Crypto trading. How to Trade Cryptocurrencies: A Beginner's Guide to Buying and Selling Digital Currencies

What is crypto trading?

The act of speculating on the price movement of a cryptocurrency through a trading account with a contract for difference (CFD) or buying and selling underlying coins through an exchange is called cryptocurrency or cryptocurrency trading. CFD trading is a type of derivative that allows you to bet on the price of Bitcoin (BTC) without owning the underlying currencies.

Both are leveraged instruments, meaning you only need a small deposit, known as cryptocurrency margin trading, to have full exposure to the underlying market. However, since your profit or loss is still determined based on the total size of your investment, trading cryptocurrencies with leverage increases both profits and losses.

In addition, cryptocurrency options are used by investors to reduce risk or increase exposure to the market. Crypto options trading refers to a “derivative” financial instrument whose value depends on the price of another asset – in this case, the underlying cryptocurrency.

Before even considering crypto trading, it is important to have a complete understanding of the assets and technologies involved.

As with stocks and other financial markets, cryptocurrency trading can be complex, involving many components and requiring knowledge. Bitcoin was launched in 2009 as the first crypto asset and remained the largest cryptocurrency in market cap and adoption.

However, over the years, a whole industry of other digital assets has emerged that can be traded for profit. All other non-BTC cryptocurrencies are known as altcoins, the largest of which is ether (ETH).

This guide will explain crypto trading strategies and introduce you to crypto trading platforms and applications, trading components, trading styles, and the role of technical and fundamental analysis in creating a comprehensive trading strategy.

How to trade cryptocurrency for beginners

There are many different approaches to trading cryptocurrencies. To start trading cryptocurrencies, first of all, adequate knowledge of the subject is necessary. It is also important to be aware of the risks involved and the laws that may apply depending on the jurisdiction and decisions should be made accordingly.

Steps to trade cryptocurrency:

1. Register on the cryptocurrency exchange

You will need to open an account on a crypto exchange if you do not already have a cryptocurrency. The top crypto brokerages on the market include Binance, Coinbase, Huobi Global, FTX, and Kraken. All three of these services have a simple user interface and a wide selection of altcoins.

To open an account with a crypto exchange, you need to provide personally identifiable information. When creating an account, you need to provide your address, date of birth and email address, etc.

2. Fund your account

You will need to connect your bank account after registering with the crypto brokerage.

Bank transfers are usually the most economical way to fund an account and are available on Coinbase and Gemini.

3. Choose a cryptocurrency to invest

Most cryptocurrency traders invest their money in bitcoin and ether.

Many cryptocurrency investors invest some of their money in altcoins. Although they are riskier than large market cap cryptocurrencies, small average market cap cryptocurrencies have more significant upside potential.

4. Start trading

You can try cryptocurrency auto trading if you are looking for a cryptocurrency trading strategy. Cryptocurrency trading bots implement a process designed to provide the highest possible return depending on your investment goals.

5. Store your cryptocurrency

If you are actively trading BTC, you will need to hold your funds on the exchange in order to access them. For example, you should purchase a bitcoin wallet if you are buying cryptocurrency for medium to long-term storage.

Software wallets and hardware wallets are two types of cryptocurrency wallets. Both are secure, but hardware wallets provide the most protection because they store your cryptocurrency on a physical device that is not connected to the internet.

Fundamentals of Cryptocurrency Trading

The value of Bitcoin is determined every second and day by day by a market that never sleeps. As a standalone digital asset whose value is determined by the open market, Bitcoin poses unique volatility issues that most currencies do not face.

Bitcoin trading can range in scope and complexity from a simple transaction such as cashing out a fiat currency such as the US dollar to using various trading pairs to profit from the market to increase one's investment portfolio. Of course, as the size and complexity of a crypto trade increases, so does a trader's exposure to risk.

First, let's look at some basic concepts.

Crypto trade structure

Cryptocurrency trading consists of a buyer and a seller. Because there are two opposing sides to a trade—buying and selling—someone is bound to win more than the other. Therefore, trading is inherently a zero-sum game: there is a winner and there is a loser. A basic understanding of how cryptocurrency markets work can help minimize potential losses and optimize potential gains.

When a price is agreed between the buyer and seller, the transaction is executed (through an exchange) and a market value for the asset is established. For the most part, buyers tend to place orders at a lower price than sellers. This creates two sides of the order book.

