Simple Trading Strategy

• The Importance of time

• Allocating discretionary income

• Have a clear objective

• Cost Averaging as trading strategy

All our article on WikiBit to know how to trade cryptocurrency provides a basic foundation for anyone new to the subject. Trading is about trying to quantify and manage risk. Cryptocurrency markets are inherently risky because they are immature but the same types of approach used in traditional trading can be applied.

From our last article weve introduced the ideas behind Technical Analysis - studying short term volume and price movement - and Fundamental Analysis - analysing broader adoption metrics and influences.

The moment you‘ve absorbed this information, along with the basic mechanics of where crypto prices come from and the role exchanges play in offering trading, you’re left with the difficult decision on whether trading cryptocurrency is something you want to pursue, and if so, what approach should you take？

Well The answer to that question should come down to the amount of time you can reasonably dedicate and the amount of money you can reasonably afford to invest. As said, trading entails high risk!

The Importance of Time

It is obvious that Everyone will be familiar with the phrase ‘practice makes perfect’. The celebrated author, Malcolm Gladwell, popularised the idea that mastering a skill takes 10,000 hours of practice, along with innate skill. Even though Gladwells idea has been challenged, there is a definite correlation between time and success in trading cryptocurrency. You have to commit the time to simply understand the basics, but that simply is step 1. Experienced traders take years to refine their skills - which is an open-ended process - and that is doing it as their full time job.

You're expecting to find time to accept the actual research to establish a trading decision, and when boiling this down to the time involved, and your personal circumstances, it may become immediately clear what path to take. Your lifestyle will be an important factor in this. If you are in full time employment, have a family, or a busy social life, where will you find the time to learn, do the required research and monitor your trades？

Trading lifestyles are notably anti-social. The constant pressure of market volatility and processing new information can create stress and impact sleep, which in turn may lead to poor decision-making. This consideration alone may be enough to guide your approach, the second key component will be your discretionary income.

Allocating Discretionary Income

What amount of time you spend in reasoning about trading will surely be relative to how much money you want to invest. Before thinking about allocation, you should always follow these golden rules:

• Never invest money you cannot afford to lose

• Don't invest using a credit card or debt such as student loans or re-mortgaging

• Don't rely on unqualified trading advice

• Commit only a small proportion of your discretionary income

• Be prepared to see your investment decline

• Have an idea in your head of what you are trying to achieve

Discretionary Income is money left over after income tax and essential living expenses are taken care of. This is money that might be invested or saved. There is no specific rule for how to allocate your discretionary income though there is agreement that it should be spread across a spectrum of assets by risk.

The biggest part should be for the least risky - savings and indexed share funds - and the smallest proportion for the most risky. Given that cryptocurrency is inherently risky, you should only consider allocating a small proportion, perhaps 5% or less, of your discretionary income. There are many people who feel very strongly about crypto and you may see Tweets or Instagram updates talking about going ‘all in’. It would be extremely inadvisable to allocate 100% of discretionary income.

Subject to how much your discretionary income amounts to, you can decide what approach, if any to take, but bear in mind that there are fees associated with depositing funds with exchanges. Trading small amounts might also lead you toward trading obscure and risky cryptocurrencies, seeking huge returns.

Be Clear Of Your Objective

Yes you heard it right...mind your aim and focus on it. Although It may seem like a silly question, but a crucial part of trading and investing decision making is having a clear idea of why you are doing it. Making money isnt a specific enough answer.

To begins with, there are other things you can do with your money to generate a return, so what you intend to make from trading cryptocurrency needs to justify the comparative risk. This will start with the options of leaving your money in a Fiat savings account or some basic index tracker fund but the premise of Learn Crypto is that cryptocurrency represents sounder money than fiat. So, once youve done research and accept that premise, you should be comparing against non-fiat opportunities.

This can involve things like precious metals, collectibles, property and art. Bear in mind that the returns from these options might not seem as sexy as crypto, but that is because the risk involved is far less.

If you are contented that crypto represents the best risk-adjusted investment for a portion of your discretionary income, the section on earning cryptocurrency walks through the risk spectrum. Youll observe that passive interest can generate 5% return for Bitcoin, higher for other coins, which is a good benchmark to start from - though this includes counterparty risk - which is why we include it below in potential strategies.

Building a well thought assessment of the return you wishes to generate also serves the important purpose of quantifying your ambition. As you navigate the crypto world you‘ll see a lot references of ’to the Moon‘ or ’Diamond Hands‘ suggesting that hodlers see crypto as something they aren’t considering selling.

That is great if, for example, you think the fiat system is imminently going to collapse but that is very unlikely. In all likelihood we‘re going to need fiat for a while yet, and its relevance is illustrated by the fact that crypto’s value is expressed in fiat terms. So a crucial part of any trading or investing strategy is an exit point. This is self-evident for short-term trading (as well see in the next article) but for those that invest for the longer term - the Hodlers - it's worth deciding in advance if and when you take profit (should you make any) off the table.

It is fantastic watching numbers go up during a bull market, you may even feel slightly disconnected from reality, but as soon as the market turns, and markets inevitably go through cycles, you may feel uncomfortable at not realising some profit.

