A Comprehensive Guide to Crypto Prop Trading
10 minutes read
13. 2. 2024
Are you curious about what traditional trading strategies can be used in the elusive world of crypto prop trading?
Do you find yourself wondering…
Crypto prop trading enables higher starting capital, reduced counterparty risk, and the ability to generate greater profits
There are many different strategies crypto prop traders can employ to grow their account
Volatility in crypto markets can lead to higher rewards but also higher risk, leaving traders subject to rapid swings in the price of assets
Crypto prop trading firms provide a variety of trading strategies for individuals to maximize profits without risking their own money, presenting an incredible opportunity for successful traders to test their ideas in the marketplace.
In this article, we consider some of the popular crypto trading strategies you might consider using at a crypto pop trading firm.
Crypto prop trading is emerging as a supercharged version of multi-asset trading at a traditional prop trading firm, where companies give traders access to starting capital to trade on their behalf and then split the profits. We are in the early stages of a new paradigm shift, brimming with opportunity.
However, this new opportunity comes with excitement and also challenges traders.
Crypto trading exceeds the scope and scale of trading in traditional markets because of market volatility, its 24/7 trading window, and widespread market inefficiencies and significant price dislocations. Crypto traders can execute various strategies any time at their own pace if they want to. A stark departure from the short hours of traditional financial markets.
Crypto prop trading firms also offer a wide array of trading strategies for traders to maximize their profits without risking their own capital.
Let’s take a look at some of the most common crypto prop trading strategies available to individual traders today, and see how they can use them to get the most out of crypto prop trading.
One of the popular trading styles often employed by traditional prop firms is ‘trading the news,’ a strategy that can also be beneficial for those who trade crypto to keep up-to-date with ongoing micro and macro trends in the industry. In traditional markets, prop firms or traders employing this strategy closely monitor news sources for information that could potentially impact the market. This could include economic data releases, corporate earnings reports, geopolitical developments, or regulatory announcements.
Similarly, trading the news at a crypto prop trading firm requires considering both micro and macro trends. For example, the Bitcoin halving that happens every 4 years or the recent ETF approvals are often priced into the market months, or even years before the event occurs. Savvy traders take advantage of these trends and deploy capital at the right time. Traders may also take advantage of new product releases or trading activities upon new token releases to generate gains. A common strategy to increase profits earned during bull and bear markets.
The volatile crypto market isn’t just impacted by events directly related to the digital asset industry but also by trends outside of the market. Smart crypto prop traders must keep abreast of the latest developments arising from the Federal Reserve, other financial markets, financial institutions, and the fate of the U.S. dollar, as these have historically had a knock-on effect on the price of cryptocurrencies. Alternatively, if a regulatory authority announcesstricter regulations on cryptocurrency exchanges, traders may anticipate a negative impact on market sentiment and decide to sell their holdings to avoid potential losses.
This is why the educational resources provided by crypto prop trading firms and other trading platforms are so important, as they help keep trade news top of mind. Along with obvious important factors like risk management, trading skills, awareness of trading instruments, and careful allocation of a firm’s capital in cryptocurrency trading, awareness of micro and macro trends may be most important.
Another popular strategy among crypto prop trading firms is some form of trend following. It is common to hear the term ‘cycle’ in crypto trading circles. This refers to the notion that roughly every 4 years, the crypto market goes through strong bullish and bearish periods. While other markets such as FX as commodities generally trend less frequently and remain range-bound as a norm, most crypto participants are attracted to crypto prop trading to take advantage of fast and trending conditions using third-party notional capital.
Trend following is a broad descriptor that takes many forms. When the market is trending higher with significant new inflows and fresh capital being injected into the asset class, simple trend following tools work well. It is common for crypto prop trading firms to see a large number of traders execute trend following strategies based on Moving Averages, Bollinger Bands, and even simple price-based market structure.
Crypto trends tend to be fast and aggressive. The benefit of using trend following systems is that they provider crypto prop traders with an entry in a market that does not offer a large amount of meaningful technical pullbacks.Additionally, until such a time that a counter-signal or a trend reversal signal is generated, it allows traders to justify holding their position to maximize the period of time where the market is trending. This is in stark contrast with shorter-term or more aggressive trading systems that require frequent rebalancing and much shorter holding periods. There are countless instances of crypto traders buying an instrument and selling it for a small gain, only to watch it go significantly higher and for longer. Trend following systems seek to ride these trending cycles without closing the position too early.
The difficulty with crypto trend following takes several forms. First, crypto prop trading firms typically have maximum daily loss limits. If a trend is particularly volatile or if the trend following system is being executed on a very fast-moving time frame, there is a risk that the trader exceeds the crypto prop trading firm’s daily risk limit even if the trend remains intact. Additionally, it is generally difficult to ascertain when a market is trending and where in the lifespan of the trend a given market is trading. Executing a trend following strategy in a mean-reverting market, or executing it at the end of a trend, may lead to losses.
