Binance Cryptocurrency Trading and Investment Strategies
What is a trading strategy?
A trading strategy is simply a plan you follow when executing trades. There’s no single correct approach to trading, so each strategy will largely depend on the trader’s profile and preferences.
Regardless of your approach to trading, establishing a plan is crucial – it outlines clear goals and can prevent you from going off course due to emotion. Typically, you’ll want to decide what you’re trading, how you’re going to trade it, and the points at which you’ll enter and exit.
In the following chapter, we’ll get into a few examples of popular trading strategies.
What is portfolio management?
Portfolio management concerns itself with the creation and handling of a collection of investments. The portfolio itself is a grouping of assets – it could contain anything from Beanie Babies to real estate. If you’re exclusively trading cryptocurrencies, then it will probably be made up of some combination of Bitcoin and other digital coins and tokens.
Your first step is to consider your expectations for the portfolio. Are you looking for a basket of investments that will remain relatively protected from volatility, or something riskier that might bring higher returns in the short term?
Putting some thought into how you want to manage your portfolio is highly beneficial. Some might prefer a passive strategy – one where you leave your investments alone after you set them up. Others could take an active approach, where they continuously buy and sell assets to make profits.
What is risk management?
Managing risk is vital to success in trading. This begins with the identification of the types of risk you may encounter:
- Market risk: the potential losses you could experience if the asset loses value.
- Liquidity risk: the potential losses arising from illiquid markets, where you cannot easily find buyers for your assets.
- Operational risk: the potential losses that stem from operational failures. These may be due to human error, hardware/software failure, or intentional fraudulent conduct by employees.
- Systemic risk: the potential losses caused by the failure of players in the industry you operate in, which impacts all businesses in that sector. As was the case in 2008, the collapse of the Lehman Brothers had a cascading effect on worldwide financial systems.
As you can see, risk identification begins with the assets in your portfolio, but it should take into account both internal and external factors to be effective. Next, you’ll want to assess these risks. How often are you likely to encounter them? How severe are they?
By weighing up the risks and figuring out their possible impact on your portfolio, you can rank them and develop appropriate strategies and responses. Systemic risk, for example, can be mitigated with diversification into different investments, and market risk can be lessened with the use of stop-losses.
What is day trading?
Day trading is a strategy that involves entering and exiting positions within the same day. The term comes from legacy markets, referencing the fact that they’re only open for set periods during the day. Outside of those periods, day traders are not expected to keep any of their positions open.
Cryptocurrency markets, as you probably know, are not subject to opening or closing times. You can trade around the clock every day of the year. Still, day trading in the context of cryptocurrency tends to refer to a trading style where the trader enters and exits positions within 24 hours.
In day trading, you’ll often rely on technical analysis to determine which assets to trade. Because profits in such a short period can be minimal, you may opt to trade across a wide range of assets to try and maximize your returns. That said, some might exclusively trade the same pair for years.
This style is obviously a very active trading strategy. It can be highly profitable, but it carries with it a significant amount of risk. As such, day trading is generally better suited to experienced traders.
What is swing trading?
In swing trading, you’re still trying to profit off market trends, but the time horizon is longer – positions are typically held anywhere from a couple of days to a couple of months.
Often, your goal will be to identify an asset that looks undervalued and is likely to increase in value. You would purchase this asset, then sell it when the price rises to generate a profit. Or you can try to find overvalued assets that are likely to decrease in value. Then, you could sell some of them at a high price, hoping to buy them back for a lower price.
As with day trading, many swing traders use technical analysis. However, because their strategy plays out across a longer period, fundamental analysis may also be a valuable tool.
Swing trading tends to be a more beginner-friendly strategy. Mainly because it doesn’t come with the stress of fast-paced day trading. Where the latter is characterized by rapid decision-making and a lot of screen time, swing trading allows you to take your time.
What is position trading?
Position (or trend) trading is a long-term strategy. Traders purchase assets to hold for extended periods (generally measured in months). Their goal is to make a profit by selling those assets at a higher price in the future.
What distinguishes position trades from long-term swing trades is the rationale behind placing the trade. Position traders are concerned with trends that can be observed over extended periods – they’ll try to profit from the overall market direction. Swing traders, on the other hand, typically seek to predict “swings” in the market that don’t necessarily correlate with the broader trend.
