Trend Following Strategies for Cryptocurrency Traders
It’s no surprise: Cryptocurrency traders deal with a huge amount of volatility, whether they’re trading bitcoins or a more obscure altcoin. And while a buy-and-hold strategy has worked out very well the last few years, it hasn’t been without some stomach-churning volatility along the way.
In fact, many cryptocurrency investors and traders have endured drawdowns of 50% or more. And not only are these price swings severe, they also happen fast. That’s why technical analysis, and trend following in specific, might be of interest to traders looking to manage risk in their altcoin portfolios.
But before we can talk about specific trading strategies, let’s take a closer look at the topic of technical analysis as it relates to cryptocurrencies.
Does technical analysis work with crypto?
One question that often comes up from aspiring traders is whether or not technical analysis works in the first place. And hey, I understand why you might be skeptical. Because nobody can predict the future of markets, and certainly not with some esoteric indicator or oscillator.
On the other hand, price charts do provide some context into how people have traded stocks in the past. And they can also give insight into potential supply and demand levels. The great thing about this raw price data is that it’s also totally independent of asset class. It represents human behaviour and it doesn’t matter if you’re trading stocks, options, or altcoins, price bars all looks the same.
Plus, since human nature is embedded so deeply within us, it doesn’t really change across asset class. Fear and greed impact any opportunity or investment you might have that is fluctuating in price. This is what technical analysis really represents.
Now, while technical analysis of all kinds can be helpful for traders, trend following strategies are one particular tool that might be of use to cryptocurrency and altcoin traders. Let me show you why.
Why trend following can help crypto traders manage risk:
The appealing aspect of trend following trading strategies is that they help traders participate in big price moves for big gains. But they also help manage risk by using fixed stop-loss and position sizing rules to protect your portfolio on the downside. Make sense?
An example of a trend-following strategy would be to buy an altcoin as it hit a new 52-week high. You’d use a stop-loss below the entry price and as the cryptocurrency trends in your favour, you raise your stop-loss alongside it, eventually locking in a healthy profit if things do reverse. Of course, if you get stopped out immediately you also incur a small loss, but at least you can take your money and quickly move on to a higher-odd opportunity.
Trend following on these daily or weekly time-frames could help cryptocurrency traders capture meaningful price swings, but also avoid some of the downside risk that comes with this volatile asset class. Of course, no trading strategy will be perfect, but the big price moves make trend following a worthwhile consideration for any aspiring cryptocurrency trader.
So I encourage you to learn more about trend following, and how it might be applied to managing upside exposure and downside risk in your altcoin portfolio.