“Success in trading comes from knowing the markets well and knowing yourself better.” — Larry Williams.
The crypto industry has been increasingly attracting professional traders, investors and new “players”, who were making good profits on the market over the last decade due to high volatility, interest earnings, the possibility of 24/7 speculation and market manipulation.
Most of the market participants, depending on their strategy, may be categorized as either a trader or an investor. One could roughly say that the difference between the two lies in time each one holds the position, but there is more to it: their goals and strategies differ significantly as well.
In this article we will review both categories, as well as compare the basic principles of their strategies.
Neither such a thing as a single correct way to trade, nor a universal method that works constantly and is suitable for every market participant does exist. The more people mirror a trading strategy, the more likely it is for that strategy to fail.
Traders try to benefit from both rising and falling markets and enter/exit positions within a short time period. Their goal is to have the volume of profit to exceed the volume of loss. If successful, a trader can book as much as 1000% gains per annum and even more.
The cryptocurrencies market meets many requirements, set by the traders: low commissions, high volatility, quick access to trading tools and personal funds. This allows traders to earn good profits if they follow a well-defined strategy and proper risk management.
Traders can be divided into four categories:
- Scalp Trader: positions are held between seconds and minutes, avoiding long positions.
- Day Trader: positions are held no longer than 24 hours;
- Swing Trader: positions are held between several days and a week;
- Position Trader: positions are held between one month and one year;
Traders often choose their trading style based on the following factors: the size of the deposit, the amount of time that can be dedicated to trading, the peculiarities of the strategy, and proper risk management.
So-called scalp traders can hold positions for several minutes, based on technical analysis or trade based on the important news release. Day traders focus on the trading day, while swing traders may hold positions for a few days or weeks expecting to implement their trading strategy. Position trading is often compared to investors’ “buy and hold” strategy, rather than to active trading. Position trading outs longer time frames (daily to monthly charts) to work, some other methods are used in order to determine market trends.
If you are interested in trading, here are some recommendations to minimize your risks:
- Create a plan that determines levels at which you will buy and sell the asset. For example, you can determine the price which you are going to sell at if the asset rises or falls at a certain point in time.
- Stick to your trading plan. It is vital to make informed decisions and determine the ideal trading parameters. A good trading plan will insure you against taking emotional decisions in the midst of the process and help you fight occurring temptations.
- Set a certain percentage of the deposit allocated to the transaction and the percentage you can afford to lose if the bid does not go according to your plan. Traders tend to allocate up to 5% of the whole deal’s deposit.
- As the trader makes many deals, he generally pays a huge commission. Try to calculate how much you lose to commissions in a certain period of time and how it affects the profitability of your trades.
“If you want good money, you must learn to wait.” — Larry Williams.
Cryptocurrency investors possess a completely different mentality when compared to traders. The former ones focus on long-term benefits rather than short-term gains. Generally, an investor’s approach is to buy and hold.
One of the common strategies in the cryptocurrency community is called HODL. “HODL” derives from the typo, made in a Reddit post by an early Bitcoin investor, which propelled into becoming one of the biggest memes in the Bitcoin community and turned into the abbreviation “Hold on to dear life”. And this is exactly what many investors will do. Investors look for opportunities to buy crypto assets while their price is very low. They also try to find assets that may be very promising in the future. They might buy tokens and store them for years before choosing to sell them.
Investors are generally less likely to take risks when compared to traders. They do not approve of the investment strategy based on speculation. Investors are looking for a reliable rate of return year after year. Just think of those people who bought bitcoins under $100 per coin a few years ago or even earlier. Some of them have literally become millionaires.
Unlike traders, investors are not forced to keep their funds on an exchange. They can simply use exchanges to purchase assets and then keep those tokens in their own wallets. Investors do not need all the tools that traders utilize, although they may need access to some basic charts.
If you are interested in investing, here are some recommendations to minimize your risks:
- You will need patience and discipline to withstand the ups and downs of the market. A long-term plan is a must when choosing this strategy. Be prepared for a long journey.
- You should analyze hundreds of projects prior to making any long-term investments.
- You should not panic when the market is experiencing temporary drawdowns.
- You should also ensure security of your funds and only use safe wallets for storing your assets.
Investor’s strategy is safer than the one of a trader. At the same time you should consider that while money is invested in the project today, the profit may be realized as far down the road as six months, a year or even five to ten years. A lot can happen to the market or the chosen project for investment during such a period of time. Do not forget that due to a huge competition over 90% of cryptocurrency projects could not survive. In the long run, many early investors lost all their savings.
There is no universal strategy to satisfy every market participant’s interests. What has worked for others may not work for you. Choosing the best approach will depend on the financial goals you are striving for. Are you eager to be exposed to higher risks while having greater potential gains or would you prefer to minimize risks and be fine with a lower upside and longer time horizon? You will have to make your own choice and stick to it.