Guide To Bitcoin Trading Strategies
Trading Guides

Guide To Bitcoin Trading Strategies

Authored by Ivan Delgado

Ivan Delgado is a decade-long Forex Trader. Feel free to follow Ivan on Youtube. Join thousands of traders who follow Ivan's insights to increase their profitability rate by learning the ins and outs of how to read and trade financial markets. Ivan has you covered with in-depth technical market analysis to help you turn the corner.

Trading forex vs bitcoin

Trading the bitcoin currency market is a whole new ball game compared to trading fiat currencies, with a number of subtleties to be aware of.

Firstly, forex is a well-established and very efficient marketplace, with liquidity abounding as middlemen or dealers act as counter-parties due to the huge amount of vested interest that exist to participate in the currency market.

On the other hand, trading bitcoin serves those with an interest in placing speculative bets in a market that is still in its infancy, meaning much less liquidity, and a lot more shady business conducted by predatory brokers looking to cash in on the uneducated.

Trading the bitcoin market, unlike forex, carries a much greater magnitude of volatility, as a by-product of the comparatively thinner liquidity that exists. What this translates into is that large orders have a greater impact on the valuation of bitcoin.

All these differences also have direct repercussions on the type of trading strategies best suited to trade the bitcoin market. A strategy that looks to capitalize on the volatility of bitcoin can therefore become a rather lucrative venue to get involved in trading the crypto asset.

Basics about bitcoin trading strategies

One of the similarities, nonetheless, when trading bitcoin or any other asset class, is that one must take ownership of the methodology deployed by leaing it inside out.

Any bitcoin trading strategy works best with extra layers of confluence such as trading with the dominant market cycle in higher time frames, a mechanical risk management, or awareness of risk events just to name a few elements. Robustness can be improved through one’s own backtesting in order to gain confidence.

There are plenty of free resources out there, where one can get some insights into a large range of bitcoin trading strategies by searching “bitcoin trading strategies in reddit” or “bitcoin trading strategies in youtube.”

Bitcoin trading strategies for beginners – debunking a myth

It is also important to understand where you are at in your trading career. Are you getting started in the realm of trading bitcoin? In other words, are you looking for trading strategies as a beginner or have you done the hard yards and are into strategies with more complexity?

Either way, there are no trading strategies that can classify as best suited for beginners vs trading strategies for advanced traders. That’s a rather fallacious assumption.

What exists is a classification of traders based on the experiences they’ve been able to acquire trading a particular trading strategy while perfecting other key areas such as trading psychology, risk management, analytical skills, only to name a few. That is what separates someone dubbed a professional or advanced trader vs a beginner, and not the strategy they deploy.

For example, under the same market conditions, if two individuals were given the exact same bitcoin trading strategy, and told to trade following the same specific rules, with the only difference being that trader 1 is a complete novice lacking the mastery of risk, psychology and a whole other plethora of elements critical to successfully trade bitcoin, while trader 2 is an experience trader who’s gone through years of trading lessons, the results of trader 1 vs trader 2 would be like day and night, as the strategy is just the tip of the iceberg to trade profitably.

Bitcoin algorithmic trading strategies

One of the potential options for those traders swamped with typical beginners’ mistakes such as jumping the gun due to emotions, overtrading due to revenge, lack of discipline to respect certain risk parameters, or placing trades without following the rules, would be to deploy an algorithm, also referred to as a trading robot as the primary trading strategy to trade bitcoin.

Algorithmic trading is essentially the use of mathematical models and formulas to determine when a trade or a series or trades will be placed on an exchange. Algorithmic trading can span from the most basic set of rules to something hugely sophisticated. Some of the benefits of algorithmic trading includes hands-off approach and execution speed.  

Since trading the bitcoin market has evolved out of the techie, geeky breed exploring this fascinating world of financial democratization, there is an abundance of services available out there, either via dedicated websites or crypto-related coders that act as freelancers, who for a relatively small fee (depending on the complexity), will build an automatic trading strategy for one to apply into the charts, which means you are delegating the decision to a robot.

