One of the most difficult aspects of becoming a successful trader in any market is knowing fundamentals sticking to a strategy during times of economic turmoil. Many novice traders can pick a strategy that could work in theory, but they end up making rash decisions when they start to see massive price swings. This is obviously an even bigger problem in the bitcoin market due to the young currency’s volatility.

Having said that, choosing the proper strategy is still one of the first steps to making sure that you’re making the right trades at the right time. While sticking to your guns may be difficult, finding the right strategy to use in a certain market is still an integral part of making profitable trades. Let’s take a closer look at how to choose your strategy and how to manage risk once you begin making trades.

Day Trading vs Long-Term Holding

The first thing you need to decide when it comes to trading on the bitcoin market is your stance on the time of your investment. Are you looking to make a quick buck? Do you think bitcoin is the future and holding it over the long term is the best option? By understanding the timeframe of your investment, you’ll be able to figure out which trading strategy will be better suited for your needs. If you’re someone who thinks that bitcoin could be worth millions of dollars one day, then you’re probably going to want to stick with a long-term trading strategy. Anyone who is simply looking to profit off of the movements in the bitcoin price will want to research short-term trading strategies.

The Long Game

If you’re playing the long game, then you’ll want to plan your purchases of bitcoin in the correct manner. Although the price of bitcoin can swing quite wildly in a single day, it’s important to remember that your strategy is not to day trade cryptocurrencies. Just because you see a price dip does not mean that you should automatically place a new buy order on an exchange. If you’re looking to purchase bitcoin as a long-term speculation, then you should place your orders in regular intervals.

For example, let’s say you get a paycheck from your work every two weeks. To plan your long-term bitcoin speculation strategy, you would simply take a percentage of your paycheck every two weeks and use it to purchase bitcoins on an exchange. You could even split that amount in half and make your purchase every single week instead of every two weeks. The point of this trading strategy is two-fold. First, you take the price fluctuations out of the equation (for the most part). In other words, you’ll likely avoid a scenario where you purchase 20 bitcoins at the peak of the bubble and then don’t have any cash left over to purchase more during the dip. Secondly, this strategy completely removes your greed and emotions from the equation. As long as you stick to your original plan and purchase bitcoins at the same time on the same day of every week, you won’t have to worry about getting caught up in a price bubble or selling during a crash. This will make it less likely that you buy high and sell low.

Day Trading Strategies

If you’re only looking to profit off of bitcoin from the short-term price movements of the digital currencies, then you’ll want to look at some of the strategies laid out in our recent post on the fundamentals of bitcoin trading. Tracking indicators such as support, resistance, and moving averages can give you a good idea of when it’s time to buy or sell. Combining multiple indicators into your own trading strategy is usually going to be the best recipe for success because there will be a lower number of traders looking at the same trends as you.

If you’re going to pick out a few different indicators to track the bitcoin price on a daily basis, then you should make sure to back test your strategy before you put real money on the table. A back test is a way to see how a particular trading strategy would have fared in the past. Although past trends are not necessarily indicators of future price movements, these backrests can give you a good idea of whether or not your collection of price indicators has been able to predict price movements in the past.

Managing Risk

After you’ve chosen your trading strategy, it’s time to think about how you are going to manage your risk. The good news is that having a trading strategy at all is a good move in the direction of properly managing risk. In order to properly manage the risks associated with trading on a bitcoin exchange, it’s important to plan your trades. This is where your trading strategy comes into play. Having said that, planning the trade is only half the battle. In addition to planning a trade, you also have to “trade the plan.” In other words, following through with your strategy is one of the best ways to manage risk.

If you’re in bitcoin for the long term, then you just need to think about how much of your portfolio you want to put into bitcoin. In other words, your risk management process just comes down to proper money management tactics. It’s important to remember that bitcoin is still a high-risk, long-term speculation, and you should only put a small amount of your entire portfolio into the digital currency. In many situations, the best way to manage your risk is to make sure that you aren’t putting your life savings or your children’s college money into bitcoin. Remember, you should only speculate with an amount of money that you are willing to lose.

Stop-Loss and Take-Profit

If you’re a day trader, then you’ll need to know about stop-loss and take-profit points. These are the price levels where you are going to exit a trade. For example, if you think that the price of bitcoin has reached a support level that it has come to in the past and there are no signs that it will be able to break through that support and go lower, then you may want to place a buy order. However, you should have a plan of when you are going to exit that trade before you enter it. The stop-loss point is the price that you will sell at if the bitcoin price continues to fall, while the take-profit point is the point at which you will sell and take your profit. By planning your sell point before you place a buy order, you can take greed and emotion out of the equation. It’s always better to make a trade decision when you’re in the right state of mind.

Plan Ahead

The moral of the story when it comes to picking a trading strategy and managing risk is that it’s always a good idea to plan ahead. When you have a clear course of action in mind before you get started, it becomes easier to not let your emotions get the best of you. Your decisions on when to buy or sell should not be made at a moment. These decisions should be made before the initial action that led to your current situation. All you need to do is follow the playbook.

Try out your trading strategy on CEX.IO!