6 Bitcoin Trading Strategies for New Investors
You can make profits from trading Bitcoin and other crypto assets However, beginners should be aware that becoming a successful cryptocurrency trader or investor requires patience, dedication and discipline. Successful Bitcoin traders view cryptocurrencies an asset class similar to forex, stocks, commodities, precious metals or bonds.
You should always be kept informed to the latest developments in the crypto world, remember to read the latest Digital Asset News. Now, I’ll share some really useful tips to help you getting started as a cryptocurrrency trader.
#1 Follow the Trend
Of course, trend following is certainly not perfect. This trading approach does contain a few flaws. For example, trend following has a tendency to generate false breakouts. Traders will get “whipsawed” when the market is stuck in a trading range, which could produce several small losses. However, over the long run, this method will generate enough big winners to offset the small losses.
Always remember, there is no “magic formula” to profitable trading. However, 20 SMA will definitely keep you on the correct side of the prevailing trend, which is critically important.
#2 Volume is Important
Very few traders pay attention to volume. This is a mistake because volume can provide several clues to the underlying strength or weakness of the market. It can give early warning signs concerning a possible change in trend.
The most prudent way to use this indicator is to compare and contrast the daily volume on a big up day or a big down day. If a bullish breakout is not confirmed by record volume, it’s probably a false breakout. Additionally, if a bearish breakout is not confirmed by record volume, the most likely outcome is a false breakout.
Volume is very similar to moving averages in terms of producing false signals. However, this strategy certainly has a useful purpose. Volume should not be ignored.
#3 Pay Attention to Relative Strength
The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. The oscillator fluctuates between 0 and 100. RSI is a fairly popular indicator which can be found on many financial websites.
Typically, traders use RSI to determine if a market is overbought or oversold. The general belief is that a market becomes overbought when RSI exceeds 70. Conversely, a market becomes oversold when RSI drops below 30. This particular strategy doesn’t work very well in the real world. Markets can remain overbought or oversold for extended periods of time. As a result, RSI tends to generate many false signals.
A more appropriate way to apply RSI is to use it as a confirmation indicator. For example, if bitcoin is making a new high, RSI should also be making a new high in order to confirm the strength of bitcoin’s breakout into new territory.
#4 Don’t Ignore Money Flow
The Money Flow Index (MFI) is a momentum indicator that measures the inflow and outflow of money into a security over a specific period of time. It uses price and volume to calculate trading pressure. Arguably, MFI is the purest way to determine the amount of money entering and leaving a particular security or market.
Similar to RSI, the index fluctuates between 0 and 100. In terms of bitcoin, the best way to apply MFI is to use it as a validation tool. Please review the following table.
As we discussed previously, these indicators are not perfect. However, taken as a group, they certainly provide an excellent approach to trading bitcoin. The best strategy is wait patiently for all indicators to validate a buy or sell signal. A simple yet highly effective method is to wait for bitcoin to generate a 20 SMA buy or sell signal. However, don’t initiate the trade unless the breakout is confirmed by at least one of the other indicators (preferably all three indicators).
Successful bitcoin trading is certainly possible. However, it requires patience, discipline and a handful of reliable indicators. The indicators are the easy part. The hard part is the patience, discipline and dedication.
#5 Important Bitcoin Trading Strategies
- Buy on a break above the 20-day moving average
- Sell on a break below the 20-day moving average
- Don’t buy a bullish breakout if it’s not confirmed by volume
- Don’t sell a bearish breakout if it’s not confirmed by volume
- Don’t buy a bullish breakout if it’s not confirmed by RSI
- Don’t sell a bearish breakout it it’s not confirmed by RSI
- MFI should be used to verify all new highs and new lows
- The best overall strategy is to combine 20 SMA with volume, RSI and MFI
- Wait patiently for the indicators to validate a buy or sell signal
- Don’t trade until all indicators are pointing in the same direction
#6 Characteristics of Successful Bitcoin Trading
- Bitcoin trading is not a “get rich quick” scheme
- Successful bitcoin trading requires dedication, patience and discipline
- Digital currencies should be viewed as a separate asset class
- There is no perfect method to trading bitcoin
- Each trader should develop her/his own style of trading
- Trend following is the foundation to successful trading
- In terms of moving averages, 20 SMA is the best approach for trading bitcoin
- Traders should use bitcoin volume to confirm a bullish or bearish breakout
- Relative Strength Index (RSI) should be used to validate all breakouts
- Money Flow Index (MFI) calculates the movement of money into & out of a market
- The most profitable trades occur when all indicators are pointing in the same direction