Trading cryptocurrencies such as Bitcoin, Ethereum, or Dash can be profitable as long as you know the rules of the game, and you know how you can win it. But with the rise of cryptocurrencies and the regulation of these instruments, it can be more difficult nowadays to make money in the market. Buying and holding cryptocurrencies is considered an obsolete strategy today.
You should also take note that many traditional strategies used in the stock market and forex market are not applicable in cryptocurrency trading. For example, if you need to value specific stocks in the market, you need to study the fundamentals by taking a closer look at the ratios such as price/earning ratio as well as debt ratio. These metrics are not available in the cryptocurrency market. Still, you can analyze the cryptocurrency market and make a profit despite its volatility. Below are essential tips you can do to make this happen:
Study the Cryptocurrency TradingVolumes
Before investing your money into cryptocurrency trading, you first need to evaluate its trade volumes. It is ideal to place your bet on cryptocurrencies that have historically higher trading volumes on a daily basis. However, you should also watch out for significant news about low volume cryptocurrencies that could potentially provide you with massive returns. Just be very careful because low volume cryptocurrencies usually have insufficient support from the community, and so there is the risk that they will be delisted from cryptocurrency exchanges.
Focus on the Sharpe Ratio
After identifying cryptocurrencies with high trade volumes, the next step is to take a closer look at the movements of your possible holdings. You can do this by evaluating the financial ratio known as Sharpe ratio. This will allow you to measure the possible ROI according to its volatility. Ratios that are higher than 1 normally indicate a high potential return. With the excellent performance of many cryptocurrencies in the first half of 2018, many of them currently have outstanding Sharpe ratio. Hence, you need to narrow down further to find cryptocurrencies with excellent figures considering the general cryptocurrency market to profit from the trade.
Be Updated withCryptocurrency TradingNews and Updates
By now, you should already have a shortlist of cryptocurrencies that may provide you with a higher profit margin. However, you may need to trim down the list further to identify specific currencies with higher potential to bring you more profit at a faster rate. This is why those who are engaged in trading are always alert about financial or business news. Be sure to check out news or announcements about cryptocurrency trading. One way to do this is to set up Google News Alerts about specific cryptocurrencies you are trading so you will easily get notifications.
For example, let’s say you are trading Ether and the Ethereum blockchain announced that it will implement a fork next week, all ETH holders could gain from the new token on a specific ratio. You should not miss this significant news as this could make or break your trade. You should also watch out for emerging cryptocurrencies as you can also make a profit if the valuation of such coins grow and you have purchased early before the peak.
Gain an Entry Point
After identifying the cryptocurrencies you want to trade, the next step is to look for an entry point so you can start cryptocurrency trading. Usually, the recommended strategy for this is to perform technical analysis when you need to start trading financial assets. You may do this by studying the candlestick patterns of a specific cryptocurrency. Let’s say you are looking to trade Monero, then a bullish pattern on its weekly chart is a good sign to gain entry into the market.
Be Cautious in Investing in ICOs
Many new blockchain projects offer traders and investors a chance to buy a share of the project in exchange for a specific amount of tokens or coins at the lowest price. The primary drive for the traders is that the token can be traded anytime that could yield a higher profit. There have been many profitable ICOs such as Ethereum and Neo, but there are also ICOs that were proven scams.
Hence, you need to perform your due diligence when you want to buy shares from an ICO. Basically, you need to evaluate the expertise of the people behind the ICO and study its roadmap to ascertain if the project is viable. Never purchase tokens if the ICO has no website, is not organized by a team of professionals with enough background in cryptocurrency, or no plan on how the project will achieve its potential.