Breakout’s crypto environment closely simulates live markets, featuring dynamic conditions mirroring real-time changes in spreads and order book depth.
Day trading is a medium frequency trading strategy that see trades executed, managed, and closed typically within a single trading day. Day trading is very popular in the crypto prop trading world as traders seek to capitalize on intraday moves on a large range of closely-correlated instruments which are being quoted 24/7.
Traders who adopt this strategy maintain a relentless focus on real-time fluctuations in cryptocurrency prices to reach their account gain target. Traders typically don’t hold positions overnight as their focus is on real-time fluctuations, and they must constantly assess a cryptocurrency’s performance to make effective trades.
This approach demands constant attention and rapid decision-making. Day traders must stay vigilant to changes in market sentiment and react swiftly to capitalize on favorable price movements. By executing a high volume of trades, even small price differentials can translate into substantial gains and better crypto payouts when aggregated over multiple trades throughout the day.
Swing trading is another strategy recommended by a crypto prop trading firm. Swing trading involves an in-depth study of technical indicators and trends in the value of a given cryptocurrency to identify the best time to buy in and the best time to sell. Swing traders typically operate on a longer timeline than day traders, often holding onto assets for weeks or months. Swing traders look to exit their positions at the optimal moment, and will often buy back in again after they deem the asset has finished its downward trend and is ready to bounce up once again.
Swing traders strategically enter positions when they anticipate an upward price movement, aiming to sell at peak prices. Conversely, they exit their positions when they foresee a downturn, seeking to capitalize on profits before the market reverses course. A common swing trading technique is. “buying the dip,” where they purchase assets during temporary price declines with the expectation of selling them later at a higher price. This strategy allows swing traders to capitalize on market fluctuations and optimize their account gain.
Overall, swing trading requires a combination of technical expertise, analytical skills, and market intuition. By mastering this strategy, traders and crypto prop trading firms can navigate the volatile crypto market with confidence and capitalize on lucrative trading opportunities over the medium to long term.
Momentum trading is another broad trading strategy that is popular in the crypto prop trading world.
Similar to trend following, traders focused on momentum are operating on the assumption that large technical breakouts or breakdowns may lead to additional large price moves in the same direction. In essence, momentum traders are betting that large market moves precede further large price moves. Large multi-week or even multi-month moves often start with a single breakout, and momentum traders are looking to capitalize on those large dislocations as early as possible.
At the same time, given the ability to long and short a range of instruments, using weakening momentum signals to short is also a popular trading strategy in crypto prop trading. In these cases, traders will typically look at a strong market and look for evidence of the momentum slowing down in order to trade a reversal.
There are a large number of momentum indicators, including RSI, MACD, Awesome Oscillator, OBV, and even price-based returns that can be used to measure increasing or decreasing momentum. Traders will often look for signs of weakening momentum in tandem with other factors such as sentiment, funding rates, and support/resistance in order to put on a reversal trade.
Like most trading strategies, the difficulty with momentum trading is knowing when to apply it. Executing momentum-based strategies in a mean-reverting market will mean buying high and selling low. Similarly, executing momentum-based reversal strategies in an overwhelmingly strong trend will often resolve in those reversal signals being extinguished, at the trader’s expense.
While there are a multitude of potential strategies open to the crypto prop trader like access to necessary capital, high-leverage trading, and a trading community at a crypto prop firm, the process is not without its challenges.
While the volatility of crypto markets can lead to higher rewards, it can also lead to higher risk, leaving traders subject to rapid swings in the price of a given asset. Popular examples of this are the Terra Luna Fiasco in 2022 or the collapse of the FTX exchange. These are events in the crypto industry that were hard to predict and can often affect profits generated.
And while regulatory clarity is increasing within the crypto industry as time goes on, there’s still a risk that traders might get locked out of selling a certain asset due to sudden law changes, or operational changes within the structure of a certain exchange platform. Again, this happened with the collapse of FTX, as Sam Bankman Fried utilized FTX users’ funds to use with his hedge fund Alameda Research. Therefore, crypto trading firms must be careful with what exchange they decide to use.
What’s more, the psychological impact of operating in high volatility can impact even the best of traders, leading to them recklessly chasing short-term gains or being swayed by the behavior of the herd. While proprietary trading firms providing traders with educational resources can help, it’s up to the trader to take advantage of the tools at your disposal. This is why crypto prop trading firms want individuals to go through an evaluation process to test the trader’s ability.
Ultimately, if there’s a take-home message to be imparted it is this: opportunities are rife for crypto prop traders at prop trading firms, but they must employ their chosen strategies very wisely. With a track record of proven strategies like trading the news, trend following, day trading, and swing trading, a proprietary trading firm is a wonderful opportunity for great traders.
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