This post covers the basics of cryptocurrency trading. It will help you get familiar with basic terms, understand different ways to “read” the market and its trend, make a trading plan, and learn how to execute that plan on cryptocurrency exchanges.
Cryptocurrency Trading Summary
Many investors like to trade cryptocurrency because it’s an extremely volatile asset. If you can time the market right, trading crypto can give you much higher returns than traditional investments.
Cryptocurrency trading is the act of buying low and selling high. Unlike investing, which means holding cryptocurrency for the long run, trading deals with trying to predict price movements by studying the industry as a whole and price graphs in particular.
There are two main methods people use to analyze cryptocurrencies price — fundamental analysis and technical analysis. Successful trading requires a lot of time, money and effort before you can actually get good at it.
In order to trade Bitcoins you’ll need to do the following:
- Open an account on a Bitcoin exchange (e.g. eToro, Kraken, Binance, CEX.io)
- Verify your identity
- Deposit money to your account
- Open your first position on the exchange (i.e. buy or short sell)
That’s Bitcoin trading in a nutshell. If you want a really detailed explanation, keep on reading.
- Bitcoin trading vs. investing
- Trading types
- Analysis Methods — Fundamental vs. Technical
- Bitcoin trading terms
- How to read price charts
- What are the most common trading mistakes?
1. Bitcoin Trading vs. Investing
To start with the similarities, both investors and traders want to make a profit. Their end goal is the same but their means to that end are quite different. Investors generally buy securities to hold for a long time, hoping that their value will appreciate over time. Traders, on the other hand, like to take advantage of rising and falling markets to buy and sell during a shorter period, generally taking smaller but more frequent profits than investors.
2. Trading Methods
While all traders want the same thing, they practice different methods to get it. Let’s review some examples of popular trading types:
Day trading is the process of speculating on financial products and assets over the span of a single day. Day traders will often buy and sell any number of financial instruments in the span of several hours, or less, and profit from speculating on short-term price movements. Day traders stay up-to-date on what moves markets in the short term and can place hundreds of orders in a single day to profit in the long run.
Scalping is a trading strategy geared towards profiting from minor price changes in a stock’s price. Traders who implement this strategy place anywhere from 10 to a few hundred trades in a single day with the belief that small moves in stock price are easier to catch than large ones; traders who implement this strategy are known as scalpers. Many small profits can easily compound into large gains if a strict exit strategy is used to prevent large losses.
Swing trading is a speculative trading strategy in financial markets where a tradable asset is held for one or more days in an effort to profit from price changes or ‘swings’. A swing trading position is typically held longer than a day trading position, but shorter than buy and hold investment strategies that can be held for months or years. Profits can be sought by either buying an asset or short selling. Momentum signals (e.g., 52-week high/low) have been shown to be used by financial analysts in their buy and sell recommendations that can be applied in swing trading.
3. Analysis Methods: Fundamental vs. Technical
Can I predict Bitcoin’s price movement?
The short answer is that no one can really predict what will happen to the price of Bitcoin. However, some traders have identified certain patterns, methods, and rules that allow them to make a profit in the long run. No one exclusively makes profitable trades, but here’s the idea: at the end of the day, you should see a positive balance, even though you suffered some losses along the way.
People follow two main methodologies when they analyze Bitcoins (or anything else they want to trade, for that matter) — fundamental analysis and technical analysis.
The reason you can apply fundamental analysis to almost any asset is because of its focus on underlying value, which plays such a critical role in investment decisions. Fundamental analysis encompasses a wide range of disciplines, techniques, and concepts; but not all them are appropriate for every asset. It’s a matter of picking which tools to use for which asset class and why. For example, if you’re an equity analyst, you might choose to examine an earnings report: a company’s balance sheet, share price, earnings per share (EPS), and price-to-earnings (P/E) ratio, along with a host of other metrics and variables. But if you’re a foreign exchange (forex) trader, you’ll look at entirely different factors, like central bank data that helps to determine the state of a particular nation’s economy.
