Momentum and contrarian trading in crypto: Pros and cons

Investors are usually in for the long run. 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. To be a successful trader, one must not only know the market inside out but also devise intelligent strategies to make the most out of price fluctuations.

In this article, we will focus on two distinct trading strategies namely, Momentum and Contrarian strategy. Although these strategies are not for the faint-hearted, both can be helpful with the correct application in the volatile cryptocurrency market. Let us begin!

This method dictates that a trader purchases assets when they are gearing up for an uptrend and sell the assets when their price is at the highest. The selling must be done before a reversal occurs. The core 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 predominantly used in the equities market, it has been effective in cryptocurrencies too. This is because cryptocurrencies do not contain any intrinsic value as such, and the market is prone to a whole lot of speculation. The volatility in cryptocurrencies makes them a perfect candidate for momentum trading. Momentum traders in crypto expect that crypto assets with a history of performing well will perform well again.

There are two types of Momentum trading - Absolute and Relative. Absolute traders analyse the historic performance of one crypto asset to ascertain its future price movements. On the other hand, relative traders measures crypto tokens compare with each other, trading the better performing tokens and avoiding those that are poorly performing.

Time Period: Timeframes are essential in this case. For an asset to have significant momentum, it must project the uptrend in multiple timeframes. An asset performing with the same upward momentum in timeframes 15m, 30m, 1hr, 4hr, and 24hr is believed to be good.

Volatility: A successful momentum trader always knows how to exploit short-term price movements and asset volatility.

Volume: The 24 hr 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 high demand for an asset, it will eventually lead to a hike in price. Traders should be intelligent enough to understand market manipulation by whales while trying to analyse a particular asset.

Highly profitable over brief time periods

Enables traders to utilize volatility in the market

Relying on Technical Analysis does not leave much room for emotions.

Higher trading frequency resulting in more trade fees may affect profitability eventually.

Unexpected trend reversals.

It is only profitable when the market is bullish.

It requires intensive analytics as the strategy is highly time sensitive.

The term contrarian 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 the prevailing market sentiments. In simple words, this method allows for trading in the opposite direction of the market. A trader will buy when the market sells, and vice versa.

For instance, many traders like trading a specific group of cryptocurrencies believing that their prices will go up. A contrarian trader, in this case, will go against such traders hoping that when the market goes down, he will be able to cash in on their fears.

The Contrarian approach to trading believes that the 'herd instinct' which often takes control of the direction of the market, is detrimental or quite 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 that is, "Be fearful when others are greedy, and greedy when others are fearful."

Contrarian trading is not as easy as it may look. It requires rigorous discipline and patience to conduct fundamental analysis and explore opportunities to invest. Finding undervalued cryptocurrencies may not be that difficult in the present market scenario. However, the lack of intrinsic value in cryptocurrencies makes it difficult for contrarian traders because they need to measure the intrinsic value of an asset with razor-sharp precision before zeroing in on it.

Trading is a game of patience. An impulsive trader is as good as a novice investor. The momentum and contrarian trading approaches require discipline, method, and above all patience, which one can build 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.