Momentum and Contrarian Trading in Crypto: Pros and Cons
In momentum trading, a trader buys assets when preparing for an uptrend and sells assets when their price is at an all-time high. In the Contrarian trading strategy, a trader goes against prevailing market sentiments.
Investors are generally long term. They buy and hold crypto assets in the hope that the price of the tokens in question will rise in the future. This is not the case with trading. Being a successful trader requires not only knowing the market inside out, but also devising smart strategies to make the most of price fluctuations.
In this article, we will focus on two distinct trading strategies, namely the Momentum and Contrarian strategy. While these strategies are not for the faint-hearted, both can be helpful with the correct application in the volatile cryptocurrency market. Let’s start!
This method dictates that a trader buys assets when preparing for an uptrend and sells assets when their price is at a high. The sale must be made before a reversal occurs. The basic principle behind Momentum Trading is to buy high and sell higher. This strategy is popular in both scalping and day trading. Even long-term traders often find this strategy quite effective.
Although momentum was invented in the 1990s and primarily used in the stock market, it has also been effective in cryptocurrencies. Indeed, cryptocurrencies do not contain any intrinsic value as such and the market is subject to many speculations. The volatility of cryptocurrencies makes them an ideal candidate for momentum trading. Momentum crypto traders expect crypto assets with a track record of good performance to perform well again.
There are two types of momentum trading – absolute and relative. Absolute traders analyze the historical performance of a crypto asset to determine its future price movements. On the other hand, relative traders measure crypto tokens against each other, trading the best performing tokens and avoiding the poorly performing ones.
The success of momentum trading always depends on three factors:
Period of time: Deadlines are key in this case. For an asset to have significant momentum, it must project the uptrend over multiple time frames. An asset performing with the same upward momentum within 15m, 30m, 1h, 4h and 24h timeframes is considered good.
Volatility: A successful momentum trader always knows how to exploit short-term price movements and asset volatility.
Volume: The 24-hour volume of an asset gives a good understanding of the price movement of an asset. High volumes refer to higher supply and demand. Whenever there is a high demand for an asset, it will eventually cause prices to rise. Traders must be smart enough to understand whale manipulation of the market while trying to analyze a particular asset.
Advantages of Momentum Trading
Disadvantages of Momentum Trading
The term contrary is derived from the word “contrary” which means opposite in nature, direction or meaning. As such, a contrarian trading strategy is when a trader goes against prevailing market sentiments. Simply put, this method allows trading in the opposite direction of the market. A trader will buy when the market sells, and vice versa.
For example, many traders like to trade a specific group of cryptocurrencies thinking that their prices will go up. A contrarian trader, in this case, will go against these traders hoping that when the market goes down he can take advantage of their fears.
The Contrarian approach to trading believes that the “herd instinct” that often takes over the direction of the market, is detrimental or completely contrary to a robust trading strategy. Billionaire Warren Buffet is a notable example of a contrarian investor. He summed up his approach to investing in one simple line and it is: “Be fearful when others are greedy, and greedy when others are fearful.”
Contrarian trading is not as easy as it looks. It takes rigorous discipline and patience to perform fundamental analysis and explore investment opportunities. Finding undervalued cryptocurrencies may not be so difficult in the current market scenario. However, the lack of intrinsic value in cryptocurrencies makes it difficult for contrarian traders, as they must measure the intrinsic value of an asset with pinpoint accuracy before zeroing in on it.
Trading is a game of patience. An impulsive trader is as good as a novice investor. Momentum and contrarian approaches to trading require discipline, method, and above all patience, which can be built up over time. However, with the volatility in the crypto space, a lot of money can be made if these strategies are used in the right way.
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