But cryptocurrencies are not issued by a corporation, so how can you use fundamental analysis to arrive at the underlying value of a crypto asset? As with any asset, you would look at the surrounding factors that could influence it. For example, you could evaluate the state of the cryptocurrency sector, the market as a whole, the domestic and global economic environment, supply and demand, and the competitive landscape, to name a handful of potential indicators.
The technical analysis is a branch of study used to anticipate the future direction of quotes by studying historical market data. To achieve this, this technique makes use of data referring to the prices, volumes and open interest of a market.
This means that the Technical analysts use trading data along with mathematical indicators to make their trading decisions.. The result of these formulas is automatically reflected in a graph that is updated in real time, which will be interpreted by the traders
Thanks to the technical analysis it is possible to predict the direction of the quotes, which has made it one of the main tools for predicting the behavior of financial markets. The latter is especially true when technical analysis is combined with fundamental analysis. The union of both types of analysis allows traders to have a more complete assessment of the reality of the market. Thanks to this, traders can obtain a clear advantage when carrying out trades with benefits.
So, which methodology is better?
Well, as I already said in the previous chapter, no one can accurately predict the future. From fundamental perspective, a promising technological achievement might end up as a flop, and from technical perspective, the graph just doesn’t behave as it did in the past.
The simple truth is that there are no guarantees for any sort of trading. However, a healthy mix of both methodologies will probably yield the best results.
4. Understanding Bitcoin Trading Terms
Let’s continue to break down some of the confusing terms and statistics you’ll encounter on most of Bitcoin and crypto exchanges:
Trading Platforms vs. Brokers vs. Marketplaces
Bitcoin trading platform are online sites where buyers and sellers are automatically matched. Note that a trading platform is different from a Bitcoin broker, such as Coinbase.
Unlike trading platforms, brokers sell you Bitcoin directly and usually for a higher fee. A trading platform is also different from a marketplace such as LocalBitcoins, where buyers and sellers communicate directly with each other, in order to complete a trade.
The order book
Simply put, the order book is the list of all open orders that are currently available on an exchange for a specific trading pair. An open order is essentially another investor saying they are willing to buy or sell an asset at a specific price.
An example of an order book could be for the BTC/USD trading pair. The order book will have the corresponding buy and sell orders that customers have placed on the exchange to either buy or sell Bitcoin for US Dollars.
In this case, the price of Bitcoin is using USD as the quote currency. That means the price of Bitcoin would be in terms of USD on the order book. For example, there could be a buy order to buy Bitcoin at the price of 5,000 USD on the order books.
Exchanges will often have multiple trading pairs. That way you can buy or sell a variety of different assets. Instead of only having a BTC/USD pair, they may also have ETH/USD, LTC/USD, and XRP/USD trading pairs. These trading pairs would allow you to buy or sell Ethereum, Litcoin, and XRP for USD on the exchange.
Some exchanges have as many as hundreds of different trading pairs.
Understanding What Determines Bitcoin’s Price
Unlike investing in traditional currencies, bitcoin is not issued by a central bank or backed by a government; therefore, the monetary policy, inflation rates, and economic growth measurements that typically influence the value of currency do not apply to bitcoin. Contrarily, bitcoin prices are influenced by the following factors:
- The supply of bitcoin and the market’s demand for it
- The cost of producing a bitcoin through the mining process
- The rewards issued to bitcoin miners for verifying transactions to the blockchain
- The number of competing cryptocurrencies
- The exchanges it trades on
- Regulations governing its sale
- Its internal governance
Volume, or trading volume, is the number of units traded in a market during a given time. It is a measurement of the number of individual units of an asset that changed hands during that period.
Each transaction involves a buyer and a seller. When they reach an agreement at a specific price, the transaction is recorded by the facilitating exchange. This data is then used to calculate the trading volume.
A market order is a request by an investor — usually made through a broker or brokerage service — to buy or sell a cryptocurrency at the best available price in the current market.
It is widely considered the fastest and most reliable way to enter or exit a trade and provides the most likely method of getting in or out of a trade quickly. For many large-cap liquid cryptocurrency, market orders fill nearly instantaneously.
