The broader crypto markets experienced a bear market in 2022 with prices of the two biggest cryptocurrencies by market capitalization, Bitcoin (BTC) and Ethereum (ETH), falling by 65% and 67% respectively for the year.
If you are just a buy-and-hold investor, chances are you probably experience a decline in your crypto portfolio in 2022. As we head into the rest of 2023, if you are looking to stay ahead of the curve, you will need to adapt and evolve your crypto trading strategy.
In this article, we will explore the 5 advanced crypto trading strategies that you can employ in different market conditions to potentially achieve success in the year ahead.
Moving Average Crossover Strategy
The moving average crossover trading strategy is used by traders to identify potential trend changes in the markets. The trading strategy involves using two moving averages of different periods and observing when they cross above each other. The moving average crossover strategy builds on the idea that shorter-period moving averages follow prices more closely than longer-period moving averages.
When a shorter-period moving average crosses above a longer-period moving average, this provides traders with a bullish and potential buy signal. Conversely, when the shorter period moving average crosses below the longer period moving average, it is a bearish and potential sell signal.
The above is a price chart of Bitcoin (BTC). The blue line represents the 21-day Exponential Moving Average (EMA) and the red line is the 50-day Simple Moving Average (SMA). At the left side of the price chart, as the 21 EMA (blue line) crosses above the 50 SMA (red line), this provides a potential buy signal. A potential sell signal is generated at the right side of the price chart when the 21 EMA (shorter-period moving average) crosses below the 50 SMA (longer-period moving average).
A breakout trading strategy in crypto focuses on cryptos that break out from above or below specific price levels. Traders typically look for cryptos breaking out from their key support and resistance price levels. The idea is that when prices break out from these key levels, there is strong momentum behind the price movements. As such, the breakout trading strategy aims to capture the momentum behind such price moves.
The price chart above shows Bitcoin (BTC) breaking out from its multi-month-long base and above a key resistance level. The momentum behind the price move which allowed BTC to break above its resistance level eventually saw BTC achieve close to a five-fold move in just a couple of months.
In an uptrend, prices do not move up in a straight line. The converse is true for downtrends. Instead, prices will occasionally encounter a reversal or a pullback against the prevailing trend especially when prices are extended and have moved in the direction of the trend for an extended period. The pullback trading strategy aims to provide traders with potential buy and sell points in an uptrend and downtrend respectively. Rather than buying or selling cryptos when prices are extended, the pullback strategy provides traders with relatively lower-risk entry points.
The price chart above shows Ethereum (ETH) in an uptrend with the arrows indicating potential buy points using the pullback strategy. While prices generally rise over time in an uptrend, if traders have bought ETH when it is extended, they might experience losses immediately after their purchase. Traders who use the pullback trading strategy would have waited for prices to pullback before buying. This allows them to not only have lower-risk entry points but also lower their average purchase price.
Mean Reversion Strategy
The mean reversion strategy is based on the theory that prices tend to trade around the average levels over time and that extreme price levels are unlikely to sustain for extended periods. Traders who trade this strategy believe that after an extreme price move, prices tend to return to normal levels. The distance between prices and key moving averages and the use of Bollinger Bands are some ways that traders use to determine whether prices are extended and at extreme levels.
The above shows the Bollinger Bands technical indicator overlaid on the Bitcoin (BTC) price chart. The Bollinger Bands consist of a moving average (red line), an upper and lower band (blue lines). When prices reach the limits of the bands, traders who use the indicator believe that prices are at extended levels and are likely to reverse. These traders can look to either take some of their existing positions off or start a new position against the current price direction.
The countertrend trading strategy is contrarian in nature where traders trade against the prevailing trend. Similar to the pullback strategy, it is based on the theory that prices do not rise and fall in a straight line in an uptrend and downtrend respectively. Traders that employ the countertrend strategy will take a position against the direction of the trend as they believe prices will experience a temporary reversal after an extended and impulsive move.
The price chart above shows Ethereum (ETH) in a downtrend. The arrows highlight the areas where prices are a distance away from the 21 EMA (blue line) which provides potential entries that traders can take to trade against the prevailing downtrend.
The 5 advanced crypto trading strategies outlined in this article offer you a diverse range of strategies to capitalize on price movements in the crypto markets. Whether the markets are in an uptrend, downtrend or trading sideways, crypto traders who equip themselves with these strategies will be well-positioned to take advantage of the opportunities that lie ahead in 2023.
Disclaimer: This material is for information purposes only and does not constitute financial advice. Flipster makes no recommendations or guarantees in respect of any digital asset, product, or service.
Trading digital assets and digital asset derivatives comes with significant risk of loss due to its high price volatility, and is not suitable for all investors.