Cryptocurrencies are a form of digital currency that can change hands from person to person without the need for intermediary institutions like banks or payment processors acting as middlemen to facilitate the transaction.
The infrastructure surrounding a cryptocurrency is decentralized in most cases, meaning no central group or a single person has any control over the network.
When it comes to trading cryptocurrencies, the process involves speculating the tokens’ price movements via a contract for difference (CFD) trading account or buying and selling the underlying asset via an exchange.
This article is a beginner’s guide to everything that you need to know about cryptocurrency trading. We will discuss what crypto trading is, how it works, and its fundamentals, before listing some trading strategies that can help you get favorable returns.
So, let’s get started.
What is Cryptocurrency Trading?
As we mentioned earlier, cryptocurrency trading refers to the act of speculating a crypto token’s price movements via a CFD trading account or buying and selling them via centralized or decentralized exchanges.
CFD trading is a type of derivative that allows you to bet on the price movements of a cryptocurrency without taking ownership of the underlying asset. The idea here is to buy (go long) if you believe the value of a particular token will rise, or sell (short) if you think its price will fall.
Since both are considered leveraged products, you will need to put up a small deposit, also known as a margin, to gain full exposure to the underlying market. The profit or loss of your trade is determined based on the full size of your position. Thereby, the leverage will magnify both profits and losses of the trade.
Furthermore, investors make use of cryptocurrency options to reduce risk or increase their market exposure. Crypto options trading refers to the derivative financial instrument that services its value from the price of another asset – in this case, the underlying crypto asset.
What Moves the Cryptocurrency Market?
Cryptocurrency markets move based on the supply and demand for the tokens. Since they are decentralized, cryptocurrencies remain largely free from many of the economic and political concerns that affect traditional finance.
The following factors can have a significant impact on their prices:
| Supply | The total number of coins and the rate at which they are released, burned, or lost. |
| Market Capitalization | The total value of all coins in existence and how users perceive the project to be developing. |
| Press | How cryptocurrency is being portrayed in the media and how much mainstream coverage it is getting. |
| Integration | The lengths to which the cryptocurrency can easily integrate into existing infrastructure such as e-commerce and digital payment systems. |
| Key Events | Major happenings related to the cryptocurrency market, such as regulatory updates, security breaches, and economic setbacks. |
Basic of Cryptocurrency Trading
A cryptocurrency trade consists of a buyer and a seller. Since there are two opposing sides to a trade, one side stands to gain more than the other. Hence, trading is a zero-sum game where there is a winner and a loser.
By having a basic understanding of how the cryptocurrency market operates, one can minimize the potential loss they may suffer and optimize for substantial gains.
A trade is executed when a price for a cryptocurrency is agreed upon between the buyer and seller. This sets the market valuation for the asset. In most cases, buyers tend to set orders at a lower price than sellers, which forms the two sides of an order book.
When there are more buy orders than sell orders, the cryptocurrency’s price is bound to go up as there is more demand for the asset. Conversely, when more people are selling an asset than buying, it means that the asset’s price is falling.
1. Longing and Shorting
Simply put, if you want to buy a cryptocurrency, the idea is to spend the least amount possible, and if you want to sell the token, you will want to make as much as possible out of the deal. This is where the concept of longing and shorting comes into play.
To go long means buying a cryptocurrency and earning profit based on its upward price movement. On the other hand, shorting refers to selling an asset on a high to buy it back when its price falls below the value at which you sold it.
2. Bull and Bear Markets
Reading the market is a very important step in crypto trading. However, what may sound complicated to you becomes a lot simpler once you begin to understand the concept.
The process involves recognizing patterns, or trends, over time that the trader can choose to act upon. There are two types of market trends: bullish and bearish.
A Bullish market, commonly known as a bull market, occurs when the market’s price action is steadily rising. These upward price movements also known as “pumps”, are as an influx of buyers in the market increases prices.
A Bearish market, or bear market, occurs when the price action appears to steadily decrease. These downward price movements are known as “dumps”, indicating a mass sell-off event that results in the price going lower.
3. Upward and Downward Price Action
Bullish and bearish trends can also exist within other larger market trends. This depends on the time horizon at which you look at the market. For instance, a bearish trend can occur within a broader long-term bullish trend. Generally, an uptrend results in the price action making higher highs and lower lows. Whereas, a downtrending market makes lower highs and lower lows.
