As the second largest cryptocurrency in the world, Ethereum offers a bunch of benefits for its holders. What is the best Ethereum trading strategy that you can use?
The trend of cryptocurrency trading has intensified in recent years, especially after the pandemic started. Many investors are actively looking for new opportunities in order to generate extra income or diversify their portfolios. As the second largest cryptocurrency in the world, Ethereum or Ether (ETH) has been growing significantly. Whether you're a newbie or a veteran trader, Ethereum trading offers a variety of benefits that you surely don't want to miss.
Understanding How Ethereum Works
Back in 2015, a young innovator named Vitalik Buterin founded Ethereum. It is an open source, blockchain-based crypto platform that allows users to build any type of decentralized application by using codes known as smart contracts. These smart contracts are particularly designed to be highly accessible and able to run programs easily without being controlled by the government or other forms of authority.
The use of smart contracts is mainly what makes Ethereum different from Bitcoin's blockchain. Instead of only being used as a platform to buy and sell cryptocurrencies, Ethereum operates as a programmable blockchain, so it's able to build and manage new programs, tools, apps, DeFi, NFTs, and more.
See Also: Is Non-Fungible Token (NFT) Worth It?
Moreover, Ethereum has its own native token called Ether (ETH), which is a tradable digital currency that can be used for various purposes on the blockchain. Due to the rising popularity of Ethereum, the price of Ether also surged at an unbelievable pace in the past few years. In the beginning, the price of Ether was less than a dollar. Now, it has risen to $2930 and has reached an all-time high of $5000 last year.
Many experts believe that there’s still room to improve further. Some even predict that the price could grow by up to 400% in value.
How to Trade Ethereum
When it comes to Ethereum investments, there are several ways that you can choose based on your level of expertise and trading style. The first option is to buy and hold your ETH coins in a secure crypto wallet so you can sell them later at a higher price.
Secondly, you can trade ETH by using derivatives like Contract for Difference (CFD), options, and futures. If you trade with derivatives, you don't actually own the coins, but instead, only a contract that speculates the price.
Alternatively, you can also copy professional traders and use their strategies to earn profit. It can be an easy solution to trade, particularly for beginners who still don't have much knowledge about crypto trading. However, please know that this feature is not completely safe because even expert traders can lose too and their loss is basically your loss. That's why, if you want to start copy trading, you need to do it with caution and ensure that the option is suitable for your condition.
Regardless of what method you use to trade, the first thing that you need to do is to register in a reliable exchange. In this case, it's highly recommended to a regulated firm that has proven to be compliant with basic financial regulations. Trading on regulated exchanges can definitely minimize the risk of fraud and ensure that you won't get scammed.
See Also: Top 10 Crypto Exchange for Beginners
Ethereum Trading System
There are many trading strategies that you can use to trade Ethereum, one of the most powerful options requires you to use these two indicators:
- Moving Average Convergence Divergence (MACD): This is a popular momentum indicator that can be used to help traders spot the market's trend. It is suitable in almost any financial market in the world, including the crypto market.
- Money Flow Index (MFI): This technical indicator can measure the money flow into or out of a cryptocurrency based on price action and volume. In crypto trading, it is useful to measure buying/selling pressure and determine entry points.
Once you set up the indicators, your trading chart should look more or less like this.
Now, let's jump straight into the trading strategy. In this article, we're going to be using an example of a Buy trade. If you want to open a Sell trade, then you can use the same rules in reverse. Here is the step-by-step guide to help you get started:
- Wait until the MFI reading falls below 20.
An MFI reading of 20 or below basically indicates that the price is in the oversold territory. However, it's important to understand that MFI is not supposed to be used alone. You need other technical indicators like MACD to confirm the signal.
- Wait for the MACD histogram to move above 0.
The next step is to wait for the MACD histogram to be on the positive spectrum. This essentially confirms the previous signal we received from the MFI, that the bullish momentum is starting to build up. But even so, this piece of information is still not enough to place a position.
- Enter the market when the MACD is positive and the MFI reading breaks above 50.
For extra safety, you need to wait for the MFI reading to break above 50 while making sure that the MACD is still positive before buying the ETH. MFI reading above 50 indicates that there is an inflow of money into the cryptocurrency. In other words, it shows that smart money is starting to make its way into the market, presenting an excellent opportunity to take a profit.
- Place a Stop Loss below the previous swing low.
To manage the risk, place a protective stop loss close to the market price, specifically under the previous swing low. This is important to save your trade if a false breakout occurs. The stop loss will automatically kick you out of the market if the price moves against your favor and reaches a certain point.
- Exit the market when the MFI reading is above 80.
An MFI reading of 80 or above indicates that the price is entering an overbought condition. It means that the price might turn around at any second, so it's best to get out of the market before it happens.
How to Purchase Ethereum
One of the easiest ways to get your hands on Ethereum is to buy them on crypto exchanges. You can find ETH in most crypto exchanges these days, so you won't have any trouble buying it. You just need to make sure that the exchange provides the payment method that you prefer depending on the location you're in.
Apart from choosing an exchange to buy the cryptocurrency, you also need to pick an Ethereum wallet to store your coins. After that, you may need to complete KYC procedures as a part of identity verification. Then, you can make a deposit and start buying the ETH with your deposited funds.
Where to Store Ethereum
There are many reliable crypto wallets to store your Ethereum. Here are some recommendations to get you started:
- Metamask: An Ethereum wallet that lets you store and manage your ETH, allowing you to send and receive coins with ease.
- Trezor: This is one of the most popular Ethereum hardware wallets that offer high security and 2-factor authentication. Hardware wallets are usually considered safer in general as users get full control over their private keys. Apart from that, Trezor offers a bunch of special features like advanced cryptography and more.
- MyEtherWallet: One of the leading Ethereum wallets that allow users to access their assets, loans, and investments.
- Status: This is an Ethereum mobile browser token wallet, chat, and dApp platform that allows users to store and send their ETH safely.
- Coinbase Wallet: Another popular Ethereum wallet that's available for mobile phone users.
- uPort: This is an app that will give users an Ethereum address. This allows them to interact with other Ethereum holders and exchange information privately.
- Balance: A wallet that gives users access to their accounts in Open Finance while at the same time managing their tokens, loans, and investments.
- Brave: This is a fast, open source, privacy-focused platform that is integrated with BAT and ERC-20 tokens. It is available on both web and mobile browsers.
See Also: 7 Most Popular Ethereum Based Tokens
We can see that trading with Ethereum comes with a lot of considerable advantages, such as high potential returns, high accessibility, lower costs, and ease of use. On top of that, the rising popularity of dApps and DeFi recently might also cause a rise in the price of Ether, especially considering that Ethereum 2.0 will be released soon.
However, before you invest, please remember that trading with Ethereum is just as risky as with other cryptocurrencies. Ether can be highly volatile at times and picks up momentums extremely fast, so be prepared for big price movements every once in a while. Only trade with the money that you can afford to lose and do not forget to manage your risks.
Despite all the good qualities of Ethereum, its presence has been threatened by other blockchains that claim to "fix some drawbacks" famously associated with Ethereum. One of the so-called Ethereum killers is Solana. How is it compared to Ethereum? Learn further in "Is Solana the Next Ethereum?"