It allows you to buy or sell Bitcoin at a specific price that you decide on. In other words, the order may not be entirely fulfilled, since there won’t be enough buyers or sellers to meet your requirements.
Let’s say that you place a limit order to buy five Bitcoins at $30,000 per coin. Then you could end up only owning 4 Bitcoins because there were no other sellers willing to sell you the final Bitcoin at $30,000. The remaining order for 1 Bitcoin will stay there until the price hits $30,000 again, and the order will then be fulfilled.
A sell–stop order is an instruction to sell at the best available price after the price goes below the stop price. A sell–stop price is always below the current market price.
For example, if an investor holds a cryptocurrency currently valued at $5.000 and is worried that the value may drop, he/she can place a sell–stop order at $4.000. If the share price drops to $4.000, the broker sells the cryptocurrency at the next available price. This can limit the investor’s losses or lock in some of the investor’s profits (if the stop price is at or above the purchase price).
Maker and Taker fees
Other terms that you may encounter when trading are maker fees and taker fees. Personally, I still find this model to be one of the more confusing ones, but let’s try to break it down.
Exchanges want to encourage people to trade. In other words, they want to “make a market.” Therefore, whenever you create a new order that can’t be matched by any existing buyer or seller, i.e. a limit order, you’re basically a market maker, and you will usually have lower fees.
Meanwhile, a market taker places orders that are instantly fulfilled, i.e. market orders, since there was already a market maker in place to match their requests. Takers remove business from the exchange, so they usually have higher fees than makers, who add orders to the exchange’s order book.
For example, perhaps you put a limit order in to buy one Bitcoin at $20,000 (at most), but the lowest seller is only willing to sell at $21,000. Then you’ve just created a new market for sellers who want to sell at $20,000.
So whenever you place a buy order below the market price or a sell order above the market price, you become a market maker.
Using that same example, perhaps you place a limit order to buy one Bitcoin at $22,000 (at most), and the lowest seller is selling one Bitcoin at $21,000. Then your order will be instantly fulfilled. You will be removing orders from the exchange’s order book, so you’re considered a market taker.
5. Reading Price Charts
Now that you’re familiar with the main trading terms, it’s time for a short intro into reading price graphs.
A candlestick chart (also called Japanese candlestick chart) is a style of financial chart used to describe price movements of a security, derivative, or currency. Each “candlestick” typically shows one day, thus a one-month chart may show the 20 trading days as 20 candlesticks. Candlestick charts can also be built using intervals shorter or longer than one day.
It is similar to a bar chart in that each candlestick represents all four important pieces of information for that day: open and close in the thick body; high and low in the “candle wick”. Being densely packed with information, it tends to represent trading patterns over short periods of time, often a few days or a few trading sessions.Candlestick chart of EUR/USD currency pair on daily timeframe in MetaTrader 5 trading platform.
Candlestick charts are most often used in technical analysis of equity and currency price patterns. They are visually similar to box plots, though box plots show different information.
Bull and Bear markets
A bull market is a market that is on the rise and where the conditions of the economy are generally favorable. A bear market exists in an economy that is receding and where most stocks are declining in value. Because the financial markets are greatly influenced by investors’ attitudes, these terms also denote how investors feel about the market and the ensuing economic trends.
A bull market is typified by a sustained increase in prices. In the case of cryptocurrency markets, a bull market denotes a rise in the prices of cryptocurrency. In such times, investors often have faith that the uptrend will continue over the long term.
By contrast, a bear market is one that is in decline. A market is usually not considered a true “bear” market unless it has fallen 20% or more from recent highs. In a bear market, cryptocurrency prices are continuously dropping. This results in a downward trend that investors believe will continue; this belief, in turn, perpetuates the downward spiral.
Support and Resistance levels
Support is a price level where a downtrend can be expected to pause due to a concentration of demand or buying interest. As the price of cryptocurrency, demand for the cryptocurrency increases, thus forming the support line. Meanwhile, resistance zones arise due to selling interest when prices have increased.