Be aware, in this era of digitalization, the clear trend is for traders to rely each year more heavily on the ability of trading robots to substitute the human intervention as long as one can lay out a well defined set of rules for the robot to follow. You will have to nonetheless monitor very closely when market conditions are changing to tweak the algorithm in order to adapt.

It is estimated that at least ¾ of all the trading in the US stock market is driven by algorithms, and since trading cryptocurrencies, specifically bitcoin, can also be traded on online exchanges which offer the option to place trades via an API, algorithmic trading is therefore possible too.

Bitcoin margin trading strategies

Another type of route to take as part of trading strategies for bitcoin includes the use of leverage, which essentially entails controlling a much larger pool of ‘fictitious’ funds available for the purpose of trading larger contracts size. Note, margin or leverage trading strategies carry an inherited greater risk, and should be perceived as a double-edged sword.

On one hand, margin trading strategies allow deposit of lesser amounts of capital into one’s trading account if the intention is not to ramp up the trading size, in other words, trading more contracts. On the other hand, margin trading strategies are easily an account’s killer as traders, especially those with a quick-rich approach, will be overleveraged in hopes of making much larger profits; what they tend to ignore, however, is that as the potential for rewards increase, so does the risk of much fatter losses.

Some of the crypto exchanges that allow bitcoin margin trading strategies include:

By far, the crypto exchange that has grown the most in popularity to deploy bitcoin margin trading strategies is Bitmex. What appealed to traders right from the beginning was the choice of margin trading,  is the insanely high leverage of 100:1, in other words, you only need $1 to control $100 or $100 to control $10,000.

List of bitcoin trading strategies

It’s time to dive into a few bitcoin trading strategies. Below, you can find a range of various manual trading strategies, even if the avid trader could easily tu them into algorithmic trading strategies to trade bitcoins with the assistance of a programmer.

Bitcoin swing trading strategy – version 1 -: This is a trend-following strategy with the use of bollinger bands at the epicenter. It’s all about letting the price retu to a point of equilibrium, graphically depicted by price overshooting the 20-period moving average by testing the opposite side of the bollinger band, hence, creating an opportunity to enter at levels that are considered to be at wholesale or at a discount but in the context of an ongoing trend. One of the pre-conditions is that the trader clearly determines that the market has been in a well established trend. Furthermore, another important element to factor in is to make sure that, if trading an uptrend, the latest swing high is greater in magnitude than the previous one as it will communicate a strong commitment by buyers to still take the market to higher levels. To assess this latter concept, the bollinger band width (BBW) indicator will be our best tool to illustrate that. If the BBW is breaking into new highs, then we’ll be on the look out for a price movement outside the opposing side of the most distant bollinger band (low band in uptrends). The stop loss will be a distance equal to 2 times the ATR on a 14-period (average true range) of that particular time frame in order to account for the volatility currently at play, while the profit target could be aiming for a 50{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} on a retest of the latest high (in an uptrend), while the remaining position would run for a target 3 to 4 times the ATR from your entry. It is prudent to move to break even in order to protect your risk once the price makes it to the first target. In the example below, several trade setup have been marked with an up arrow in black.

Bitcoin swing trading strategy – version 2 -: This strategy is resemblant to the described above, with the subtle difference that this time the entry order is looking to engage in long positions in the context of an uptrend at what should be seen as a fair price, which would occur on a retest of the 20-period moving average. The pre-conditions described above are still applicable, that means the same stop loss and risk management logic. In the example below, several illustrations of a trade setup have been marked with an up arrow in black.