It’s not uncommon to see position traders favor fundamental analysis, purely because their time preference allows them to watch fundamental events materialize. That’s not to say technical analysis isn’t used. While position traders work on the assumption that the trend will continue, the use of technical indicators can alert them to the possibility of a trend reversal.
Like swing trading, position trading is an ideal strategy for beginners. Once again, the long time horizon gives them ample opportunity to deliberate on their decisions.
What is scalping?
Of all of the strategies discussed, scalping takes place across the smallest time frames. Scalpers attempt to game small fluctuations in price, often entering and exiting positions within minutes (or even seconds). In most cases, they’ll use technical analysis to try and predict price movements and exploit bid-ask spread and other inefficiencies to make a profit. Due to the short time frames, scalping trades often give a small percentage of profits – usually lower than 1%. But scalping is a numbers game, so repeated small profits can add up over time.
Scalping is by no means a beginner’s strategy. An in-depth understanding of the markets, the platforms you’re trading on, and technical analysis are vital to success. That said, for traders that know what they’re doing, identifying the right patterns and taking advantage of short-term fluctuations can be highly profitable.
What is asset allocation and diversification?
Asset allocation and diversification are terms that tend to be used interchangeably. You might know the principles from the saying don’t keep all your eggs in one basket. Keeping all of your eggs in one basket creates a central point of failure – the same holds true for your wealth. Investing your life savings into one asset exposes you to the same kind of risk. If the asset in question was the stock of a particular company and that company then imploded, you’d lose your money in one swift movement.
This isn’t just true of single assets, but of asset classes. In the case of a financial crisis, you’d expect all of the stock you hold to lose value. This is because they’re heavily correlated, meaning that all tend to follow the same trend.
Good diversification isn’t simply filling your portfolio with hundreds of different digital currencies. Consider an event where the world governments ban cryptocurrencies, or quantum computers break the public-key cryptography schemes we use in them. Either of these occurrences would have a profound impact on all digital assets. Like stocks, they make up a single asset class.
Ideally, you want to spread your wealth across multiple classes. That way, if one is performing poorly, it has no knock-on effect on the rest of your portfolio. Nobel Prize winner Harry Markowitz introduced this idea with the Modern Portfolio Theory (MPT). In essence, the theory makes the case for reducing the volatility and risk associated with investments in a portfolio by combining uncorrelated assets.
What is the Dow Theory?
The Dow Theory is a financial framework modeled on the ideas of Charles Dow. Dow founded the Wall Street Journal and helped create the first US stock indices, known as the Dow Jones Transportation Average (DJTA) and Dow Jones Industrial Average (DJIA).
Though the Dow Theory was never formalized by Dow himself, it can be seen as an aggregation of the market principles presented in his writings. Here are some of the key takeaways:
- Everything is priced in – Dow was a proponent of the efficient market hypothesis (EMH), the idea that markets reflect all of the available information on the price of their assets.
- Market trends – Dow is often credited with the very notion of market trends as we know them today, distinguishing between primary, secondary, and tertiary trends.
- The phases of a primary trend – in primary trends, Dow identifies three phases: accumulation, public participation, and excess distribution.
- Cross-index correlation – Dow believed that a trend in one index couldn’t be confirmed unless it was observable in another index.
- The importance of volume – a trend must also be confirmed by high trading volume.
- Trends are valid until reversal – if a trend is confirmed, it continues until a definite reversal occurs.
It’s worth remembering that this isn’t an exact science – it’s a theory, and it might not hold true. Still, it’s a theory that remains hugely influential, and many traders and investors consider it an integral part of their methodology.
What is the Elliott Wave Theory?
Elliott Wave Theory (EWT) is a principle positing that market movements follow the psychology of market participants. While it’s used in many technical analysis strategies, it isn’t an indicator or specific trading technique. Rather, it’s a way to analyze the market structure.
The Elliott Wave pattern can typically be identified in a series of eight waves, each of which is either a Motive Wave or a Corrective Wave. You would have five Motive Waves that follow the general trend, and three Corrective Waves that move against it.
An Elliot Wave Cycle, with Motive Waves (blue) and Corrective Waves (yellow).
The patterns also have a fractal property, meaning that you could zoom into a single wave to see another Elliot Wave pattern. Alternatively, you could zoom out to find that the pattern you’ve been examining is also a single wave of a bigger Elliot Wave cycle.
