Trading, especially with digital assets, has been growing in popularity, as they’ve proven to be the most profitable. There are many different strategies you can use to make money in crypto and this article will provide insight into these various techniques, so you will more easily decide which suits your needs, personality as well as circumstances the best.
Before we dive into different types of traders, you have to understand that all of the trading strategies fall into two basic categories, based on the timeframe in which we expect assets to appreciate in value. Now you might be wondering which are these two fundamental categories?
Two basic trading categories
All strategies can be classified into either short or long term categories.
Most long term traders use fundamental analysis to evaluate whether a particular asset is undervalued and buy the coins at the time, when it’s cheap, betting that the price will appreciate in the future and catch up with its fundamentals. The traders then wait through different market phases, before selling when the coin is overvalued.
Contrarily short term trading (as the name suggests) is all about making profits in the short run. Usually such short market movements in price are calculated based on technical analysis (as fundamentals generally don’t change overnight). Short term trading also has the edge over long-term trading in the sense that traders can take advantage of short term volatility to maximize profits.
It’s important to note that managing your emotions and actually understanding short-term market movements is a really difficult job, which requires lots of time, preparation and experience. Instead of maximizing profits, the great majority of people who try to profit from short-term volatility actually lose money. For instance, a study of eToro day traders found nearly 80% of them had lost money over a 12-month period and there are many more studies that show comparable results.
The first type is a Scalper trader, who makes dozens or even hundreds of trades per day in an attempt to "scalp" a small profit from each trade by exploiting the bid-ask spread or short-term price movements. We could say that this is the most ‘impatient’ type of traders, as they sell tokens in a very short time frame.
The second type are Day traders, who buy and sell a token within the same day. They are probably most devoted to trading, as they have to monitor the markets all the time and look out for market trends and their impact on the prices (We suggest using TradingView for TA). Day trading can be extremely profitable, as day traders usually make their living out of trading, but it requires a lot of practice, knowledge and experience, as well as managing your emotions to become a master in the field.
The third type is called Swing traders, who attempt to catch the trend, looking to capture short to medium term gains in a coin over a period of a few days up to a couple of months. Swing traders usually use technical analysis to spot good trading opportunities based on price trends and patterns in combination with some fundamental analysis. Generally the longer the time frame on which you aim to hold tokens, the more fundamental analysis should be done in addition to technical analysis.
Investors, who hold their coins and aren’t distracted with the short-term volatility are in the crypto community known as hodlers. They have the most long term oriented strategy. It involves buying an asset and letting it increase in value over time, not getting distracted (selling) even if the market value goes down substantially. Being a hodler on one hand comes with less day to day activity, but on the other hand it requires a time consuming, research-intensive effort and having a great expertise in the field.
The last type is Arbitrage trading, which is a little different than the others, as traders in this case don’t bet on appreciation (or depreciation in case of shorting) of a cryptocurrency, but only take advantage of price differences of same coins on different exchanges, or other types of market inefficiencies. For example, if a cryptocurrency trades on multiple exchanges and is less expensive on one exchange, it can be bought on the exchange, where the price is lower and then sold on the other exchange at the higher price. The difference in prices is the trader's profit, but you also need to take fees (for buying/selling as well as for transactions) into the account.
If Arbitrage trading seems interesting, because of the low risk it carries, we’ve developed a Tool that spots arbitrage opportunities for you. You can find our Arbitrage Tool here.
To sum it up, it’s best to try out various techniques to settle on what works best for your personality, goals and circumstances. You can also consider using multiple techniques at the same time, which can be beneficial in case of a downturn, as it provides some type of diversity just like investing in multiple assets.