When there are more buy orders than there are sell orders, the price usually rises as there is more demand for the asset. Conversely, when more people sell than buy, the price goes down. In many exchange interfaces, buying and selling are represented by different colors. This should give the trader a quick idea of ​​the state of the market at the moment.

Cryptocurrency order book

You may have heard the common adage in trading: “Buy low, sell high.” This proverb can be difficult to navigate as high and low prices can be relative, although the proverb gives a basic idea of ​​the incentives for buyers and sellers in a market.

If you want to sell something, you want to get the most out of the deal. While this is generally good wisdom to follow, there is also an additional dimension of wanting an asset versus selling an asset.

Opening a long position on an asset (longing for an asset) means buying an asset and making a profit based on the upward movement of its price. In contrast, selling an asset short (short selling) essentially means selling an asset to buy it back when its price falls below the point at which you sold it, profiting from the price drop. Shorting, however, is a bit more complex than this short description and involves the sale of leveraged assets that are paid back later.

Reading the markets

To the layman, "the market" may seem like a complex system that only a specialist can understand, but it comes down to what people buy and sell. At first, how to trade cryptocurrencies may seem like an esoteric concept. However, once you start to understand this, the idea becomes much easier.

The collection of active buy and sell orders is a snapshot of the market at any given moment. Reading the market is an ongoing process of identifying patterns or trends over time that a trader can act on. In general, there are two trends in the market: bullish and bearish.

A bull market, or bull market, occurs when the price movement is steadily increasing. These upward price movements are also known as "pumps" as the influx of buyers increases prices. A "bear" market or a bear market occurs when the price movement seems to be steadily declining. These downward price movements are also known as "dumps" as the massive sell-offs result in lower prices.

Upward and downward price movement

Bullish and bearish trends can also exist within other larger countertrends, depending on the time horizon you are looking at.

Another market condition called "consolidation" occurs when the price moves sideways or ranges. As a rule, consolidation phases are easier to spot on higher time frames (daily or weekly charts) and occur when an asset cools down after a sharp uptrend or downtrend. Consolidation also occurs before a trend reversal or during periods when demand is muted and trading volumes are low. Prices mostly trade in a range during this market condition.

Technical analysis

Technical analysis (TA) is a method of analyzing past market data, primarily price and volume, to predict price movements. While there are many TA indicators of varying complexity that a trader can use to analyze the market, here are some basic macro and micro level tools.

Just as traders can spot patterns over hours, days, and months, they can also spot patterns over years of price fluctuations. There is a fundamental structure to the market that makes it susceptible to certain behavior.

Market Structure

The cycle can be divided into four main parts: accumulation, markup, distribution, and decline. As the market moves between these phases, traders will continually adjust their positions by consolidating, pulling back, or adjusting as they see fit.

Bull and bear are very different creatures and behave oppositely to each other in general environmental conditions. It is imperative that a trader knows not only which role he falls into, but also which one currently dominates the market.

Technical analysis is essential not only to position yourself in this ever-changing market but also to actively navigate the ebb and flow as they arise.

Chasing a whale

Price movements are largely driven by "whales" - individuals or groups who have large funds to trade. Some whales act as "market makers", placing orders and asking both sides of the market to create liquidity for an asset while making a profit. Whales are present in almost every market, from stocks and commodities to cryptocurrencies.

A cryptocurrency trading strategy should take into account the trading tools favored by whales, such as their preferred TA indicators. Simply put, whales tend to know what they are doing. By anticipating the intentions of the whales, a trader can work alongside these experts to profit from their strategy.

Psychological cycles

With a zoo full of metaphors, it's easy to forget that these trades are for the most part real people and, as such, are subject to emotional behavior that can significantly affect the market.

The psychology of the market cycle

While the bull/bear structure is useful, the psychological cycle pictured above provides a more detailed spectrum of market sentiment. While one of the first rules of trading is to leave emotions at the door, the power of the group mentality tends to take over. The transition from hope to euphoria is driven by FOMO - the fear of missing out - of those who have already taken their place in the market.

Navigating the valley between euphoria and complacency is critical to timing the exit before the bears take over and people panic sell. It is important to consider the high volume price action here, which can indicate overall market momentum. The “buy low” philosophy is quite obvious given that the best time to accumulate in a market cycle is during a depression following a sharp price drop.

The challenge a serious trader faces is to not let emotions dictate their trading strategy during a flurry of hot inferences and analysis from the media, chat rooms, or so-called opinion leaders. These markets are highly susceptible to manipulation by whales and those who can influence the pulse of the market. Do your homework and be decisive in your cryptocurrency trading activities.

