Cryptocurrency Trading Guide for Beginners
This post will cover 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 to learn how to execute that plan on the cryptocurrency Exchanges. Finally, we will go over some common trading mistakes.
Cryptocurrency Trading vs. Investing:
The first thing we want to do before we dive deep into the subject is to understand what Cryptocurrency trading is, and how is it different from investing in Cryptocurrency. When people invest in Cryptocurrency, it usually means that they are buying Cryptocurrency for the long term. In other words, they believe that the price will ultimately rise, regardless of the ups and downs that occur along the way. Usually, people invest in Cryptocurrency because they believe in the technology, ideology, or team behind the currency.
Thus, Cryptocurrency investors tend to HODL the currency for the long run (HODL is a popular term in the Cryptocurrency community that was actually born out of a type of the word “hold”—in an old 2013 post in the BitcoinTalk forum). Cryptocurrency traders, on the other hand, buy and sell Cryptocurrency in the short term, whenever they think a profit can be made. Unlike investors, traders view Cryptocurrency as an instrument for making profits. Sometimes, they don’t even bother to study the technology or the ideology behind the product they’re trading.
Having said that, people can trade Cryptocurrency and still care about it, and many people out there invest and trade at the same time.
As for the sudden rise in popularity of Cryptocurrency trading – there are a few reasons for that. First, Cryptocurrency is very volatile. In other words, you can make a nice profit if you manage to correctly anticipate the market. Second, Unlike traditional markets, Cryptocurrency trading is open 24/7.
Most traditional markets, such as stocks and commodities, have an opening and closing time. With Cryptocurrency, you can buy and sell whenever you please. Finally, Cryptocurrency’s unregulated landscape makes it relatively easy to start trading—without the need for long identity-verification processes.
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: This method involves conducting multiple trades throughout the day, and trying to profit from short-term price movements. Day traders spend a lot of time staring at computer screens, and they usually just close all of their trades by the end of each day.
Scalping: This day-trading strategy is becoming popular lately. Scalping attempts to make substantial profits on small price changes, and it’s often referred to as “picking up pennies in front of a steamroller.” Scalping focuses on extremely short-term trading, and it’s based on the idea that making small profits repeatedly limits risks and creates advantages for traders. Scalpers can make dozens—or even hundreds—of trades in one day.
Swing trading tries to take advantage of the natural “swing” of the price cycles. Swing traders try to spot the beginning of a specific price movement and enter the trade then. They hold on until the movement dies out, and take the profit. Swing traders try to see the big picture without constantly monitoring their computer screen. For example, swing traders can open a trading position and hold it open for weeks or even months until they reach the desired result.
Fundamental vs. Technical:
Can I predicted Bitcoin’s price movement? The short answer is that no one can really predict what will happen to the price of Cryptocurrency. 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 Cryptocurrency’s (or anything else the want to trade, for that matter): fundamental analysis and technical analysis.
Tries to predict the price by looking at the big picture. In Cryptocurrency, for example, the fundamental analysis evaluates Cryptocurrency’s industry, news about the currency, technical developments of Cryptocurrency (such as the lightning network), regulations around the world, and any other news or issues that can affect the success of Cryptocurrency. This methodology looks at Cryptocurrency’s value as a technology (regardless of the current price) and at relevant outside forces, in order to determine what will happen to the price. For example, if China suddenly decides to ban Cryptocurrency, this analysis will predict a probable price drop.
Tries to predict the price by studying market statistics, such as past price movements and trading volumes. It tries to identify patterns and trends in the price, and based on these deduce what will happen to the price in the future. The core assumption behind Technical analysis is thus: Regardless of what’s currently happening in the world, price movements speak for themselves, and tell some sort of a story that helps you predict what will happen next.
So, which methodology is better? Well, as we already said in the previous chapter, no one can accurately predict the future. From a fundamental perspective, a promising technological achievement might end up as a flop, and from a 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.
Understanding Cryptocurrency Trading Terms:
Now, let’s continue to break down some of the confusing terms and statistics you’ll encounter on most of the Cryptocurrency exchanges:
What are Cryptocurrency exchanges? Cryptocurrency exchanges are online sites where buyers and sellers are automatically matched. Note that an exchange is different from a Cryptocurrency broker, such as Coinmama. Unlike Cryptocurrency exchanges, Cryptocurrency brokers sell you Cryptocurrency directly and usually for a higher fee. An exchange 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
The complete list of buy orders and sell orders are listed in the market’s order book, which can be viewed on the exchange. The buy orders are called bids, since people are bidding on the prices to buy Cryptocurrency. The sell orders are called asks, since they show the asking price that the sellers request.
Whenever people refer to Cryptocurrency’s “price”, they are actually referring to the price of the last trade conducted on a specific exchange. This important distinction occurs because, unlike US dollars for example, there is no single, global Cryptocurrency price that everyone follows. For instance, Cryptocurrency’s price in certain countries can be different from its price in the US, since the major exchanges in these countries include different trades. Note: Next to the price, you will sometimes also see the terms high and low. These terms refer to the highest and lowest Cryptocurrency prices in the last 24 hours.
The volume stands for the number of overall Cryptocurrencys that have been traded in a given timeframe. Volume is used by traders to identify how significant a trend is; Significant trends are usually accompanied by large trading volumes, while weak trends are accompanied by low volumes. For example, a healthy upward trend will be accompanied by high volumes when the price rises and low volumes when the price declines. If you are witnessing a sudden change of direction in the price, experts recommend checking how significant the trading volume is, in order to determine if it’s just a minor correction or the beginning of an opposite trend.
