“There are two pieces of news – good and bad. Bad – the market cannot be predicted. Good – you don’t need to make money! “
Cryptocurrency trading is becoming more popular as the digital asset class continues to grow rapidly. For many, buying digital assets remains a daunting task. The abundance of complex industry jargon and polarizing media coverage may leave some concerns. However, with some preparation, new traders can confidently enter the world of cryptocurrency trading..
- 1 Fundamentals of Crypto Trading
- 2 What is leverage or margin trading
- 3 Learn about the markets and keep a journal to develop your skills
- 4 Understand risks and learn how to manage them
- 5 Centralized cryptocurrency exchanges
- 6 Decentralized cryptocurrency exchanges
- 7 Conclusion
Fundamentals of Crypto Trading
In this review, we will look at the basic things that every participant in the cryptocurrency market should follow..
As with any asset, a thorough background check is required before diving into the crypto industry. Perhaps the most important rule is that you should never buy more cryptocurrency than you can painlessly lose. But what exactly constitutes due diligence in this digital asset class? Let’s take a look at a few specific considerations:
- There are several factors you need to evaluate when purchasing a particular coin or token. The stated goals and objectives of the project, as well as its market capitalization, trading volumes and the usefulness of the coins are the most important considerations. If a token has very low trading volume and few strong use cases, future growth is doubtful.
- The team behind the token is as important as the digital asset itself. Project teams and their unique skills need to excel.
- When purchasing digital assets, you should also consider your own risk tolerance. Even popular, large assets are experiencing wild price changes. With lower market capitalization assets, these fluctuations can be even more pronounced..
Research is absolutely essential before purchasing any digital asset. Always do your own research (“DYOR -” Do Your Own Research “).
Understand if you are a trader or investor
Cryptocurrencies are attractive to both traders and investors.
Day traders are interested in the high volatility of cryptocurrencies, while investors will believe in the long term that Bitcoin or other cryptocurrencies will rise in value over time. This is despite volatility and occasional sharp corrections as they become more common..
Be honest with yourself, because if you buy with a long term perspective and the price of the cryptocurrency you just bought drops by 20%, you may well start to panic and lean towards selling at a loss..
The worst thing you can do is not understand your own motives. If you can’t figure out what you want, then how can you develop an effective strategy?
To really understand what you are good at, you need to try something new and not be afraid to experiment (with small amounts that you can easily afford to lose).
You may also consider opening a free demo account using the popular trading platform that offers cryptocurrency trading.
However, free demo accounts often do not repeat the same experience as live trading, as a trader does not experience the same emotional stress and anxiety as when trading with real money..
Although, a free demo account or a paper account is well suited for completely green beginners in the first steps, in order to painlessly study the working interface of the exchange and in practice understand how it works.
What is leverage or margin trading
Trading assets, including cryptocurrencies, on the online trading platform will attract leverage.
This means that the potential benefits you could get are multiplied by 10, 100, or even 1000 times. Conversely, you can also easily incur losses, and leverage will accelerate this process by the same 10, 100 or 1000 times..
The easiest way to explain the use of leverage or margin trading to someone unfamiliar with the concept is to compare it to getting a home mortgage..
Of course, there is a significant difference between a bank and an online brokerage platform offering margin. For example, if the price of the house falls below the value of the deposit, the bank will not give you a margin call, ask you to make up for the shortfall, or worse, automatically sell your property and require you to return everything at once, including any deficits. In fact, it is the same with online trading platforms that allow you to trade on margin or leverage.
Let’s say for simplicity: the deposit margin for bitcoins is 10%. This means that if Bitcoin is trading for $ 12,000, the online trading platform will ask you for a deposit of at least $ 1,200. This can seem very beneficial as you can access the whole bitcoin by depositing only a fraction of its current market value. But you should understand that the potential profits and losses are significantly increased, which also means that you can lose your deposit very easily, because the $ 1,200 that is already pledged by the broker, he will take away at the same moment as the loss on the opened by you positions will approach the coverage amount, while the broker liquidates the position itself on quite legal grounds, in order to prevent large losses. This procedure is called Margin Call.
Therefore, leveraged trading is extremely risky and certainly not suitable for newcomers to cryptocurrency. After all, the crypt is already highly volatile and unpredictable. Why Exacerbate Your Risks?
When you buy or trade cryptocurrency through an exchange or wallet, it usually happens without any leverage. This does not mean that your capital is not at risk. You can lose all of your money without using leverage, except that you generally don’t get more than your investment..
There are currently certain crypto exchanges experimenting with derivatives and leverage, although these tools will target more professionals..
But at the same time, be patient and don’t be afraid to experiment (with amounts that you are not afraid to part with). Over time, you will improve your understanding of the markets and be able to identify your strengths.
Learn about the markets and keep a journal to develop your skills
Don’t feel like you have to learn everything at once. Some things will come to you naturally, and then they will simply focus on developing your powers and make them even more effective..
Keep a trading diary
Record your observations about the market and different asset classes in a trading diary or notebook. Also use your diary to record your key investment or trading decisions, clearly stating why you are choosing certain positions.
There is nothing wrong with keeping a trader’s diary, do it regularly and correctly:
- Check the decisions and risks you documented on your laptop (daily if you want to be a successful trader).
- Be careful in your reviews and write down what went wrong (we usually learn from our mistakes).
- Try different trading styles and strategies
You don’t have to be a day trader. Perhaps you will trade positionally, only under certain market conditions.
