“There are only patterns, patterns on top of patterns, patterns that affect other patterns. Patterns are hidden by patterns. Patterns within patterns.”
“If you watch closely, history does nothing but repeat itself. What we call chaos is just patterns we haven't recognized. What we call random are just patterns we can't decipher. what we can't understand we call nonsense. What we can't read we call gibberish.”
I never thought I would have to go back to this quote from the book Survivor by Chuck Palahniuk. However, that's pretty much how the crypto market has been these last couple of weeks. There are patterns people can't decipher anymore. One minute your fundamental analysis predicts a nice turn, the next minute a tweet or a major news article takes everything downhill.
Cryptocurrencies are volatile. Trust me they are. Volatility in financial markets refers to changes in the price of an asset. It's either healthy with steady increases or decreases in price within a range or they could be extreme with sudden price movements in either direction.
There are no numbers or indices to calculate the volatility of cryptocurrencies. However, just as Chuck said; if you watch closely, history does nothing but repeat itself. All you need to do is glance through historical price charts and see the pattern of skyrocketing peaks and depressive troughs. We've seen patterns of Bitcoin rising and falling in big figures. In 2016, bitcoin rose by 125% and in 2017, it rose by over 2000%. After reaching an all-time high, the price of bitcoin dropped. In 2021, bitcoin rose to a new all-time high. This was higher than the last all-time high in 2017 and right now, the price has gone down once more. Patterns.
It takes a master of the art to trade cryptocurrencies despite their volatility. There are a lot of things responsible for the volatility in cryptocurrencies. Being able to analyze the market and trade with less risk is what crypto traders live for.
Let's Dive Into the World of Trading
There are different ways to trade cryptocurrencies and make profits. Having a trading strategy helps you organize your techniques into a unified framework. A trading strategy is not compulsory but it's important. With a trading strategy, you can eliminate a lot of unnecessary decisions and mitigate financial risk.
Your trading strategy may include;
Your tools and indicators
Your position sizing
What triggers your entry and exit
What cryptocurrencies you trade
Of course, every success comes from practice. It doesn't stop at getting a strategy. It will have to pass the test of time and experience.
There are different types of trading strategies you can use to trade. They range from day trading, swing trading, scalping, and a lot more. What trading strategy you divide to use all depends on your budget, time, attention, and most importantly, how patient it is. Don't fret, I will be your tour guide as we journey into the world of trading strategies.
Day Trading
This is one of the most popular trading strategies. Day trading involves entering your entry and exit positions on the same day. As a day trader, you capitalize on intraday price movements to trade cryptocurrencies.
Day traders typically use price action and technical analysis to develop trading ideas. Trading cryptocurrencies intraday can be very profitable for some people, but it is usually stressful, demanding, and can be very risky. People who do day trading are usually professional traders. Do you want to be a professional too?
Well, you can check out Blockchain University. You'll thank me later. I'm sure of that.
Swing Trading
You can see swing trading as the elder sibling to day trading. Unlike day traders, swing traders usually hold positions for several days or weeks. Swing traders try to take advantage of weekly price movements to trade cryptocurrencies.
This trading strategy usually favors those who have full-time jobs and like to trade in their leisure hours. Since positions are held more than a day, traders do not need to sit down all day monitoring the charts and their trades.
Scalping
With the scalping strategy, you don't try to take advantage of big trends. Scalpers focus on exploring small moves over and over again. Scalpers don't look at holding positions for a long time. They target small intraday price movements. Don't be surprised to see scalp traders open and close their position within seconds. Imagine a quickie in the convenience room of a public restaurant. Yeah, that's it.
Scalping becomes more fun when a trader finds a market inefficiency that happens frequently and can be exploited. A trader can make profits that compound every time it happens. The purpose is to make a large number of quick trades with small profit earnings, but due to the large number of transactions carried out in each trading session, the profits are accumulated by the end of the day.
Index Investing
Usually, index investing means buying ETFs and indices in the traditional markets. However, this also applies to the crypto sector. You can also apply index investing in the crypto market.
The idea is to create a folder of crypto assets and track their combined performance. This folder can be a combination of cryptocurrencies with similar features. For example, if you're bullish on privacy coins, you can track the performances of Monero, Dash, Cash, and Beam and diversify your funds across all assets. If you're interested in investing in blockchain platforms with the Proof-Of- Stake framework, you can invest and track the performances of EOS, Polkadot, Cardano, and others that fall in that category.
Buy and HODL
This trading strategy is used in long-term investment portfolios. The idea is to buy a crypto asset and hodl it for a long time, regardless of market fluctuations. This is one of the most commonly used trading strategies today. It doesn't matter how long you hold your crypto assets as long as you make profits off holding them.
Why HODL
I get this question a lot. I've gotten them more these last few weeks. So the question remains. Why Hodl?
Just like Pontius Pilate publicly washed his hands off the case of Jesus' trial in the Bible, those who hodl wash their hands off worrying about the volatility of the crypto assets they hodl. Hodling helps traders counter FOMO (fear of missing out). FOMO leads to traders buying high. FUD (fear, uncertainty, and doubt) pushes traders to sell low.
