A beginners guide to crypto trading strategies

Introduction

When looking to trade in a market it is key that you have some form of pre-planned strategy in mind to execute against. Without this you are essentially trading blind. This insight will look to expand your knowledge if just starting out trading cryptocurrency, educating yourself on a few basic key crypto trading techniques.

What is a trading strategy?

A strategy when trading can be seen as a goal with a set list of rules that will help you achieve this goal. Strategies can come in many various different forms and no strategy will be the same as the other. Each has their own nuance that provides an edge for that strategy. When thinking of what strategy to apply to your trading you must first understand your risk appetite.

How can I assess my personal risk appetite?

It is important to understand the inherent risk with trading. It is the one constant in trading that you can predict. If you risk more, you lose more. This should be at the forefront of your decision making when formulating any strategy or trading plan. This can be put forward via the idea of your own personal risk appetite. How big of a risk are you willing to take for a reward? Certain trading strategies can apply to risk adverse traders, and other strategies can complement traders that prefer to take risks. You must find out where you lie and apply a strategy that compliments your risk appetite. If you choose to trade a very risky strategy, but you do not like taking risks, you will lose money. It's as simple as that. We can use this logic to now explore some risk taking and risk averse trading strategies.

Risk Taking Strategies

Mean Reversion Trading

Mean reversion trading in crypto tries to capitalise on extreme changes in the pricing of a particular asset, assuming that it will revert to its previous state. This theory can be applied to both buying and selling, as it allows a trader to profit on unexpected upswings and to save on abnormal lows.

In practice this is best suited to quick price movements, say a $100 drop in BTC over a 2 to 3 minute period would give a good opportunity to try and buy it back up to the mean. It is best suited to ranging markets that then pop up or down quickly out of the mean area, with the idea to buy or sell it back to the mean for a quick return.

Scalping

Scalping is a trading style that specialises in profiting off of small price changes and making a fast profit off reselling. The above mean reversion strategy would qualify also as a scalping strategy due to its short intraday nature. Scalping can apply generically to any form of short term biased trading. There is no one set method of scalping, more so if you see an opportunity that presents a short term trade (usually minutes) then this would be a scalp.

Risk Averse Strategies

Spread Trading

Spread trades are usually entered to capture a market inefficiency, if a trader believes a future is mispriced against another, they can buy and sell each future to capture the ‘spread’. If the market is efficient, then in time the spread should converge from where you entered and thus realising a profit.

We have covered Spread Trading in the below insight:

https://www.alphatrading.systems/insights/spread-trading-explained

Basis Trading

Basis trading is carried out when a trader thinks that the securities they’ve invested in are mispriced. In order to address the gap, traders carry out basis trading to profit from it, avoiding all perceived potential losses in the process.

We have covered Basis Trading in the below insight:

https://www.alphatrading.systems/insights/how-to-trade-the-basis

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