If we are to classify traders operating with Bitcoin, we should take into consideration:
– their preferred time frame;
– their personal style of trading as well as
– whether they prefer to operate within a trending environment or within trading ranges.
As we already noted in our Forex guides, scalping involves very intensive, quick trading. If you allow your positions to last from a few seconds only up to 1 minute, then you are referred to as a scalper.
Scalpers usually examine price charts with a time frame of 1 minute and 5 minutes (in rare cases 10 minutes or more). What is specific about this trading style is that scalpers seek to utilize market imbalances to register a series of small gains.
However, many experts consider scalping as a style not that suitable for traders who operate with Bitcoin by using Contracts for Difference (CFDs). It is so, because the wide spread increases trading fees, which may offset and even surpass expected returns.
If you enter a number of trades within the same trading day and close all of them before the end of the session, then you are referred to as a day trader. Depending on your trading method, you may have from several to hundreds of orders every day.
Day traders usually examine charts with a time frame of 15 minutes, 30 minutes or 1 hour. They seek to utilize intraday price swings, with trading decisions being made mostly with the help of technical indicators, price action setups and chart patterns.
Experts consider day trading as a suitable style for Bitcoin CFDs. The only exceptions are periods of low volatility, when even highly-leveraged CFDs will probably not compensate day traders for the time they spend on the market.
If you aim to take advantage of a long-lasting bullish or bearish price move (trend) and stick with it until it is ”exhausted”, then you are referred to as a trend trader. Generally, trends can be observed across all time frames, but yet, the most reliable ones are usually spotted on larger time frames – daily, weekly and monthly charts.
Of course, in order to obtain a better view of a particular market situation, you should analyze more than one time frame. For instance, you may pay attention to the daily price chart to grasp the general picture and then switch to a lower time frame, say 5 minutes to 1 hour, to detect the most appropriate points of entry. Since we are discussing trend trading, these entry points should usually be at the end of a pullback.
Trend trading is a suitable style if you want to operate with Bitcoin by using CFDs.
For a detailed discussion on how you can identify a trend, how you can choose your entry and exit points, how you can preserve your gains and when you can expect a price reversal, feel free to check our Forex trading guides out.
If you allow your position to last from a few days to a few weeks and base your decisions mostly on technical analysis, then you are referred to as a swing trader. As such, you will seek to utilize a considerable price move between a peak and a trough.
As we noted in our Forex guides, a situation, in which the market is not in a discernible bull or bear trend, is known as a trading range, formed between two extreme levels – high prices (resistance) and low prices (support). Swing traders will look to enter the market at these two extremes – or sell at resistance and buy at support. Buying on heavy volume at support causes the price to reverse to the upside, while selling on volume at resistance triggers a reversal to the downside.
In order to detect points (levels) of reversal, swing traders will use indicators that signal overbought and oversold conditions – most often these are the Relative Strength Index (RSI), the Stochastic Oscillator and Bollinger Bands. You can learn more about these and other indicators in our guide on Technical Forex Trading Indicators and our Forex Academy.
When Bitcoin reaches a probable point of reversal, swing traders will take action as soon as the indicators mentioned above confirm the likelihood of a price reversal. If, however, no reversal takes place and the price continues moving in the same direction, it becomes evident that the trading range has been breached. If that is indeed the case, traders should enter in the direction of the new trend, rather than waiting for a reversal. Such a situation can be observed on the daily chart below.
Swing trading is considered as an appropriate style for Bitcoin CFDs, because the time frame used (daily and weekly charts) and the larger price movement will be more than sufficient to compensate traders for the daily premium and the spread.
If you prefer to take a look at the bigger picture and thus, seek to utilize the largest time frames (weekly and monthly charts), then you are referred to as a position trader. As such, you will usually allow your trades to last from several weeks to several months.
Position traders base their decisions on the belief that Bitcoin will continue to gain value in the long run and take action mostly due to fundamental factors (the economic potential of the cryptocurrency, its inherent advantages over conventional currencies and so on) rather than technical (chart) patterns.
Daily price fluctuations are of no concern to position traders. They tend to view even the sharpest price drops as a chance to add to their trading positions. If they are convinced that the price has gone up to an unsustainable peak, they may consider taking profit on a certain part of their position (but they will hardly close the entire position).
Position trading is considered as not appropriate for Bitcoin CFDs, because of two reasons:
– if you hold CFDs on Bitcoin for too long, the premium you need to pay on a daily basis will weigh on your profitability and
– let us not forget the high risk associated with holding simulated Bitcoins on an exchange. In comparison, storing real Bitcoins under your control in a digital wallet is something else.