For example, you might decide to buy a cryptocurrency before its block reward is halved, and then sell after it has increased by x%. And that may be the only strategy you’ll ever follow and focus on..
Do research and experiment, but so that all your steps are structured and measured.
Understand risks and learn how to manage them
How you approach risk is critical. Being a good trader is all about building stamina and longevity, and you can only do this if you learn to withstand blows..
You should start by assessing the potential risks and losses that could arise if certain adverse scenarios arise. Usually, this is the first point to call before making a trade..
Study a number of different risk metrics to understand how volatile the asset you will be dealing with is. These risk metrics include understanding things like price variance, standard deviation, and so on..
Build your own risk management system that will be comfortable for you and relieve unnecessary psychological stress when trading.
Use limit orders
Limit orders are extremely useful for reducing the risks of trading and investing, especially when the underlying market or asset is extremely volatile.
For example, if you place a market order to buy bitcoins, you may not get your desired price due to price volatility. However, limit orders will help you achieve your desired price or even improve it when buying and selling. Find out how to use them.
If you place buy limit orders, this will allow you to buy at the price you want, or even lower (which is best for you). Sell limit orders will allow you to sell at the price you want or higher (i.e. also better for you).
Close losing positions
You can sometimes become biased by reputable analysts reporting on the news, so the lesson here is to learn to be as objective as possible..
Never “fall in love” with your positions and be prepared to cut your losses.
Professional traders in traditional financial markets often exit positions when the underlying price of an asset is between 15% and 20% in the red, but this decision will largely depend on your circumstances and the type of strategy you choose to follow..
It is good practice to try to set a stop loss rule for yourself
Stop loss is useful because you can set it to automatically close a position when a certain unfavorable price threshold is reached, thereby limiting your losses.
Stop loss is absolutely essential to use when trading with leverage or margin.
Learn how to place your stop loss correctly, because if you place it too close to your starting level, you risk being stopped too early. However, if you place your stop loss too far from your starting level, you can end up with significant losses that cannot be returned to an online broker. Learn to manage your risk.
Assess liquidity risk carefully
If the cryptocurrency asset you are trading has low liquidity, then you risk being exposed to sharp and sudden price jumps (up or down).
As explained above, this is why it is especially important for you to learn how to use limit orders when buying and selling crypt, as well as stop loss.
Lack of liquidity will lead to sharp price spikes, so if you place your stop loss too close to the entry level, you can quickly be stopped at a loss and fall prey to slippage (when the position is closed well below the stop loss level).
You can reduce the risk of slippage by using a guaranteed stop loss, although not every broker or online trading platform offers this..
Experienced traders understand the tremendous value of market data when trading cryptocurrencies. Using both fundamental and technical analysis, you can manage their risks by identifying new trends and market behavior. While these metrics can be intimidating for newbies, a little research goes a long way..
In line with long-term trading strategies such as DCA (Dollar-Cost Averaging), fundamental analysis examines the main factors that influence the prices of digital assets. These factors can include the project’s vision and goals, the quality of the project team, the level of activity of the project on Github, the project’s social media presence and size of its community, and the history of achieving its goals. Using this method for short-term analysis is especially challenging given the high volatility in cryptocurrency markets..
Unlike the long-term application of fundamental analysis, technical analysis focuses on short-term price movements (in terms of hours or days, not months or years). When conducting technical analysis, price charts often reveal trends and patterns that give traders an immediate understanding of the market. By simplifying these short-term forecasts, technical analysis is extremely important for day traders and others looking to make quick profits. As a result of ongoing cryptocurrency volatility, technical analysis continues to gain momentum.
Centralized cryptocurrency exchanges
Most cryptocurrency exchanges are centralized today. This dynamic means that ETFs are owned by the exchange itself and not by the users. For some, this arrangement is problematic, given the rich history of hacking of these sites..
However, large centralized exchanges also offer reliable volume and ample liquidity, providing a lot of flexibility for traders. To manage the risk of being hacked, many users have started storing their funds in personal wallets rather than the exchange’s centralized wallet..
Decentralized cryptocurrency exchanges
Decentralized exchanges are becoming more prominent in the digital asset ecosystem. Unlike centralized ones, these platforms facilitate peer-to-peer transfers by eliminating the need for an exchange intermediary. And although in principle they are similar to each other, these platforms differ greatly in functionality..
In general, decentralized exchanges offer the following benefits:
- Trading without deposit
- Atomic Swaps (Instant Swaps)
- No withdrawal or top-up is required
In addition to these features, AtomicDEX is also the first atomic replacement DEX available on mobile. It is also the only DEX bridging the gap between Bitcoin and Ethereum-based ERC-20 tokens. This functionality makes AtomicDEX an excellent choice among all decentralized exchanges..
For those new to the digital asset class, trading should always start with an extensive due diligence process. While they are similar in functionality to traditional markets, digital currencies remain highly volatile and traders must consider inherent risks. While stable incomes are possible, losses are also likely.
Using both fundamental and technical analysis can help traders make objective, evidence-based decisions. Using this approach can help newcomers make pragmatic decisions rather than emotional ones..
Develop strategies based on your observations and experiments. You need to be aware of the changing market and any relevant news, regularly implement your strategy and be sure that you are making the best and most informed decisions..
While cryptocurrency trading can be challenging, with practice and desire, even beginners can be successful..