Bitcoin trend exhaustion strategy: This is classified as a counter-trend strategy which anticipates a reversal back to the mean as volume tapers off and the trend exhausts itself on lack of further demand follow through (in the case of a bullish trend). The first precondition is to identify a series of legs comprised of 3 pushes up or down, with each pass showing a divergence between the price and the bollinger band width (BBW) in what’s referred to as ‘compression’. Once this scenario is in place, if trading short, the price must see a close below the 20-period moving average to validate the entry as it communicates the mark down phase has begun. The placement of the stop would be above the highest point of the cycle, with several options to place take profits, such as 50{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} at a 1 time ATR, time when the position is moved to break even, while the remaining position can aim for 2 times and 3 times the ATR of the timeframe traded.

Bitcoin breakout trading strategy: This is another trading strategy that orbits around the use of the bollinger band as a prerequisite to make it work. Once the band squeezes (contraction), it means that the volatility in the market is low and sooner or later a new expansionary wave must be released, acting like a rubber band. This strategy aims to bank on this transition from contraction to expansion, that’s where the opportunity to enter the market exists. To qualify a breakout, the price of bitcoin must first accept through two closing candles outside the edge of the established range, which is the go ahead that the period of compression is over. After that, the strategy defines the entry by the price retuing towards the mid bollinger band (20 moving average). The stop could then be placed at the other extreme of the range and the target could be 50{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} at a 1 time ATR, time when the position is fully adjusted to break even, with the remaining position aiming to reach a distance of 2 times and 3 times the ATR. In the chart below, an illustration on a breakout out of a compression period is shown.

Bitcoin measured move trading strategy: This trading strategy is all about exploiting market symmetries by anticipating potential tops and bottoms. By drawing a 100{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} Fibonacci projection, the trader will aim to get the best possible pricing before a potential reversal in price. These reversals often occur due to the side in control taking profits off the table, counter-trend positions added by contrarian players or market makers incentivized to reverse positions. The way to draw the projection target to identify the entry entails dragging the Fibonacci tool from the latest swing high/low through the breaking point that confirms a new cycle. This time, unlike the rest of the strategies above, the entry would be a limit order with a stop loss at the same distance as the ATR (average true range) of the chart traded. The targets will still remain the same as the other strategies, which means taking 50{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} off the table at a 1 time ATR and move to break even, take another 20/30{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} at target 2 at a distance of 2 times and the remaining at 3 times the ATR. Note, the higher the timeframe to calculate these target projections where the entry will be enacted, the more reliable it’s going to be.

Bitcoin squeeze trading strategy: This trend-following setup is all about identifying a failure to rotate in the context of a well established bias. The rotation is successful when the price reaches the previous fractal pivot point or swing high (in an uptrend). The strategy aims to catch a significant portion of the run up towards what’s anticipated to be the next successful rotation to the upside, in the case of an uptrend. The term squeeze applies as a metaphor to refer to all those weak-handed players that get trapped shorting the market on this move up. The entry is confirmed on a break of the candle high (if in an uptrend) after a sequence of decreasing volume candles, with the stop loss placement below the most recent low (if uptrend) with some buffer room prudent as the stop tend to be rather tight. The first target in this type of strategy would be a retest of the most recent high, where the position will be moved to break even and either total or partial profits will be taken off the table. See below an illustration of a long trend with the pre-conditions met as per the description above.

Closing thoughts on bitcoin trading strategies

Trading bitcoin has carried, especially in the past, a lot of hype. The market remains quite volatile at times, which is the bread and butter traders rely upon to find opportunities. The strategies described in this article and the basics we’ve touched on should provide a handy guide for one to dip their toes into the world of trading bitcoin.

Remember, whatever strategy you adopt, be it manual or automatic, using margin trading or simply trading based on the capital available, it must suit your style, in other words, it must resonate with your personality, and most importantly, practice with it so that you can explore by yourself how much of a disceible edge it provides through your own backtesting. Own it.

What will make the difference is to take responsibility to follow your own idiosyncratic way of trading the markets rather than follow someone else’s system. In this guide, you get a red carpet introduction that can hopefully open the first doors of experimentation.