Market or instant order
This type of orders will be instantly fulfilled at any possible price. You only set the amount of Cryptocurrencys you wish to buy or sell and order the exchange to execute it immediately. The exchange then matches sellers or buyers to meet your order, respectfully. Once the order is placed, there is a good chance that your order will not be matched by a single buyer or seller, but rather by multiple people, at different prices. For example, let’s say you put a market order to buy five Cryptocurrencys. The exchange is now looking for the cheapest sellers available. The order will be completed once it accumulates enough sellers to hand over five Cryptocurrencys. Depending on sellers availability, you might end up buying three Cryptocurrencys at one price, and the other two at a higher price. In other words, in a market order, you don’t stop buying or selling Cryptocurrencys until the amount requested is reached. With market orders, you may end up paying more or selling for less than you intended, so be careful.
Allows you to buy or sell Cryptocurrency 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 Cryptocurrencys at $10,000 per coin. Then you could end up only owning 4 Cryptocurrencys because there were no other sellers willing to sell you the final Cryptocurrency at $10,000. The remaining order for 1 Cryptocurrency will stay there until the price hits $10,000 again, and the order will then be fulfilled.
Lets you set a specific price that you want to sell at in the future, in case the price drops dramatically. This type of order is useful for minimizing losses. It’s basically an order that tells the exchange the following: If the price drops by a certain percentage or to a certain point, I will sell my Cryptocurrencys at the preset price, so I will lose as little money as possible. A stop-loss order acts like a market order. In other words, once the stop price is reached, the market will start selling your coins at any price until the order is fulfilled.
Maker and Taker fees
Other terms that you may encounter when trading on exchanges 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 the 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 Cryptocurrency at $10,000 (at most), but the lowest seller is only willing to sell at $11,000. Then you’ve just created a new market for sellers who want to sell at $10,000. 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 Cryptocurrency at $12,000 (at most), and the lowest seller is selling one Cryptocurrency at $11,000. 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.
Reading Price Charts:
Now that you’re familiar with the main Cryptocurrency exchange terms, it’s time for a short intro into reading price graphs.
A very widely used type of price graph, Japanese candlesticks are based on an ancient Japanese method of technical analysis, used in trading rice in the 1600s. Each “candle” represents the opening, lowest, highest, and closing prices of the given time period. Due to that, Japanese Candlesticks are sometimes referred to as OHLC graph (Open, High, Low, Close). Depending on whether the candle is green or red, you can tell if the closing price of the timeframe was higher or lower than the opening price. If a candle is green, it means that the opening price was lower than the closing price, so the price went up overall during this timeframe. On the other hand, if the candle is red, it means that the opening price was higher than the closing price, so the price went down.
Bull or Bear Markets Graphs
These terms are used to indicate the general trend of the graph, whether it’s going up or down. They are named after these animals because of the ways they attack their opponents. A bull thrusts its horns up into the air, while a bear swipes its paws downward. So these animals are metaphors for the movement of a market: If the trend is up, it’s a bull market. But if the trend is down, it’s a bear market.
Resistance and Support Levels
Often, when looking at market graphs e.g. OHCL it may seem as though Cryptocurrency’s price cannot break through certain highs or lows. For example, you can witness Cryptocurrency ’s price go up to $20,000 and then appear to hit a virtual “ceiling” and get stuck at that price for some time without breaking through it. In this scenario, $20,000 is the resistance level i.e. a high price point Cryptocurrency is struggling to beat. The resistance level is the outcome of many sell orders being executed at this price point. That’s why the price fails to break through at that specific point. Support levels, in a sense, are the mirror image of resistance levels. They look like a “floor” Cryptocurrency’s price doesn’t seem to go below when the price drops. A support level will be accompanied by a lot of buy orders set at the level’s price. The high demand of a buyer at the support level cushions the downtrend. Historically, the more frequently the price has been unable to move beyond the support or resistance levels, the stronger these levels are considered.
Great, you made it this far, and by now you should have enough know-how to go out and get some field experience. However, it’s important to remember that trading is a risky business and that mistakes cost money. Let’s go over the most common mistakes that people make when they start trading—in the hopes that you’ll be able to avoid them.
- 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, and 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. Mostly, you may end up losing a portion of your money that you can’t do without.
- 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.
- Leaving money on an exchange: This is the most basic ground-rule for any crypto trader: NEVER leave your money on an exchange that you’re not currently trading with. If your money is sitting on the exchange, it means that you don’t have any control over it. If the exchange gets hacked, goes offline, or goes out of business, you may end up losing that money. Whenever you have money that isn’t needed in the short term for trading on an exchange, make sure to move it into your own Cryptocurrency wallet or bank account for safekeeping.
- Giving into fear or greed: Two basic emotions tend to control the actions of many traders: fear and greed. Fear can appear in the form of prematurely closing your trade, because you read a disturbing news article, heard a rumor from a friend, or got scared by a sudden dip in the price (that may soon be corrected). The other major emotion, greed, is actually also based on fear: the fear of missing out. When you hear people telling you about the next big thing, or when market prices rise sharply, you don’t want to miss out on all the action. So you may get into a trade too soon, or even delay closing an open trade. Remember that in most cases, our emotions rule us. So never say, “This won’t happen to me.” Be aware of your natural tendency towards fear and greed, and make sure to stick to the plan that was laid before you started the trade.
- Not learning the lesson: Regardless of whether or not you made a successful trade, there’s always a lesson to be learned. No one manages to only make profitable trades, and no one gets to the point of making money without losing some money on the way. The important thing isn’t necessarily whether or not you made money. Rather, it’s whether you managed to gain some new insight into how to trade better next time.
We covered a lot of ground about Cryptocurrency trading, but I have to warn you: The majority of people who start trading Cryptocurrency 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.