Crypto assets are a high-risk investment, and trading them without a plan in place can often lead to a loss of invested capital. While most analysts would agree there is no “perfect” trading strategy, there are three well-known methods that are well suited to beginner traders.
For the purposes of this explainer, you will need the following:
This content is for informational purposes only and should not be construed as investment advice.
1. Dollar cost averaging (DCA)
Dollar cost averaging is a popular and well-tested trading strategy that works best when done over longer periods of time. The concept is simple. Instead of investing all your money in a particular cryptocurrency at once you divide it into small amounts, choose a particular time and day of the week and only buy at those times.
Example: Bob has $10,000 he wants to invest in bitcoin. Instead of spending the full amount in one go, he decides to use the DCA strategy and divide his $10,000 amount into 20 lots of $500. He then chooses a particular day of the week and time to buy bitcoin – let’s say Monday at 12:00 local time. Over the next 20 weeks, Bob systematically buys $500 worth of bitcoin every Monday at midday until he has invested his entire $10,000 amount.
Buying at regular intervals like this over a long period of time helps to reduce the impact of market volatility – when prices rise and fall sharply – and means, on average, Bob will likely get more bitcoin for his money than if he had spent all his money at once.
DCABTC, a bitcoin-focused DCA calculator, illustrates this in greater detail.
Had you bought $150 of bitcoin once every Monday from Jan. 1, 2018, you would’ve spent $23,550 overall and have 3.04 bitcoin ($147,307 at press time.) Whereas, if you’d spent $23,550 on bitcoin on Jan. 1, 2018, you would’ve ended up with 1.69 bitcoin ($81,779 at press time.)
Another reason why dollar cost averaging is such a good crypto trading method for beginners is that the whole process can be fully automated via a number of different trading bot services, such as CryptoHopper, Coinrule or 3Commas. This means all you need to do is deposit funds, tell the trading bot what you want to trade and when to trade it, and let it do all the hard work for you.
If you opt to do the DCA strategy manually – buying the crypto yourself on an exchange at set times– you can improve your overall results by adding one simple rule: only buy the particular crypto asset at the set intervals when prices are in the red. This means when the price of an asset is lower than it was 24 hours ago. You can find live price data on the leading 20 crypto assets on CoinDesk’s website.
2. Golden cross/death cross
The “golden cross/death cross” crypto trading strategy is a method that uses two moving averages (MAs) – a chart indicator line that shows the mean average price of an asset over a defined period of time. For this strategy, you are looking for crossovers between the 50 MA (an average of the previous 50 days) and 200 MA (an average of the previous 200 days) over long chart time frames such as the daily and weekly charts. Because it deals with observing price activity over wide time periods, this is another long-term trading strategy that works best over 18 months and onward.
There are two types of crossovers you are seeking:
- Convergence (golden cross): When the 50 MA crosses above the 200 MA
- Divergence (death cross): When the 50 MA crosses below the 200 MA
Convergences are a signal that short-term momentum is exceeding long-term momentum, which is a buy signal. This happens when buyers return to the market and drive prices higher. Divergences are a signal of the opposite, that short-term momentum is falling compared to the long-term momentum. This is a sell signal. Divergences arise when large numbers of traders decide to exit the market and sell their assets.
To set this up, you will need to log on to your online charting tool account – the image below shows a TradingView account – and change the time frame (red arrow) to either daily or weekly (red box) and click on the indicators button (blue arrow) and search for “moving averages.” Click twice to add two moving averages.
You will then need to change the moving average settings by clicking on the cog icon of each moving average (in the top left-hand corner) and changing the length (red arrow) to “50” and “200” respectively. You can also click on “style” and change the colors (blue arrow) so you can distinguish between the two lines.
It’s worth noting that this crypto trading method is most effective in a highly volatile market (when prices are rising or falling sharply). When the market moves sideways, however, it can trigger multiple buy and sell signals as the two moving average lines converge and diverge more frequently. This usually happens when there is a lot of uncertainty in the market and there’s an equal number of bearish and bullish traders. This is the only problem with the trading strategy, but the average gains tend to outweigh any losses incurred from periods of low volatility. Again, this is a long-term strategy and works best over a period of at least 18 months and can be combined with other indicators to deliver better results.
In the chart below, the last golden cross on the bitcoin chart was around $8,000. This means if you were using this strategy for the past year, you would’ve received a buy signal at $8,000 and still be holding bitcoin, which is currently up 495% from that price (at press time).
3. RSI divergence crypto trading strategy
The RSI divergence strategy is a more technical strategy but can be used to great effect for timing trend reversals before they happen. This is when the price starts moving in the opposite direction, from a downtrend to an uptrend or vice versa.
RSI stands for “Relative Strength Index,” which is a chart indicator that measures momentum by calculating the average number of gains and losses over a 14-day period. The indicator line oscillates between 0 and 100 and can be used to highlight when an asset is “overbought” or “oversold.” A channel between 30 and 70 is most commonly used to show this. When the indicator line breaks out of the channel above 70, the asset is considered “overbought” and the price will likely come back down. Conversely, when the asset breaks through the bottom of the channel below 30, the asset is considered “oversold,” which means the price will likely rise.
While this system alone can be used as a simple crypto trading strategy, it can sometimes give false results. For example, there are times when the RSI shows an asset is overbought, which is typically a buy signal, and then the price continues down even further.
The RSI divergence strategy is more advanced than this and can be used to identify when the price trend will change direction before it happens. It works by looking for discrepancies between the price and the RSI indicator. Normally, both the price and the RSI move in roughly the same direction. However, there are times when the price is falling but the RSI is rising, and vice versa. This only happens when there’s a subtle shift in buying or selling volume and is a tell-tale sign that momentum is in the early stages of reversing.
The best time frames to look for divergences are usually within a four-hour or daily window. These time frames tend to show stronger shifts in the mid-to-long-term trend. Looking at the chart below, we can see that there were three key RSI divergences on the recent bitcoin/U.S. dollar chart (BTC/USD) that foreshadowed changes in the overall trend. The yellow lines show the discrepancies between the RSI indicator and the price. The best times to look for divergences are when the price is in either the oversold or overbought areas.
You can also use this strategy to find smaller changes in a trend – for instance, spotting a pullback in a downward trend. If we look at the circled area (white) more closely on the 30-minute chart, we can see there was another divergence that showed momentum was changing back to bullish.
This content is for informational purposes only and should not be construed as investment advice. Nothing mentioned in this article constitutes any type of solicitation, recommendation, offer or endorsement to buy and sell any crypto asset. Trading in any financial market involves risk and can result in loss of funds. Before investing any money, one should always conduct thorough research and seek professional advice.
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