There are many different methods to make profits – or losses – with cryptocurrencies. Trading is one of the most popular.
This guide discusses where to start, including choosing a trading style, developing a trading strategy, finding a trading platform, and things to remember.
Disclaimer: This information is not a financial recommendation or an endorsement of cryptocurrencies or any particular provider, service or offering. Cryptocurrencies are highly volatile and highly vulnerable. Do your own research and seek financial advice before buying. Please check with the providers if their services are readily available in your country.
How to trade cryptocurrencies
There are 5 steps to get started:
- Research and check if trading cryptocurrencies is right for you
- Choose whether you want to trade long-term or short-term.
- Choose the trading approach that is right for you.
- Discover how to place trades and read charts.
- Choose an exchange and start trading.
This guide will take you through each of these actions.
The different types of cryptocurrency trading
The first step is to decide between long-term or short-term cryptocurrency trading. The two are very different.
Long-term traders buy and hold cryptocurrencies over a long period of weeks, months or perhaps years, with the intention of making a profit or using them later.
If you believe that the value of a cryptocurrency will rise over the long term and don’t want the stress of active trading, then this could be your style, and a great first step can be figuring out how to buy and hold cryptocurrencies safely.
Short-term trading is about making the most of the short-term cryptocurrency price visit by creating and executing a trading strategy. It’s more active, stressful, and dangerous than long-term trading, but it also offers faster and greater prospective returns for those who do it right, and lets you make money from cryptocurrency prices that not only rise, but also fall.
If that’s what you’re looking for, you can either read on for a beginner’s guide or compare cryptocurrency trading platforms to get started.
Choose a trading approach
The 2nd action is to choose a trading technique. This is important because all cryptocurrencies are very different and require different strategies. In some cases, the same cryptocurrency exchange offers several different types of trading.
Cryptocurrency trading for newbies
Before you can start trading, you need to be sure that cryptocurrency trading is suitable for your situation and that you understand the dangers involved. You also need to know what each key means.
Most cryptocurrency exchanges have similar-looking market pages, and you can certainly miss a lot of the details on the page.
In this case, Binance uses 3 basic order types: market, stop limit, and OCO.
- Market Order: place a buy or sell order at the current market price, which will be executed immediately.
- Stop Limit: If you select this option, you will be prompted to choose a separate stop price and limit cost. Once the object (in this case Bitcoin) reaches the stop price, it will cost at least the limit price, if possible.
- OCO. “One cancels the other.” This is 2 integrated stop limit orders, where one cancels the other when it is triggered.
Market and stop-limit are the standard order types you will find on almost all exchanges, while OCO is a little less typical. Different exchanges often have different order types and slightly different guidelines on how to place them. More information can be found here and elsewhere: https://www.xtb.com/de/kryptowaehrungshandel-kb
How to develop a trading strategy
The difference between gambling and trading is having a strategy. Creating a plan is a three-step process:
1. Look for patterns
The standard approach to reading charts and creating trading strategies is to look for patterns in past price movements and then use them to try to predict future movements.
Some patterns appear regularly enough in multiple markets that they are given their own names, such as resistance and support. Others, however, are much more unusual and are never given their own names.
If you think Bitcoin is going up when Ethereum is going down, or Bitcoin is going up when the US dollar is going down relative to the Chinese Renmibi, or anything else you can think of, that might be a pattern you can trade.
2. Make a plan and stick to it
The two basic elements of a trading strategy are:
- A place where you take profits
- A place where you limit your losses
For example, someone’s basic plan could be to sell 33% of their bitcoin for every single $1,000 the price goes up (take profits), or immediately sell all of their bitcoin when the cost drops below the current support line (cut losses). To implement this strategy, they could set up a series of stop limit orders.
This is not always a great plan, but it would ensure that the amount they gain or lose is within reasonable limits no matter what the market does.
As traders become more experienced, they can create more sophisticated trading plans that take into account more market signals and allow for far more nuanced trading techniques.
Experienced traders usually use cryptocurrency trading bots to execute their methods, due to the fact that they relentlessly follow complicated trading strategies faster and more reliably than a human ever could.
It is good to test trading theories before implementing them with real money. This is where paper trading or backtesting can be helpful. Both of these features are usually found on trading platforms.
Paper trading involves trading in the real markets with fake money, so you can test a trading technique under real, actual conditions. Backtesting is running a trading technique through historical market movements to see how it would have performed.
What to watch out for
Trading cryptocurrencies carries many of the risks of trading any other market, in addition to some unique challenges.
- Volatility. Cryptocurrencies are volatile. This is one of the important factors that make them so attractive to traders, but it also makes them very risky. Within a day, double-digit price fluctuations are common, and drastic changes can occur in a matter of minutes.
- Uncontrolled, manipulated markets. Cryptocurrency markets are largely unregulated compared to standard markets. It is an open secret that wash trading and market manipulation are prevalent. They are also much less liquid than numerous other markets, which can increase volatility and make it easier for well-heeled “whales” to manipulate costs, force liquidations, and the like. The exchanges themselves have been accused in some cases of manipulating their own markets against their own customers.
- Unreliable Patterns. Markets often follow patterns, but often they do not. This is a danger in trading, but the particular characteristics of the cryptocurrency market mean that it is a particular obstacle there.
- Be overexposed. Don’t bet more than you can lose. Limit your direct exposure and consider setting up take-revenue and stop-loss orders to limit your direct exposure in the event of drastic fluctuations.
- Extremely take advantage. Many cryptocurrency exchanges offer up to 100x exploitation, which greatly amplifies the potential dangers. The volatility of cryptocurrencies combined with high-stakes trading can cause positions to liquidate extremely quickly.
- Not knowing when to give up. Whether you are up or down, it is important to know when to close a position and either take profits or cut your losses.
Continue reading here for more detailed information before you start crypto trading.
Comparison of Cryptocurrency Trading Platforms
When choosing a cryptocurrency trading platform, you should pay attention to whether it offers derivatives or leverage, what order types it allows, and how easily it integrates with cryptocurrency trading bots, among other things.
The first step is to choose between long-term and short-term cryptocurrency trading. In some cases, the same cryptocurrency exchange offers several different types of trading.
The difference between gambling and trading is having a plan. Paper trading involves trading on the real markets with fake money so that you can test a trading method in real, existing conditions. It is an open trick that clean trading and market adjustment are typical.