Taking advantage of asset price movements might be a profitable business. However, before diving into cryptocurrency trading, it is important to know how to do it properly.
If you are interested in cryptocurrencies and want to earn from their price change, trading is a way to get involved. Although it is riskier than simply investing in digital assets and requires deeper knowledge, it can be more rewarding as well. In this article, we will present the basic guidelines of how to trade cryptocurrency.
However, before opening a position on a chosen cryptocurrency exchange, you first have to consider the type and style of trading, determine the trading strategy and research the platform where you will be buying and selling digital assets.
Follow these six steps to know how to trade cryptocurrency:
- Choose the type of trading
- Determine the style of trading
- Set up a trading strategy
- Choose the exchange
- Set up the account
- Open / close the position
1. Choose the type of trading
Speaking generally, there are two basic types of trading: trading on the cryptocurrency exchanges and trading on Contracts for Difference (CFDs). The main difference here is ownership. If you are trading on exchanges, you have to buy the digital assets, meanwhile trading on CDFs allows speculating on asset price without owning it.
Trading on cryptocurrency exchanges
The most common way of cryptocurrency trading is via a cryptocurrency exchange. Here anyone can buy and sell digital assets and profit from the price change. It depends on the crypto exchange, but many of them allow trading both fiat-to-crypto and crypto-to-crypto trading pairs.
Although there are numbers of crypto exchanges across the globe, it is important to choose the right one. Further in this article, we will review the list of criteria that are helpful to know before you start trading on the cryptocurrency exchange.
Trading on CFDs
The Contracts for Difference (CFDs) is an agreement between a trader and broker to pay the price difference. It is a derivative financial instrument, whose price is based on the prices of underlying assets. Trading CFDs is an advanced way of trading and offers the ability to speculate on cryptocurrency prices without actually owning a coin. Cryptocurrency CFDs traders usually use them to make price bets as to whether the price of the underlying digital asset will rise or fall.
Let’s say the trader bets that cryptocurrency like Bitcoin will rise in price. At the end of the bet, the broker pays a reward to the trader if the Bitcoin’s price has risen during the investment timeframe. If the price falls, the trader then suffers a loss and the broker deducts the corresponding amount of money from the trader’s account.
2. Determine the style of trading
When learning how to trade cryptocurrency, another important step is to know which time frame you will be using to enter and exit the position. There are different types of traders depending on the style they use:
- Day trading. An active style of trading when a trader makes a number of buying and selling transactions within a day to make a profit. These traders usually do not keep open positions overnight.
- Swing trading. This style of trading aims to take advantage of market changes or fluctuations over a few days or weeks. It is important here to specify the different time periods in which you are planning to trade.
- Position trading. Less active trading style, what could be used to keep open positions for a longer-term (weeks or even months), depending on the trend.
- Scalping. One of the most active trading styles, that consists of buying and selling digital assets in a very short period of time. This kind of trader usually takes profit from small but frequent price movements and thus is operating on more liquid markets.
3. Set up a trading strategy
Every trader hopes to profit from the price difference, however, not everyone succeeds. As the cryptocurrency market is exceptionally volatile, discipline is a key element that may help to keep the head clear and make logical and adequate decisions.
This is why it is necessary to have a trading strategy and follow it. The trading plan should be simply adaptable and corresponding trader’s personal needs and psychology. The trading plan though should include:
- The goal. Determine what your trading goals are. Would you like to notice the trend change as soon as possible? Or would you like to close the order on time to protect from loss? The more specific the goal, the better.
- The cryptocurrency. Choose which cryptocurrency you would like to trade. Keep in mind the transaction and/or withdrawal fees.
- Risk management. It is important to determine how much you can afford to lose in one position at a time. Not everyone tends to take risks at the same level. You have to set up your personal Stop Loss which will make you feel comfortable and free.
- Timing. Determine which methods and technical indicators you will use to find the best position to enter or exit the trade.
- Analysis. Know the method you will use to analyze the price movement. You could use technical analysis, which is based on charts and historical data, and is used to forecast price trends. Or you may follow the fundamental analysis that is based on macroeconomic factors that affect cryptocurrencies. Despite the fact, which method you choose, it is always better to keep in mind both factors and have a close eye on what is going in with an asset you have invested in.
4. Choose the exchange
There are various cryptocurrency exchanges online from big ones like Coinbase, Bitfinex or Binance to decentralized cryptocurrency exchanges (DEX) like Uniswap or Bancor that operate in a decentralized way and allow peer-to-peer cryptocurrency transactions.
Choosing the right one might be one of the most important initial steps you need to complete. After you have determined the type of trading, it is critical to look into aspects like:
- Reputation: no one wants to put their funds in the exchange that is involved in frauds or scams. Thus it is important to do your own research on Google or social media checking up the exchange’s reputation and looking up if any previous complaints have been posted or any hacks occurred.
- Security: various security-related vulnerabilities have made it easier for hackers to steal from the crypto exchanges. Thus it is better to choose the exchange that requires an additional layer of security like the two-factor authentication (2FA).
- Volume: the number of participants and the amount of the assets trading on an exchange at any given moment determines if it will be easier or harder to buy and sell them. The websites like Coin360 or CoinMarketCap may help to make a decision as they publish the volume data of the cryptocurrency exchanges.
- Fees: crypto exchanges do charge their fees for making transactions. These fees vary depending on the trading platform and most often are based on the size of the trade. Some exchanges may apply withdrawal fees as well.
- Asset prices: the prices of the same cryptocurrency may vary on separate trading platforms mostly due to the different volumes. However, if the difference is too high, this may indicate that the exchange is suffering low liquidity and it is better to avoid it.
5. Set up the account
When you have chosen the cryptocurrency trading platform, that is best for you, setting up an account is the next step to complete. Here is the instructions of what you have to do:
- Sing up: in order to register on the selected exchange follow the given instructions, provide the necessary information, and verify your identity.
- Deposit funds: after your account becomes active, you will have to deposit cryptocurrency funds into it. This can be done by purchasing digital coins directly with the credit card or by transferring them from your cryptocurrency wallet.
6. Open / close the position
After you have decided which digital currency you are going to trade and deposited the funds into the exchange account, you should enter the position by placing an order. Here are the steps of how to complete it:
- Choose the market where you want to open a position (e.g. BTC, ETH, XRP market).
- Then specify the currency pair you want to trade with (e.g. BTC/XRP, BTC/ETH). The step is necessary if you are trading on the crypto-to-crypto market.
- Enter the number of assets you want to buy or sell.
- Submit the “Buy” or “Sell” order.
Depending on your trading style, the orders may remain open for hours, days or even months. Despite that, keep in mind, that on all trading platforms you can set the stop-loss orders to close the position as the price reaches a certain level.
If you have taken advantage of the price movements and want to leave the trading platform, you need to close the position. The process is exactly the same as opening the one, but this time you should act in the opposite direction. This means that if you are trading in long positions, entering implies “buy” and closing implies “sell”. Meanwhile, for those trading on short positions, the opening means “sell” and closing means “buy the assets back”.
Is crypto trading profitable?
Trading might be profitable if you know how to trade cryptocurrency properly. The cryptocurrency market is volatile, which means that you may take advantage of it and make a huge profit. On the other hand, it involves high levels of risk, that you need to evaluate and manage in order to gain profit or bear the losses when they occur.
There are various trading strategies, methods and technical tools available to use for analyzing and understanding when is the best time to enter or exit the position according to the price trend. The trading plan and discipline, as well as thorough research of cryptocurrency exchanges and constant monitoring of what’s going on on the crypto market, are necessary for those diving in the cryptocurrency trading.