Another market state is called Consolidation, which occurs when the price of a cryptocurrency trades sideways or within a range. It is rather easy to spot consolidation phases on daily or weekly charts (higher time frames) and they occur when an asset’s price is cooling off after a sharp upward or downward trend.
Consolidation can also take place ahead of trend reversals, or during times when demand for an asset is low and trading volumes are also low. Prices tend to trade within a certain range during this market state.
4. Technical Analysis
Technical analysis (TA) is a method of forecasting a cryptocurrency’s price action by analyzing past market data, mainly its price and volume. There are various TA indicators that a trader can use to analyze the market, but here are some basic macro and micro-level TA tools:
Market Structure and Cycles
Using this tool, traders can find patterns over years of fluctuating price action. A market cycle can be partitioned into four main parts: accumulation, markup, distribution, and decline.
Traders will continuously adjust their positions as the market moves between these phases by consolidating, retracing, or correcting as they seem necessary. Since bull and bear markets behave in opposition to each other within shared environments, a trader must know which one is dominating the market and under which role they fill.
Support and Resistance
This has to be two of the most widely used TA indicators. These relate to price barriers that tend to form in the market to prevent the asset’s price from going too far in a certain direction.
The downward trend tends to pause on the support price level due to an influx of demand. The market creates a support line when the price of a token decreases and traders tend to buy low. Conversely, resistance refers to the price level where the upward trend pauses due to a market-wide sell-off.
Trendlines
A sequence of support and resistance levels can indicate a larger trend in the market represented by a trendline. When the market is trending upwards, resistance levels begin to form, price action starts to slow and the price is pulled back to the trendline.
Traders pay close attention to the support levels of an ascending trendline, as this is an area that helps prevent the asset’s price from dropping substantially lower. Likewise, they also keep an eye on the pattern of declining peaks to connect them into a trendline.
Other technical analysis tools are:
5. Fundamental Analysis
While technical analysis involves the study of market data to determine one’s trading strategy, fundamental analysis is the study of the industry, technology, or assets that comprise a particular market, which in this case is the crypto market.
There are several aspects to be considered when analyzing the fundamentals of a crypto token:
- Developers
- Community
- Technical Specifications
- Innovation
- Liquidity
- Branding and Marketing
- Infrastructure
- On-chain analysis
Trading Strategies
Similar to equities and commodities, crypto trading is also fraught with risks and pitfalls. To get long-term benefits from the crypto market, one needs to develop strategies that will make trading fun and safe.
Let’s take a look at some trading strategies that can get you favorable results:
1. Day Trading
This trading strategy involves taking positions when the market begins and exiting when the market closes at the end of the day. The aim of the trader here is to book profits amid intraday price movements in a particular cryptocurrency. For a successful day trade, it is recommended that you rely on an asset’s technical indicators.
2. Range Trading
Range trading is a strategy where traders rely on analysis made by market experts who give out support and resistance levels each day. Resistance refers to the point at which a token’s price may rise and therefore a resistance level forms above the current price. On the other hand, Support is the level below which a token’s price is not supposed to fall, hence a support level is always formed below the current price. Range traders conduct trades between the support and resistance levels.
3. Scalping
This trading strategy involves the use of increased trading volumes to book profit. Although it is a high-risk affair, cunning traders can take care of the margin requirement to avoid a bad trade. Scalpers analyze a cryptocurrency, its past trends, and trading volumes before choosing an entry and exit point within the same day.
4. High-Frequency Trading
HFT is a certain type of algorithmic trading strategy that is often used by quant traders. The technique involves developing algorithms and trading bots that help traders quickly enter and exit a market. One needs to have a complete understanding of the complex market concepts and a strong knowledge of mathematics and computer science to be involved in HFT. Therefore, it is more suited for experienced traders than beginners.
5. Dollar-Cost Averaging
Dollar-cost averaging is a trading strategy that involves investing a fixed amount at regular intervals. This helps investors do away with the cumbersome task of timing the markets and building wealth in the long term. It does require the study of market trends and an understanding of the market cycle.
Reading technical charts can help traders plan an exit at the appropriate time. Traders should monitor a cryptocurrency’s oversold and overbought regions before taking a call.
Conclusion
Cryptocurrency trading is a risky affair. Before entering the market, it is important to know how much you are willing to lose on a particular trade if it goes against you. It is not an easy task to predict a highly volatile market, therefore it is crucial to do your research using available information and ensure that you truly understand the concept before deciding to trade cryptocurrencies.
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