How momentum trading works in crypto

Cryptocurrency is known for its volatile nature, and it is one of the biggest must-learn lessons in the industry. With this, momentum trading is used as a solution to avoid volatility at most.

Momentum trading is used by a lot of crypto traders and investors when buying an asset with an uptrend price. It is also to sell them as soon as the price of the asset loses momentum and goes down in value. 

Momentum trading crypto is a good move to consider especially at a time when almost every coin is on a downward trend. Trading comes with a lot of risks, but then it also gives traders more room to work with along with a lot of control over possible failure points.

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What momentum trading does in crypto

What is momentum trading strategy? It is is a style used by investors to ensure that they will get better returns from their crypto investments. This is a move that will yield better investment results for those who want to try and handle their crypto well.

The purpose of momentum trading is to assess the strength of a certain asset’s trend and determine if it is good to buy or not. While the price is rising, it is best to sell it at a set peak price which can result in a good transaction that will help you keep a stable value in the long run.

However, the rationale why momentum is best strategy for most traders is that they can see if there is a good amount of driving force to create a price move. This will create a ripple effect of whether the value remains the same or if it will go in the same direction for some time.

For instance, if Bitcoin is moving at an uptrend price of $54,000, then it is safe to assume that it is still at an uptrend price. A good move for a trader is to buy and catch the wave so they can make a profit of at least $56,000 before the trend crashes. 

Key factors to consider in momentum trading

Momentum trading is not that easy but can lead to bigger gains for a lot of traders. It takes a lot of practice to master the pattern, and the first job for any trader is to see how the trend is going for a certain crypto before going for a momentum investment.

This is needed to avoid big risks that address the market volatility as a whole. Price fluctuations also play a huge role in this matter since you need to deal with a lot of unexpected momentum breaks in a month or two.

Here are two key factors to consider in momentum trading:

Volatility

Volatility is the biggest factor that can affect momentum trading crypto plans. Traders mostly choose volatile markets since they can gain from the short-term ups and downs of the trend. This is why volatility matters for traders to know when is the right time to buy, sell, or trade.

Timeframe analysis

Momentum day trading strategies are always connected to the timeframe that a trader picks. The trend only makes sense at a given time, which means there is a window for traders to make the move. The price can increase on an hourly chart but can get back to a swing as it declines as well.

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Two strategies in momentum trading

Before trading, it is easy to expect that you will need a plan to ensure that you can get the best profits. This is why learning how to use a momentum based trading strategy is a must.

Momentum trading crypto can be a challenging move to make the most of your assets, but it is also a rewarding way to consider your options and make a lot of good trading decisions as well. Here are two strategies in momentum trading that can help you get more value on your assets:

Relative momentum trading 

This move is seen as a way to make a comparison between assets based on their performance. The trader will choose to buy the asset that has been doing better than the other rather than to go for an underperforming asset. This is seen as the best momentum strategy as it yields better results.

For starters, the hype of non-fungible tokens (NFTs) made it clear that it was ready to take over Bitcoin (BTC) and other peers in the long run. However, it was not a good move as most traders went on to keep their Bitcoin. In April 2021, the crypto regained its dominance and even went for a huge all-time high in the year.

Absolute momentum trading

Absolute momentum trading is more on analysing the price of a crypto and comparing the current rate to the previous months where it may have either posted an all-time high or all-time low. This means that the trader will only predict the actual pace of the coin before making a trade.

This is known as the momentum based trading strategy since it considers the full momentum of the actual coin than other strategies. This is why it is easier to calculate future trends with this one than to compare prices.

Timing momentum trades

Momentum trades cannot be made even if you have a momentum trading crypto plan until you know how to time your moves well. This is why it is a must for you to know some indicators that can help you determine when to make the move for a momentum trade.

Here are two factors in timing momentum trades:

Average directional index

The average directional index is a simple way to check the momentum since you just need to check the price for a certain period. It reflects the trend on a graph where the line fluctuates from 0 to 100. 

If the reading is set below 30, then it means the price is moving sideways. A break above the 30 mark means the price is trending. The higher the ADX goes, the stronger the trend is in a set direction, which can tell if it is good to make a trade or not.

Relative strength index

The relative strength index is a popular indicator when it comes to the price change but is more focused on the size and rate of the change. The RSI line is plotted on a chart where the price action fluctuates from 0 to 100. 

If the RSI goes below zero, then it is at an oversold level, which means that the downtrend is set to reverse. However, an RSI above 70 means that the market is en route to an overbought level. This means that the trend is set to go for a downtrend after a short upward burst.

Momentum trading is a huge part of maintaining your assets in a given time. This is why it is a must for a lot of crypto users, traders and investors to learn how they can make the most of their coins. That shows a lot of value for momentum trading as a huge principle that can affect the flow of coins in the crypto market as well.

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Words: Paul Daniel Flores