Elliott Wave Theory is met with mixed reviews. Some argue that the methodology is too subjective because traders can identify waves in various ways without violating the rules. Like the Dow Theory, the Elliott Wave Theory isn’t foolproof, so it should not be viewed as an exact science. That said, many traders have had great success by combining EWT with other technical analysis tools.
What is the Wyckoff Method?
The Wyckoff Method is an extensive trading and investing strategy that was developed by Charles Wyckoff in the 1930s. His work is widely regarded as a cornerstone of modern technical analysis techniques across numerous financial markets.
Wyckoff proposed three fundamental laws – the law of supply and demand, the Law of Cause and Effect, and the Law of Effort vs. Result. He also formulated the Composite Man theory, which has significant overlap with Charles Dow’s breakdown of primary trends. His work in this area is particularly valuable to cryptocurrency traders.
On the practical side of things, the Wyckoff Method itself is a five-step approach to trading. It can be broken down as follows:
- Determine the trend: what’s it like now, and where is it headed?
- Identify strong assets: are they moving with the market or in the opposite direction?
- Find assets with sufficient Cause: is there enough reason to enter the position? Do the risks make the potential reward worth it?
- Assess the likelihood of the movement: do things like Wyckoff’s Buying and Selling Tests point to a possible movement? What do the price and volume suggest? Is this asset ready to move?
- Time your entry: how are the assets looking in relation to the general market? When is the best time to enter a position?
The Wyckoff Method was introduced almost a century ago, but it remains highly relevant to this day. The scope of Wyckoff’s research was vast, and therefore the above should only be seen as a very condensed overview. It’s recommended that you explore his work in more depth, as it provides indispensable technical analysis knowledge. Start with The Wyckoff Method Explained.
What is buy and hold?
The “buy and hold” strategy, perhaps unsurprisingly, involves buying and holding an asset. It’s a long-term passive play where investors purchase the asset and then leave it alone, regardless of market conditions. A good example of this in the crypto space is HODLing, which typically refers to investors that prefer to buy and hold for years instead of actively trading.
This can be an advantageous approach for those that prefer “hands-off” investing as they don’t need to worry about short-term fluctuations or capital gains taxes. On the other hand, it requires patience on the investor’s part and assumes that the asset won’t end up totally worthless.
If you’d like to read about an easy way to apply this strategy to Bitcoin, check out Dollar-Cost Averaging (DCA) Explained.
What is index investing?
Index investing could be regarded as a form of “buy and hold.” As the name implies, the investor seeks to profit from the movement of assets within a specific index. They could do so by purchasing the assets on their own, or by investing in an index fund.
Again, this is a passive strategy. Individuals can also benefit from diversification across multiple assets, without the stress of active trading.
What is paper trading?
Paper trading could be any kind of strategy – but the trader is only pretending to buy and sell assets. This is something you might consider as a beginner (or even as an experienced trader) to test your skills without putting your money at stake.
You may think, for instance, that you’ve discovered a good strategy for timing Bitcoin dips, and want to try profiting from those drops before they occur. But before you risk all of your funds, you might opt to paper trade. This can be as simple as writing down the price at the time you “open” your short, and again when you close it. You could equally use some kind of simulator that mimics popular trading interfaces.
The main benefit of paper trading is that you can test out strategies without losing your money if things go wrong. You can get an idea of how your moves would have performed with zero risk. Of course, you need to be aware that paper trading only gives you a limited understanding of a real environment. It’s hard to replicate the real emotions you experience when your money is involved. Paper trading without a real-life simulator may also give you a false sense of associated costs and fees, unless you factor them in for specific platforms.
Binance offers a couple of options for paper trading. For instance, the Binance Futures Testnet provides a full-fledged interface. If you’re building trading bots or programs yourself, then the spot exchange testnet can be accessed via API.
Devising a crypto trading strategy that suits your financial goals and personality style is not an easy task. We went through some of the most common crypto trading strategies, so hopefully, you can figure out which one may suit you best.
To find out what is really working and what is not, you should follow and track each trading strategy – without breaking the rules you set. It’s also helpful to create a trading journal or sheet so you can analyze each strategy’s performance.
But it’s worth noting that you don’t have to follow the same strategies forever. With enough data and trading records, you should be able to adjust and adapt your methods. In other words, your trading strategies should be constantly evolving as you gain trading experience.
It may also be beneficial to allocate different parts of your portfolio to different strategies. This way, you can track the individual performance of each strategy while exercising proper risk management.