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Navigating Volatility: Medium-Term Crypto Trading Strategies

March 21, 2024

Continuing the series of posts about trading through the prism of timing, today we are exploring medium-term trading. While long-term strategies discussed earlier this week hinge on fundamental analysis and HODLing and short-term strategies capitalize on intraday price movements, medium-term trading occupies a unique space, offering a mix of both approaches. 

Medium-term trading typically involves holding assets for days to weeks (sometimes months), taking advantage of medium-scale price movements and market trends. Today, let's explore some of the most common medium-term crypto trading strategies and ways traders can mitigate substantial risks while navigating the turbulent waters of cryptocurrency markets.

Common Medium-term Strategies 

When it comes to medium-term crypto trading, the trend following (also known as position trading) is naturally considered one of the most widespread strategies. One can even say this is the primary strategy in this time frame. The technique involves the periodic analysis of market trends to locate emerging trends and make use of them. However, reading charts and identifying patterns that indicate a trend is not an easy or intuitive process. It requires technical knowledge beyond what is necessary for long-term trading. As a result, many traders rely on specialized software and bots to assist them (Learn more about trading with bots in this post).

After finding a trend, traders buy assets, hoping to take advantage of the momentum until signs of a possible price reversal occur. Implementing the trend-following strategy requires significant discipline because market volatility may sometimes be too scary to stick to the plan and avoid making sudden, panic-driven trades. Yet, with enough patience, expertise, and sustained market trends, such a strategy can lead to notable profits.

Range trading (also called swing trading) is another popular medium-term strategy. While implementing this strategy, traders would instead focus on price ranges when the market directions, frequently trading through the same levels. For instance, traders may analyze price changes in an asset and notice that it has been trading within a price range of $500 to $650 for a month. In that case, the goal is to buy at the lower end of that range and sell at the higher end. Note that sometimes, given the high volatility of an asset, such a strategy becomes relatively short-term.

Breakout trading is a third widespread medium-term strategy. This approach relies on analyzing certain patterns and support levels to find signals of assets waiting to break out of price ranges. The strategy operates under the assumption that when an asset's price does escape the previous ranges, it will continue to move in the same direction for some time, generating noticeable momentum that traders can exploit. 

Such price breakouts generally occur after a period of consolidation or during major news or events causing more significant market volatility. When traders spot a breakout, they take positions in the direction of the breakout and set stop-loss orders to manage risk. Breakout trading also necessitates traders to be disciplined and patient, waiting for the appropriate opportunity to arise. They must also be able to respond quickly to changing market conditions, as breakouts can be brief and may reverse course just as quickly. 

Navigating Unfavorable Conditions & Managing Risks

No matter the strategy chosen, it is always critical to have an adequate risk management plan. The first piece of advice is that traders should consider the overall sentiments of the market participants. Market sentiment pertains to investors' prevailing feelings or attitudes regarding a specific asset, technology, or event. Such matters can be assessed in several ways, including analyzing social channels, popular comments, news outlets, etc. By scrutinizing the market sentiment, traders can recognize probable trend continuations or reversals, which can assist them in making well-informed trades. 

However, as always, it is crucial to be careful and not rely solely on sentiment analysis, as other investors' feelings may often be irrational and misleading. Moreover, traders should not wholeheartedly trust their reading of charts, too, since things can always go wrong despite the pattern being promising or prominent. Therefore, creating a sound and flexible risk management strategy before initiating trades is vital. 

First of all, traders employing medium-term strategies should ideally utilize stop-loss orders to mitigate possible losses and ensure chosen risk-reward ratios for each trade. Secondly, traders should diversify the range of assets they work with and manage their position sizes strictly to avoid risking too much of their funds on one asset and trade. The same goes for overleveraging positions, as excessive leverage can amplify losses and lead to margin calls. Lastly, hedging is an important concept to know when embarking on trading, not just in the medium term. It means neutralizing the possible risk associated with your position by opening an additional position in another asset. For instance, if you are holding Ethereum and worried about a potential price crash, you could go short in altcoins. This way, if the market does crash, your gains in altcoins will compensate at least for some of your losses. 

Final Thoughts

Medium-term trading strategies offer quicker rewards compared to long-term trading, which is a more comfortable option for many traders. At the same time, it is less fast-paced and anxiety-inducing than short-term trading. By studying crypto charts, employing necessary tools, creating effective risk management plans, and knowing the current market's state and the sentiment of the surrounding community, traders can better navigate the crypto scene and increase their chances of success.

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