Crypto trading has often been compared to a game of chance: you’re in for the win, but you can never be sure of the outcome. The market is so incredibly volatile – far more so than traditional assets – and there are so many factors that can influence crypto prices that it’s virtually impossible to know if a trade is going to end up in profit or loss.
Getting into crypto trading is easy. Learning the ropes, less so. Popular exchange platforms like Binance can teach you how to buy crypto with credit card and provide access to a wide range of digital assets, yet that does not guarantee success. But then again, that’s how trading works. Without volatility and uncertainty, there would be no potential for profit and therefore, no point in trading. And unpredictability has never stopped daring investors from pursuing opportunities. Quite the contrary, it has only enhanced their interest given the likelihood of outsized earnings.
If you’re interested in giving crypto trading a try yourself, one of the most important things to keep in mind is that, contrary to popular belief, it’s not all pure guesswork. Yes, crypto is by design an unstable asset that lends itself to speculation, which can make it harder to predict trends and calculate your moves.
But crypto trading also involves analysis and strategy. This means there are ways to reduce risks and enhance precision and profitability while trading, and that’s what we’re going to focus on here.
Have a plan
The first rule of crypto trading is to never venture without a plan, as that will make you more prone to making rash decisions. In a sector like crypto, where things can change in the blink of an eye, and the fear of missing out (FOMO) can lure even the savviest traders into traps, discipline is mandatory. So, what exactly does building a trading plan imply?
Well, you should start by establishing clear trading goals. Knowing what you want to achieve will keep you grounded (as long as your goals are achievable) and stop you from getting distracted or drifting into impractical pursuits.
Once you’ve determined your objectives, you can start looking into the strategies that can help you achieve them. There’s more than one way to approach crypto trading, based on individual needs and preferences. For example, you can opt for day trading, where you buy and sell assets within the same day to profit from short-term price fluctuations, or you can choose swing trading, which implies holding positions for longer and trying to take advantage of price swings dictated by larger market trends. So, you have to analyze your options carefully and identify the strategy that would work best in your case.
Another aspect you need to focus on is risk management. It’s important to know how much risk you can handle and then take active measures to ensure you don’t expose yourself to more risk than you’re comfortable with. Diversification, setting stop-loss orders, avoiding excessive leverage or position sizing are all time-tested solutions that can help a lot in this respect.
Let chart patterns guide your steps
Mastering technical analysis is a must if you want to increase your chances of success as a trader. Unlike fundamental analysis, which looks at the intrinsic characteristics of an asset to determine its value, technical analysis focuses on the asset’s performance in order to predict its potential evolution. Basically, it’s about using past data to make future predictions.
In crypto, as in other markets, price movements tend to repeat themselves, creating formations known as chart patterns. These are visual representations that express the sequence of price changes assets go through over a certain period of time, signaling potential trend continuations or reversals. Therefore, by including chart patterns in their analysis, traders can make more accurate price forecasts and identify the most opportune moments to act.
The most popular patterns include:
- Head and shoulders (H&S) pattern – this pattern appears when the value of an asset reaches a peak, then falls, only to rise higher before falling back again. This typically indicates the end of an upward trend.
- Double top/bottom pattern – the double top pattern forms when the price of an asset hits two similar peaks consecutively, with a retracement to a support level in between, suggesting a bearish reversal. Its opposite, the double bottom pattern, could foresee a bullish reversal.
- Ascending/descending triangle pattern – the ascending triangle pattern is often associated with a bullish continuation trend, while its opposite, the descending triangle pattern, points toward a bearish continuation trend.
- Flags and pennants – these configurations emerge when an asset enters a period of consolidation after a strong price move.
Pay attention to technical indicators
Technical analysis is not limited to chart patterns. The insights you gain from these formations are most effective when combined with other technical indicators, such as:
- Moving averages (MA) – these are indicators that can tell a lot about an asset’s prospects by smoothing out price data to extract trends and signals.
- Relative Strength Index (RSI) – this is a momentum indicator that measures the speed and intensity of price changes on a scale from 0 to 100 to help traders determine if an asset is overbought or oversold.
- Bollinger Bands – the indicators consist of three lines: a simple moving average and two other lines placed above or below it to point out deviations. The outer bands can offer clues on market volatility and help spot potential breakouts or reversals.
- Fibonacci Retracement – this tool is used to reveal potential support and resistance levels based on the Fibonacci sequence.
Final thoughts
There are many unknowns in crypto trading that can ruin investors’ plans and make it more challenging for them to boost their earnings. However, it’s important to remember that proper preparation and technical analysis can help reduce this uncertainty and bring a bit of precision and certainty to what is largely regarded as a roll-of-the-dice undertaking.