Basic tools

The ability to detect patterns and cycles in the market is critical to gaining clarity from a macroeconomic perspective. Knowing where you are about the whole is of paramount importance. You want to be an experienced surfer who knows when the perfect wave is about to arrive, instead of paddling around in the water hoping something great is about to happen.

But the micro perspective is also critical to determining your actual strategy. Although there are a huge number of TA indicators, we will only cover the most basic ones.

Support and Resistance

Perhaps two of the most widely used TA indicators under the terms "support" and "resistance" refer to price barriers that tend to form in the market, preventing the price from going too far in a certain direction.

Support is a price level at which a downtrend tends to stop due to an influx of demand. When prices decline, traders tend to buy low, creating a support line. Conversely, resistance is a price level at which an uptrend tends to stall due to a sell-off.

Support and resistance levels

Many crypto traders use support and resistance levels to bet on price direction, adapting on the fly when a price level breaks an upper or lower boundary. Once traders determine the lower and upper limits, this provides a zone of activity in which traders can open or close positions. Buying at floor level and selling at ceiling level is the standard operating procedure.

If the price breaks these barriers in either direction, it indicates the overall mood of the market. This is a continuous process, as new support and resistance levels usually form when a trend breaks out.

Trend lines

While the static support and resistance barriers shown above are common tools used by traders, the price action tends to go up or down as the barriers change over time. A sequence of support and resistance levels can indicate a larger trend in the market, represented by a trend line.

When the market moves up, resistance levels begin to form, the price movement slows down, and the price returns to the trend line. Cryptocurrency traders pay close attention to ascending trendline support levels as they indicate an area that helps prevent a significant price drop. Similarly, in a downtrending market, traders will follow a sequence of falling peaks to connect them to a trend line.

Uptrend and downtrend lines

The main element is the history of the market. The strength of any support or resistance levels and their resulting trendlines increases as they repeat over time. Hence, traders will record these barriers to inform their current trading strategy.

Round numbers

One factor that influences support/resistance levels is price fixing with round numbers by inexperienced or institutional investors. When a large number of trades are centered around a nice round number — as Bitcoin usually does every time its price approaches a divisible number, such as $10,000 — it can be difficult for the price to break that point, creating resistance.

Given the market history of support/resistance levels and the resulting downtrend/uptrend lines, traders often smooth this data to create a single visual line called a "moving average".

Moving average

The moving average is good at tracking the lower support levels of an uptrend, as well as the peaks of resistance during a downtrend. When analyzing trading volume, the moving average is a useful indicator of short-term momentum.

Graphic patterns

There are various ways to build a market chart and look for patterns in it. One of the most common visual representations of market price behavior is the "candle".

Candlestick chart

Candlestick charting originated in Japan in the 1700s as a method of assessing how traders' emotions have a strong influence on price action beyond simple supply and demand economics. This market visualization is one of the most popular among traders as it can contain more information than a simpler line or bar chart. A candlestick chart has four price points: open, close, high, and low.

How does this relate to cryptocurrency trading? They are called candlesticks because of their rectangular shape and lines at the top and/or bottom that resemble a wick. The wide part of the candlestick is where the price is either opened or closed, depending on its color. A wick is a price range in which an asset trades during a set candle period. Candles can span different periods, from one minute to one day or more, and display different patterns depending on the selected time frame.

Fundamental analysis

So, how do we determine the potential of a particular crypto asset beyond or before its behavior in the trading market?

While technical analysis involves the study of market data to determine a trading strategy, fundamental analysis is the study of the underlying industry, technology, or assets that make up a particular market. In the case of cryptocurrencies, the trading portfolio will most likely consist of bitcoins and altcoins.

How can you tell if an asset is based on sound fundamentals and not on hype, exaggerated technology, or worse, nothing at all?

Developers

Before investing in a cryptocurrency asset, it is necessary to assess the honesty and capabilities of its creators. What is their track record? What software developments have they brought to market in the past? How active are they in developing the underlying token protocol? Since many projects are open source, you can directly observe this activity through shared code repository platforms such as GitHub.

Community

The community is critical for cryptocurrency trading projects. The combination of users, token holders, and enthusiasts create much of the driving force behind these assets and the underlying technologies

However, with a lot of money at stake - and with the frequent presence of non-professional retail investors - the space is often subject to toxicity and warring factions. Therefore, a healthy, transparent discussion within the community is welcome.