Tip: For longer term investment set a price target then consider a 15/10 rule, cashing in 10% for every 15% gain.

But when you cannot forecast yourself selling then think about other ways your investment can provide a return. You might apply the risk spectrum approach in turn to your crypto portfolio, keeping the bulk securely on your hard wallet, a portion earning return through Defi/Cefi and then taking greatest risk with the smallest proportion. Therefore To help you out, here are some suggested cryptocurrency trading strategies, starting with the least complex and requiring only small, regular amounts.

Cost Averaging

Weve written somewhere about Cost Averaging in our section on how to earn crypto. Cost Averaging - sometimes called Dollar Cost Averaging - simply refers to making equally sized, regularly recurring trades, instead of one lump sum. The attraction of cost averaging is that it can help mitigate concerns around volatility and choosing an entry point. Regular trades over time will smooth the ups and downs.

For sure you need to do the Fundamental Analysis to make a judgement about the long term viability of your chosen cryptocurrency, but thereafter your investment path is neatly mapped out. Cost Averaging works best when pursued over a long enough period of time to benefit from both a down cycle and an up cycle.

Dollar Cost Averaging is not risk free, during down cycles you will see the value of your investment decline, potentially below your original investment, with no certainty it will recover. There is no assurance future price movement will reflect historic, so you still need to do the Fundamental Analysis to establish that you are prepared to take the associated risk with the conviction to pursue regular purchases, seeing your investment declining over an extended period, known as a bear market.

Create a spreadsheet scheduling your investments out, then filling in the details of each regular purchase. You might want to include these fields:

• Date

• Investment Detail

• Amount investment (€)

• Cumulative Amount Invested (€)

• Purchase Price (€)

• Crypto Value

• Crypto Cumulative Value

• Portfolio Value (€)

• P&L

Cost Averaging with Passive Returns

To increase some gain to your Cost Averaging investment, you can combine it with a service that pays interest. This can be either Soft Staking - with no commitment - or Hard Staking, where you get higher returns but funds are locked up for a minimum period. This isn‘t risk free, as the providers of passive interest service expose you to what is known as ’counterparty risk. The risk they may fail or get hacked, which risks your funds as currently none offer asset insurance. Remember, there is no free ride.

Tip - Adapt your DCA sheet to include the value of interest.

Cost Averaging Using Technical Indicators

The moment youve created a routine of Cost Averaging, becoming comfortable with the mechanics and record-keeping, one option is to segue into trading by using technical indicators to adjust your regular investments. Adjusting your allocation down during periods when the market is overbought and the reverse when the market is oversold should be your only aim.

There are a different version of indicators you might employ to do this, youll need to do the adequate research to decide which you think is best. You might use Standard charting tools like Moving Averages, Relative Strength Index (RSI) or Bollinger Bands. You might also rely on an external indicator to inform the adjustments, which you feel correlate with price, such as the US Dollar Index (DXY).

The US Dollar Index, also known as DXY, is used by traders seeking a measure of the value of USD against a basket of currencies used by US trade partners. It tends to have an inverse relationship with Bitcoin and the wider crypto markets, as dollar weakness pushes investors to look for assets that are a better store of value, such as Bitcoin. Any indicator or model can be used, it just depends on the value you feel it holds. The Stock-to-flow model created by Crypto Influencer, Plan B, is another popular tool. As price moves above and below the price predicted by his model, you might adjust your DCA purchases.

TIP - Where you turn away from your regular purchases make sure to indicate this in your records, along with the rationale used.

Lump Sum Hodling Using Fundamental Analysis

Cost Averaging is an outstanding first step into investing in cryptocurrency, which can gradually lead into trading type decisions. It does however, have a few downsides. It takes a significant time to build a position and you will never benefit from investing at the bottom of the market. When you decide you want to wait to get investment exposure you can invest a lump sum, rather than the drip-feed of Cost Averaging, but your risk is concentrated in that one trade.

All For DCA and a lump sum investment strategy require Fundamental Analysis, but given the increased exposure of a lump sum you should certainly ensure you have done your research, on top of following the golden rules. Fundamental Analysis is more applicable if you are committing a significant amount of savings. You need to make a reasoned judgement on the long term prospects of the specific cryptocurrency, accepting that it may take years to realise a profit if at all. Your lump sum may simply decline in relative value over time..

Lump Sum Hodling Combining Fundamental & Technical Analysis

By the time you convinced yourself that you are comfortable with a passive long term investment decision based on Fundamental Analysis, you still have to decide on a price entry point. When your analysis recommends significant long term gains, then you may feel that the marginal gain from establishing an optimum entry point isn't worth the consideration.

Moreover you can use Technical Analysis to chose an optimal point to make the lump sum purchase - using Technical Indicators as described above - and then sit back and hope your Fundamental Analysis is accurate over the longer term. All that we have highlightedhere are simple crypto trading strategies for beginners, ideal for those without the means or desire to spend time doing Technical Analysis.

In The next article will look at trading strategies that are far more engaged.