While cryptocurrencies and stocks (stocks) may share some similarities, they differ greatly with regard to: volatility.
As such, the evolution of blockchain technology and the myriad of coins and tokens traded on a global, decentralized, “always-on” 24/7/365 market is seen by some as a digital gold rush. Often compared to a Wild Wild West where fortunes can be made and lost overnight, cryptocurrency markets have captured the ambition and imagination of a cross-generational array of traders.
While cryptocurrency trading can be lucrative, the significant risks weigh heavily; for every crypto millionaire, there are likely to be hundreds or thousands of money losses. They do this largely for a handful of reasons and fall prey to:
- FOMO (fear of missing out) – buying into loud projects that may have already reached their all-time highs,
- Extreme greed in investing because they don’t spend enough (or no) time analyzing patterns.
In addition to learning strategies and understanding the complex fundamentals and mechanisms of the crypto market, traders must make an effort to manage the emotional reactions that inevitably come from a fast-paced market. The psychology of acting is a beast in its own right that many news traders fail to consider.
However, advances in digital technologies allow traders to supplement their organic trading efforts with automated systems based on best practices or algorithms. In the following article, we will highlight the different types of trading strategies, the main differences and how they apply to cryptocurrencies.
Coinbase and twin make it possible for virtually anyone to settle in and access speculative assets, such as Dogecoin, for better or for worse. With a few extra steps, traders can access even more speculative lower market cap coins with something like Uniswap or sushi swap.
Novice investors tend to be at a distinct disadvantage as they lack experience in having enough skin in the game to understand losses or their triggers. For example, many of today’s best traders can rest on their laurels by “getting in early” on projects like Bitcoin and Ethereum, and are now able to make much bolder trades since they were technically making profits from the moment they started.
However, for the news trader who buys markets at a much higher price than, say, 2017, the downside is much greater. As such, trading psychology weighs a bit more heavily. For example, one of these two schools of thought seems to emerge:
- “I want to find the next BTC early and I want to make A LOT of money so I am going to take a much bigger risk with this project because the payout will be even bigger!”
- “Looks like everything is way too high right now. Maybe I’m just waiting for the markets to drop. I don’t want to lose all my money!”
While this article is not intended as financial advice, being too aggressive or too passive can both be a barrier to successful trading, and it is very tricky for novice (and frankly many experienced) traders to find a functional medium.
We said that digital technologies have created ways to get around many trading restrictions and enable inexperienced traders to become profitable. Digitization has streamlined access to information.
In turn, trading platforms have adapted their practices to accommodate new audiences seeking financial exposure. For example, many trading platforms recognize the social component of trading and provide visibility between experienced traders and less experienced traders. As a result, strategies such as day trading or swing trading have expanded to: include copying, mirroring and social trading.
Mirror, copy and social trading usually have a common denominator: they rely on the experience of others to identify financial markets, invest and make a profit. Of course, this comes with its own risks, but the logic is that the platform can sort the best traders to follow by exposing their historical performance.
* Historical performance does not guarantee or predict future performance, so be aware of your risks and drawbacks.
Let’s take a closer look at each of these types.
mirror trade is the process of using algorithmic determinants to copy the most successful trades and patterns of experienced traders without being subject to decisions based on their own emotions.
Continuous mirror trading means participants align their financial decisions with those of an already established trader.
This will vary by platform, but it would be unwise for a platform to support mirror trading by inexperienced traders.
Copy trade also involves imitating the trading behavior of others. Unlike mirror trading where traders implement algorithms, Copy trading allows users to copy the open positions in real time, help traders leverage someone else’s knowledge. As such, both strategies can be used by both novices and established traders.
Existing trading platforms such as eToro allow traders to browse individual traders’ profiles and see their investments in real time.
social trade, as the name suggests, social trading uses the information on platforms like eToro and makes decisions based on the profitable trades of other traders. It also takes into account predictions and patterns explained by other traders.
While social trading is usually attributed to platforms directly related to trading, the phenomenon has expanded into other sectors that disseminate information about trading such as Reddit, Discord, and even Telegram.
It is important to note that the above trading processes are usually aimed at investors who do not have enough time to analyze charts, read reports or follow the market. They all sound the same, but they differ in their mechanics and value propositions.
Mirror and copy trading also reduces human error and counteracts the negative effects of human emotions, which are paramount if one is to become a successful trader.
So, what’s the difference? Social trading adds the human component to the whole process and allows traders to make decisions based on their findings. Mirror trading, on the other hand, is not the outright copying of a trade, but instead involves creating an algorithm that provides a picture of the best traders from a number of experienced traders.
Contrary to the approach of many cryptocurrency newcomers, cryptocurrency markets are atypical of more traditional financial markets. Firstly, due to the low level of liquidity, cryptocurrencies are highly volatile. Driven by market sentiment, crypto markets are heavily influenced by positive or negative news about market conditions.
As such, cryptocurrency is seen as an immature asset class that lacks the data for successful long-term trading strategies.
However, agile traders can still learn to amplify their trading approach to make a profit regardless of bull or bear cycles. Trading strategies such as mirror trading or copy trading can be applied to any sector; however, novice traders should always take the information with a grain of salt.
These types of trading strategies also affect the platforms of choice for more advanced traders. For example, Binance and other established exchanges simply do not have the infrastructure to support copying or mimicking other users’ trades.
Considering the market sentiment approach, social trading is a very interesting lens to use, one should know how to implement it successfully. Information dissemination often takes place in decentralized places or standard platforms such as Telegram or Discord. Traders can scan and review the most profitable trades and create their trading strategies based on these resources; scouring coal to find diamonds can be a full-time job.
Some traders may even use signal groups to connect their crypto trading bots to automatically trigger a buy/sell order based on certain sentiments. Therefore, strategies with crash can be implemented when trading cryptocurrencies. While many platforms require users to have a high level of trading knowledge and expertise before successfully deploying a crypto trading bot, some offer intuitive interfaces that allow novice traders to easily drag and drop indicators and strategies.
As the ecosystem of the cryptocurrency market evolves, the technology traders will also use that in an effort to be on the tip of the spear. Bots can help traders avoid emotional trading and shield the storm in highly volatile market conditions.