Specifications

Not to be confused with market technical analysis, the main technical characteristics of a crypto asset include the choice of network algorithm (how it maintains security, uptime, and consensus) and issuance/release features such as block time, the maximum number of tokens, and distribution plan. . By carefully evaluating the protocol stack of the cryptocurrency network, as well as the monetary policy applied by the protocol, a trader can determine if such features support a potential investment.

Innovation

Although the intended use case for Bitcoin after its launch was electronic money, developers and entrepreneurs have not only discovered new use cases for the Bitcoin blockchain but have also developed entirely new protocols for a wider range of applications.

Liquidity

Liquidity is critical to a healthy market. Are there reputable exchanges that support a particular crypto asset? If so, what trading pairs are there? Is there a healthy trading/transaction volume? Are there major stakeholders in the market, and if so, what is the impact of their trading patterns?

However, creating liquidity takes time, as a new innovative protocol may be launched but may not have instant access to liquidity. Such investments are risky. If volumes are low and there are hardly any trading pairs available, you are essentially betting that a healthy market will eventually form around the project.

Branding and marketing

Most cryptocurrency networks do not have a central figure or company to facilitate the branding and marketing of their technology, resulting in branding that may lack a single plan or direction.

This does not mean devaluing the branding and marketing that comes out of the protocol over time. Benchmarking the marketing efforts of core developers, corporations, foundations, and community members can provide a detailed overview of how certain players are delivering value propositions to the masses.

Infrastructure

This quality of the crypto trade can be seen as a manifestation of the technical characteristics of the project. Despite what is written in official documents or presented at conferences, what is the actual physical implementation of the protocol in question?

Stakeholders should be identified: developers, block validators, merchants/companies, and users. In addition, it is critical to understand who the network stewards are, their role in securing the network (mining, validation), and how power is distributed among these stakeholders.

On-chain analysis

Considering that all cryptocurrencies work on blockchain technology at a basic level, a new type of analysis has emerged that relies on data from blockchains - on-chain analysis.

By studying supply and demand trends, transaction frequency, transaction costs, and the speed at which investors hold and sell cryptocurrencies, analysts can make accurate qualitative and quantitative observations about the strength of the cryptocurrency blockchain network and its price dynamics. varied markets.

On-chain data also provides valuable insights into investor psychology, as analysts can correlate various macro and micro economic events with investor actions, which are invariably recorded on the blockchain.

Analysts are looking for crypto trading signals, patterns, and anomalies in buying, selling, and holding behavior due to market rallies, selloffs, regulatory events, and other network events. This is done to make predictions about potential future price movements and investor reactions to upcoming events such as network upgrades, coin supply halving, and actions taking place in traditional financial markets.

Cryptocurrency trading vs stock trading

Stocks and cryptocurrencies are two very different types of investment vehicles. Although both are liquid assets that belong to your speculative portfolio, the similarities end there. These are two completely different types of securities that should be kept in different parts of your portfolio.

Stocks are shares of ownership of a publicly traded corporation. Each share you buy gives you a percentage of the company. This ownership is proportional to the number of shares issued by the corporation.

An investor can make a profit by selling his shares to other investors. The difference between what you spend on an asset and what you get when you sell it is called capital gains. In addition, the benefits of owning shares are entirely dependent on the firm in question. Shares can also acquire value by paying dividends to their shareholders and by having voting rights.

Cryptocurrency is a digital asset that exists exclusively on the Internet. This means that it has no physical component and only exists as entries in an online ledger that tracks ownership. This is different from the US dollar, which has both a physical component (you can withdraw and hold a dollar bill) and a digital component (you can own a dollar as nothing more than a record in your bank account that records that ownership). An individual unit of a cryptocurrency is called a token, just as an individual unit of a share is called a share.

Cryptocurrency trading is risky

Risk management is also an important aspect of trading. Before entering into a trade, it is important to know how much you are willing to lose on this crypto trade if it goes against you. This can be based on several factors such as your trading capital. For example, a person may only want to risk losing 1% of their total trading capital, either overall or per trade.

Trading in itself is a risky business. It is almost impossible to predict future market activity with certainty. In the end, it's important to make your own decisions using the available information and your judgment and make sure you're properly educated.

Also, trading strategies can vary greatly from person to person, depending on preferences, personalities, trading capital, risk tolerance, etc. Trading comes with a lot of responsibility. Anyone who trades should evaluate their situation before deciding to trade