Once an area or “zone” of support or resistance has been identified, those price levels can serve as potential entry or exit points because, as a price reaches a point of support or resistance, it will do one of two things — bounce back away from the support or resistance level, or violate the price level and continue in its direction — until it hits the next support or resistance level.
The timing of some trades is based on the belief that support and resistance zones will not be broken. Whether the price is halted by the support or resistance level, or it breaks through, traders can “bet” on the direction and can quickly determine if they are correct. If the price moves in the wrong direction, the position can be closed at a small loss. If the price moves in the right direction, however, the move may be substantial.
6. Trading Mistakes
Risking More than You Can Afford to Lose
The biggest mistake you can make is to risk more money than you can afford to lose. Take a look at the amount you feel comfortable with. Here’s the worst-case scenario: you’ll end up losing it all. If you find yourself trading above that amount, stop. You’re doing it wrong.
Trading is a very risky business. If you invest more money than you’re comfortable with, it will affect how you trade, and it may cause you to make bad decisions.
Diversify: Never Put All Your Eggs In One Basket
This can be hard if you only believe in one cryptocurrency. However, you should try to diversify your portfolio anyway. You can invest 80% in the coin you strongly believe in and 20% in another coin.
Try not only diversify coin but also the underlying technology of each coin. For example, if you invest in Bitcoin you might want to look for another cryptocurrency that doesn’t use Proof-of-work.
Making trading decisions based on emotions
The saying “never make a decision when you’re emotional” is applicable and helpful in many aspects, including bitcoin trading. This is truly evident, particularly when BTC prices go overly high.
Some traders let their fear of missing out (FOMO) drive them to buy bitcoin when there’s a price dip and then HODL their coins until the market price rises — or never again. Others sell bitcoin when there’s a surge in price, hoping to earn more from even higher rates. But when the prices decline all of a sudden, they’ll feel regretful and frustrated.
Emotions might be an important factor when making almost each of our daily decisions. But don’t let that get the better of you, especially when your crypto funds are at stake!
Always Learn From Your Trading Mistakes
Some CryptoCurrency trading Tips and Safety rules for beginner investors. No one is perfect and no one makes profit on every single trade.
However, always try to get better results and ask yourself if you could have done anything to improve the result. Don’t make changes to your strategy all the time but if you see that the same mistake frequently comes up then you need to make a change.
Not Having a Plan
Another mistake people make when starting out with trading is not having an action plan that’s clear enough. In other words, they don’t know why they’re entering a specific trade, and more importantly, when they should exit that trade. So clear profit goals and stop-losses should be decided before starting the trade.
Reduce Emotions And Stay With Your Strategy
Don’t change your strategy because not everything went as expected in every trade. Set a strategy and follow it. Re-evaluate your strategy if you see too many mistakes. Don’t panic sell, don’t FOMO and don’t be greedy.
If you only invest what you can afford to lose and you diversify there’s no reason for such behavior as panic sell off and similar. Read more about different Cryptocurrency Trading Tips and cryptocurrency trading strategies in our article.
We covered a lot of ground about Bitcoin trading, but I have to warn you: the majority of people who start trading Bitcoin stop after a short while, mostly because they don’t successfully make any money.
Here’s my opinion, if you want to be successful at trading, you’ll have to put in a significant amount of time and money to acquire the relevant skills, just like any other venture. If you want to get into trading just to make a quick buck, then perhaps it’s better to just avoid trading altogether.
There’s no such thing as quick, easy money — without a risk or downside at the other end. However, if you’re committed to learning how to become a professional Bitcoin trader, take a look at our resource section below. These resources will help you get the best possible tools and continue your education.
Bitcoin Trading Resource Section
Cointelligence Academy — An A to Z trading course by Cointelligence and Mati Greenspan
Algorithmic trading and technical analysis — Everything about technical analysis and programming trading bots. No prior knowledge needed
TradingView — The most popular trading software around
Coinigy — Another Bitcoin trading software