CryptoCurrency Finance

Understanding The Compound Trading Strategy In Crypto

How to understand compound trading strategy for crypto

OK, so I’ve been eyeing up compound trading for a while and I’ve finally taken the plunge. Today I placed my first trade on Binance to start my compound trading journey from 1k to… Well, whatever I can get to.

I’m planning on documenting this on this website, so if you’re interested in how this progresses, keep an eye out or follow us on Twitter.

It’s all because of a kinda friendly joshing I had from a buddy on a WhatsApp group I’m in. We’re a casual bunch of crypto traders, and until now I had decided to focus on HODLing coins rather than actual trading.

However, there have been some crazy gains of late, even during the 2021 low season from May til about August. So I’ve decided to take what I’ve learnt and put it into action. And compound trading is the way to do it.

What is compound trading?

To compound is to add something on top of something else. So, compound trading is the practice of taking an investment sum, in my case $1000, and aim to grow it by a small percentage with incremental trades.

In theory, each time you complete a trade you have more to invest. Until, hopefully, you hit your financial target.

Of course, not every trade will be successful, so you can expect to lose some trades. But hopefully you win more than you lose. That’s the theory anyway.

Compound trading can be done on any time frame, although it’s usually done as day trading (all trades completed within one day), or swing trading (usually over the course of a few days).

I’m going to be swing trading as I have other commitments – so I will be setting my sell targets within a few days.

The strategy behind compound trading

Like any financial investment, there is a high degree of risk involved in crypto trading. So it’s super important to analyse the market. You don’t want to be trading blindly, and you want to identify opportunities as they arise.

What you’re looking for is an entry.

This is usually when a price hits a support level, makes it stick and begins to climb again.

I’m going to be longing all my trades, which basically means I’m only picking price action that is moving upwards.

To short a trade can also be useful, which is when the price goes down and you sell out and buy back in for a profit. But, I’ll be staying away from that (at the start anyway).

There are a number of ways to identify when a price is good to continue.

This article on swing trading by my trading mentor Joe Black sums it up best.

To sum it up: try to spot where the price finds support, try to get your buy in at the support level and identify the next level for the sell.

Always plan your strategy when compound trading

Charting for compound trading

I use Trading View to run the charts for my trades.

On the daily, I place down the Fibonacci retracement chart to see the ranges of movement expected.

I will then draw trend lines on recent historical support and resistance levels.

You should then be able to see if your price action is moving towards a specific point, or if it is struggling to make support. By drawing these lines you can normally make sense of potential movement, although there is more to it than this.

You should also check a few other indicators including:

  • The moving average – or MA. I like to wait for the 5 day MA to be the dominant line, usually pointing upwards.
  • RSI – if this is under 70, this is usually a sign that there is plenty on the tank.
  • Bollinger bands on the 1hr or 4hr can be useful to show the volume of trades going through. If the bands are far apart and the price action is heading towards the top line, this can be a useful indicator

Everyone has their own favourite analysis tools and strategies.

I also like to use Twitter as a sentiment analysis tool. By following trusted traders you can get some good tips on where price action is going and if people are generally bullish or not.

I like to follow ShardiB, Lisa Edwards, Kaleo, The Wolf of All Streets, CryptoMichael, DYOR.net and probably loads more… And keep an eye out for my new crypto based project over at Playboy Cartel.

Accounting for loss in compound trading

I mentioned before about the whole win some/lose some in crypto trading. The best way to manage this, especially if you’re using Binance, is to use the OCO (one cancels the other) order.

When you enter a trade, you should always set your sell target.

With Binance, you can also set a stop loss in case the price drops down. The best idea is to identify a level just below the support where you are comfortable exiting the trade if it all goes down the pan.

Personally, I will find the lowest price point since the support was established. Let’s say I’ve identified that Ethereum is sitting comfortably on $3100, and the price is moving between $3100-3300, but I’m hoping to sell at 4000.

But, if the price drops to $3050, I might consider that support has been lost and I will cash out of my position.

This is totally just as an example, and you should make sure to identify both your sell and your stop loss levels before you enter a trade.

Your strategy is your strategy

Only you know how much you can afford to trade with, and only you know how you can trade. Always DYOR (do your own research) and make sure to read up about trading if you’re planning to do swing trading or compound trading.

This article is only for information and IS NOT financial advice. I am not a qualified financial advisor, so please seek additional information before you invest in crypto.

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