millionaire explains how to succeed in crypto.
And don’t forget the acronym: (DYOR)
It stands for “Do Your Own Research.” It is used to encourage cryptocurrency investors to conduct due diligence on a project before investing their life savings into it, so that they are fully aware of why they are buying a particular cryptocurrency or supporting that project. DYOR is commonly used all over the internet, but doing your own research is especially important in cryptocurrency, due to the lack of regulation and the elimination of third-party intermediaries. This is not necessarily a bad thing (one could argue it is a good thing), but it requires a greater degree of caution and diligence on your part.
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