Tuesday, October 17, 2017

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Cryptocurrency Trading

The Buy-and-Hold Approach

 

No other asset class has seen the magnificent gains which were recently seen in cryptocurrencies. Bitcoin, the most prominent cryptocurrency, has returned a couple of million percent since 2010 when it was valued at $0.008 at one stage.

Bitcoin and a couple of other cryptocurrencies have handsomely rewarded investors who have bought and held them. Is buy-and-hold still a powerful trading strategy for cryptocurrencies? And which of the crypto’s are worth buying?

 

Trading Cryptocurrencies - The Buy-and-Hold Approach 1 (Exponential gains)

Certain cryptocurrencies have recorded unheard-of gains.

 

The Advantages of Buy-and-Hold Cryptocurrency Trading

It Cuts Out 95% of the ‘Market Noise’

There are different buy-and-hold trading strategies (believe it, or not). The main idea behind these strategies, is to ride long-term bull trends and eliminate the market ‘noise’ associated with lower time frames. Short-term traders often get frustrated when the market shakes them out of their trades as it whipsaws on the smaller time frames (for example, the one-hour timeframe). The price action on a weekly chart is often non-volatile over a certain period of time. When the same period is analyzed on smaller time frames, the picture is usually much more ragged and unpredictable than on the weekly time frame.

Perfect Market Timing is Not Necessary

What makes buy-and-hold trading attractive to many traders and investors, is that in many cases, timing the market perfectly isn’t extremely important. For traders who plan to be in trades for months or even years, what matters most is to actually enter the trade. These traders often don’t wait for major pullbacks against the prevailing bull trend because they know that it may cause them to miss the opportunity to get into the position they’re looking for.

Trading Cryptocurrencies - The Buy-and-Hold Approach 2 (Surfer resized)

Trading cryptocurrencies with a buy-and-hold approach does not require perfect timing.

 

Reduced Transaction Costs

Traders who engage in long-term buy-and-hold trades usually don’t overtrade. This can reduce transaction costs significantly. A trader who is in and out of trades every day or every week needs to factor in the drawdown of accumulated transaction costs. The spread on some cryptocurrencies is significantly higher than on the major currency pairs, for example. This can make it very expensive and ineffective to execute many short-term trades instead of a few long-term trades.

Reduced Psychological Strain

Short-term trading and even medium-term trading can be stressful for many traders. Many times markets can be hard to trade for a few weeks and during these times short- and medium-term trading can exhaust traders, especially those who are less experienced.

Although buy-and-hold cryptocurrency trading strategies have the potential to be stressful at times, it is definitely less taxing than short-term trading strategies.

Time Efficiency

Buy-and-hold cryptocurrency trading strategies are perfect for investors and traders looking to make potentially large gains with minimal time expenditure. Long-term cryptocurrency investors who engage in buy-and-hold trades don’t need to keep a close eye on the price every day, nor do they need to do technical analysis and look at charts on a frequent basis. It would be wise for these cryptocurrency traders/investors to stay on top of fundamental news, of course, and to check up on their positions now and then but it is still much less time consuming than short-term trading.

Trading Cryptocurrencies - The Buy-and-Hold Approach 3 (Guy sitting on hang mat)

With buy-and-hold crypto trading, you don’t need to stare at charts all day long.

 

Which Cryptocurrencies Are Worth Trading?

Although small cryptocurrencies shouldn’t necessarily be avoided, the most reliable cryptos are the largest, most established ones. This includes Bitcoin (BTC), ether (ETH), dash, litecoin (LTC), Bitcoin cash, and ripple (XRP). Investors and traders have much more confidence in these (and other) large cryptocurrencies. This can help you when buying these cryptos for a long-term play.

Find reliable cryptocurrency brokers here.

One of the advantages of trading large cryptocurrencies is that they offer deeper liquidity. Sufficient liquidity helps to avoid slippage when executing trades and filling orders (take profit and stop loss orders).

The big cryptocurrencies are also much less likely to ‘crash and burn’ than the smaller ones. There have been numerous cryptocurrencies that haven’t survived very long. Investing in a brand new cryptocurrency that hasn’t proved itself yet is like buying a day old chick - high growth potential, but risky.

The more established cryptocurrencies, including the ones mentioned above, are definitely worth taking a look at. Investors with a large appetite for risk may be interested in smaller, less known cryptocurrencies. When investing in these, however, traders might want to use smaller stakes than on the bigger cryptocurrencies.

 

Ways to Enter Buy-and-Hold Cryptocurrency Trades

Many investors simply buy cryptocurrencies and hold them until they feel it’s a good time to sell. These investors often do little technical analysis before entering their trades and may in some cases prefer not to use stop loss orders.

Traders and investors with technical analysis skills may prefer to enter cryptocurrency trades after weak or substantial price retracements. Other participants like to enter the market on a break of resistance. This adds the benefit of momentum confirmation.

 

Buy-and-Hold Tips for Trading Cryptocurrencies

  • Use larger time frames for technical analysis, for example, daily, weekly, and monthly charts.
  • If using stop losses, don’t place it too close to your entry.
  • Leverage should be minimized or no leverage should be used. Holding leveraged cryptocurrency trades for months or years can be costly.
  • If possible, take advantage of pullbacks to get a better entry price.
  • If the uptrend is non-volatile and very strong, don’t wait for deep retracements. At-market entries may be considered in this instance as well as breakout entries.
  • Keep an eye on fundamental factors that may influence the long-term outlook of the cryptocurrencies you’re trading.

 

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