The fourth industrial revolution with digital transformation is here, and leading the charge are cryptocurrencies. Crypto trading has become a norm now, with traders of all shapes and sizes leveraging a wide variety of crypto trading strategies to generate profits. While crypto trading strategies can vary from market conditions, liquidity of a token, availability on different exchanges, and more, some crypto strategies are comprehensive. This article will explore what it means to utilise and implement two universal crypto trading strategies, longing and shorting, and how they actually work.
What are Longing & Shorting Crypto Trading Strategies
The terms long and short in trading indicate whether a trader believes that a cryptocurrency value will rise or fall. Long and short positions for a cryptocurrency trader indicate the direction of the price needed to earn a profit.
Long Crypto Trading Strategy
When we are longing for a crypto trade, the trader will predict that the price will increase from a pre-defined point. This point is when the trader will “go long”, so to speak, and purchase the cryptocurrency and sell it off when it rises. For example, if a person buys ten units of BTC at $50,000 each and hopes that its price will increase, they are going long on BTC. While the maximum amount of loss a person can incur in the long crypto trading strategy is the amount they have invested in purchasing (in an unlikely scenario that the price of the security reaches 0), the possibility for profit is endless as the price can increase as much as possible.
Short Crypto Trading Strategy
On the other hand, shorting in crypto means that the trader is anticipating a decline in price beyond a certain point, leading the trader to sell the cryptocurrency. For example, if a person goes short on ten units of BTC at $50,000 each, they are hoping for a price decline. While the maximum amount of profit a person can incur in the short crypto trading strategy is the amount they started on (in an unlikely scenario that the price of the security reaches 0), the possibility for loss is endless as the price can increase as much as possible.
Do you have to buy and sell cryptocurrency to engage in crypto trading?
Just as in stock trading, cryptocurrency also offers one the choice of shorting or longing without actually buying or selling it. This is where derivative exchanges come in. These derivative exchanges provide the choice of Contracts For Differences (CFD), futures, options, and similar derivative products.
The advantage of such derivative product trades is that a trader can easily execute longing and shorting trading strategies without owning any crypto.
What is a call option?
Derivatives trading has a choice similar to buying an actual cryptocurrency known as a call option. Here the crypto trader can exercise a financial contract that gives an opportunity (derivative product) buyer the right and not the obligation to purchase a cryptocurrency at a pre-specified price within a predetermined time.
What is a put option?
The choice similar to selling cryptocurrency in derivative trading is called a put option. A put option is a contract that provides the option buyer with that right and not the obligation to sell or short a predetermined quantity of cryptocurrency within a particular period. The specified price at which such a trader would sell the underlying asset (cryptocurrency) is the strike price.
What is a binary option?
Several exchanges also offer something known as binary options. Here the trade does not depend on the trend of rising or falling prices, but whether the cryptocurrency price will go above or below a specific price on a particular day.
What is Margin trading?
Margin trading includes trading using borrowed funds, also known as leverage. This type of trading can be helpful for both crypto short selling and longing.
Margin accounts utilise funds given by third parties, from the exchange platform to other traders who can be incentivised accordingly to prove their funds. The advantage here is that you can invest greater value through leveraging and enhancing the possible profit many times over.
In this case, the funds required to commit as a fraction of the total order value are called margin, hence named margin trading.
How to decide shorting and longing of a cryptocurrency
Predicting market trends requires a certain level of technical market analysis. You need to comb through reliable news and crypto sites that offer deep and reliable market insights that are actionable. For instance, a popular blockchain project such as Cardano (ADA) might be expecting a critical upgrade or even a high-value partnership. In this case, as a trader, you need to go long on the currency.
Monitoring social media and business news can also play an essential role in predicting upticks in crypto prices. You can also look for patterns of change in market sentiment using charts and prices that go above a specific limit called a resistance line. Regardless of the combination of market analysis you employ, you need to be completely confident of the currency’s trend.
Traders can utilise a resistance line or level to decide when the currency’s uptrend will saturate, halt, and start declining. You can think of this as a ball you throw up in the air, which will eventually fall back down.
Understanding when to go long and short on a crypto token can be tough, as the crypto markets are known to be extremely volatile. To ensure that you generate consistent returns irrespective of the market trends, try out Mudrex. With a wide variety of investment solutions available, you can choose the one that fits your investment goals and risk appetite.