The first step to hodling is to believe in what you hold. You can't do this without making adequate research into whatever crypto asset you want to invest in. When you invest in what you believe in, volatility doesn't scare you. True believers of crypto hodl because they think cryptocurrencies will eventually replace fiat currencies and form the basis of all future economic structures.
As you build your investment portfolio, you are going to hear about a technique called dollar-cost averaging. Dollar-cost averaging helps traders hodl crypto assets without the burden of capital allocation.
Dollar-Cost Averaging
Dollar-Cost Averaging (DCA) is an investment strategy in which an investor divides the total amount to be invested into regular purchases of target assets to reduce the impact of volatility on overall purchases. Let's break that down a little. So let's say you want to invest $1000 into buying Bitcoin or BNB. You can decide to invest $100 into BNB every month for 10 months without thinking about volatility.
Dollar-cost averaging is particularly useful in the cryptocurrency market where prices are extremely volatile and market timing is very difficult. Hence, this strategy can minimize your risk while maximizing your market presence. By diversifying your investment over time, rapid price changes will not have a major impact on you as your investment costs will balance out over time. If the market rises, so does the value of your investment portfolio. If it goes down and you keep investing, you get more assets at a reduced price.
Let me give a detailed example of what dollar-cost averaging is. Fortunately, Cryptohead provides a Dollar-Cost Averaging calculator we will use for this example. We will use a case scenario where you decide to invest $100 monthly from January 2020 till December 2020. The total investment within 12 months will be $1200. But how much value will you get in Bitcoin if you used DCA within those 12 months? The calculator takes into account the value of Bitcoin for each month within 2020. Let's break it down with figures.
January 2020
Total Investment: $100
Total Value: $100
Profit in Percentage: 0
February 2020
Total Investment: $200
Total Value: $229
Profit in Percentage: 14.5%
March 2020
Total Investment: $300
Total Value: $311
Profit in Percentage: 3.67%
April 2020
Total Investment: $400
Total Value: $333
Profit in Percentage: -16.75%
May 2020
Total Investment: $500
Total Value: $547
Profit in Percentage: 9.4%
June 2020
Total Investment: $600
Total Value: $701
Profit in Percentage: 16.83%
July 2020
Total Investment: $700
Total Value: $778
Profit in Percentage: 11.14%
August 2020
Total Investment: $800
Total Value: $1063
Profit in Percentage: 32.88%
September 2020
Total Investment: $900
Total Value: $1195
Profit in Percentage: 32.78%
October 2020
Total Investment: $1000
Total Value: $1203
Profit in Percentage: 20.3%
November 2020
Total Investment: $1100
Total Value: $1639
Profit in Percentage: 49%
December 2020
Total Investment: $1200
Total Value: $2433
Profit in Percentage: 102.75%
If you used the DCA method, you will have doubled your total investment by the end of the year. This looks better than buying $1200 with bitcoin and hodling for 12 months.
Using the same example, if you kept your Bitcoin holdings till now, your total value will be $4374. That's a 264.5% profit off your investment of $1200. This right here is the reason why I will always recommend dollar-cost averaging to anyone ready to play the long game. However, there are a few minor drawbacks with using the dollar cost averaging and I will highlight them for you.
One minor drawback is that all trading platforms charge a fee for each transaction you make. This can be solved by going with trading platforms that charge less when you trade with them. For example, users in Nigeria can testify to the outrageous fee Luno charges for every transaction made. If you're looking at investing $10 monthly into buying a crypto asset, you wouldn't want to use Luno as you may end up with $7 worth of what you're buying. That's bad business, ain't it?
The good news is that using DCA is a long-term strategy, and over time the charges are small relative to the potential gains you will have over the period you're using this strategy.
The other minor drawback is that you can never tell how the market will behave in the short term. You might be waiting till the market dips before investing again. The problem is that the asset could be on a bull run and it may take some time before there's a correction. That's why you mustn't wait for the market to dip before buying. Stick to a calendar and follow it through.
The Future is Long-Term
Creating a trading strategy that meets your financial goals and investment style is not easy. It takes months of constant practice and tweaking to find one that works for you. If you're new to trading and finding it hard to know what works for you, you can go through the strategies I mentioned and see what fits your trading style. As you keep trying each strategy without breaking the rules, you will be able to analyze what worked for you and what you need to work on.
You can't follow one trading strategy forever. With enough data and trading records, you will be able to adjust and adapt your methods. However, one trading strategy that will never lose its shine is the long-term strategy. You can always trade daily, scalp, or even use the index investment strategy. But investing for the future must be part of your strategy. I will always recommend the dollar-cost averaging method as it is one of the most effective ways to invest in any crypto asset.
It can also be beneficial to allocate different parts of the investment portfolio to different strategies. This allows you to track the individual performance of each strategy while properly managing risk.
Appreciated