Short-term traders are usually tempted by the momentum and volatility portrayed by the cryptocurrency market. This volatility has the potential to deliver massive gains over the short run. The beloved digital currency Bitcoin has generated an astonishing return to date, leaving the market participants in awe.
These fast and furious rallies in the crypto space appear enticing. But, it is hard to neglect sharp trend reversals in cryptocurrencies that make trading a bit difficult. Therefore, having a proper trading plan is essential for traders to prevent impulsive, hasty decisions that can result in substantial financial losses.
2021 perhaps turned out to be one of the best years for the cryptocurrency market. Given this backdrop, here are some tips for investors to harness the benefits of cryptocurrency trading:
1. Focus on Liquid Currencies
While thousands of cryptocurrencies have been created and listed on the crypto exchanges, not all of them are worth trading amidst a lack of liquidity. Liquidity is a key factor that enables short-term traders to enter and exit a position with ease.
The lack of liquidity in some cryptocurrencies hampers this agility of the traders. This makes it challenging for them to get in and out of a large position. The liquidity also affects the impact cost, thereby increasing the overall cost of trading. Hence, it is imperative for a trader to trade such cryptocurrencies where a sufficient volume of trading is already taking place.
2. Trade, Do Not Gamble
One thing that is common between trading and gambling is the uncertainty of the outcome. In both the playing fields, one makes a bet and waits for an outcome. However, what separates a trader from a gambler is risk management. What this means is that buying digital currencies without assessing the risk is equivalent to gambling.
With cryptos being an epitome of volatility, the uncertainty increases manifold than any stable security. Thus, it is even more important for crypto traders to have a robust risk management plan in place. It seems sensible for a trader to use stop-loss orders and just risk an amount he/she is comfortable with losing on the trade.
3. Buy the Strength, Sell the Weakness
Unlike other financial assets, cryptocurrencies do not have any intrinsic value attached to them. Therefore, there is practically no such thing as the high price or a low price of a cryptocurrency.
In such scenarios, traders can purchase a strong uptrend and sell a downtrend with a proper risk management plan in place. However, one need not neglect that cryptos also have an uncanny ability to stay in an overbought/oversold zone for a long duration of time. Thus, one should execute mean reversion trades with caution during crypto trading.
4. Ensure Due Diligence for Lower-Priced Cryptos
Lower-priced crypto assets have been gaining immense popularity among the new traders in the crypto space. The sheer gain in the percentage terms takes centre stage when such cryptocurrencies rise. These attractive gains often lure traders who end up buying these assets in heavy quantity without sufficient research.
Traders need to understand that the cheapest crypto is not always the best choice. Hence, it is imperative for a crypto trader to conduct proper due diligence before investing in such assets. Moreover, traders can hunt for crypto assets having real potential for enticing a user base in the future.
Instead of chasing the cheapest currencies, traders can seek trading platforms charging reasonable fees for processing payments to make cost-efficient crypto trading. One can also look for trading platforms that do not penalise much for converting fiat into digital currency.
5. Keep Emotions in Check
The primary emotions like fear and greed can change the results upside down even with a good trading strategy. Such emotions tend to escalate when a trader experiences large swings in his profit and loss account, which is quite common with crypto holdings amidst their erratic movements.
Working on trading psychology while containing greed and fear seems instrumental for traders to make money in the cryptocurrency market. Moreover, it is imperative for traders to have the discipline to stick with their respective trading plans and understand when to book profits and losses.