How to Trade Cryptocurrencies: Basics, Specifics, and Strategies You Can Use
Many people believe cryptocurrency to be a bubble that will burst and leave investors empty-handed. But will that happen? New things always seem weird and suspicious. But if you look at cryptocurrency trading, you’ll see that cryptocurrency isn’t. Due to trading, the crypto sphere has taken a big step forward and doesn’t seem to be going anywhere soon.
The basics
Cryptocurrency trading is, in many respects, the younger cousin of traditional trading. They belong to the same family and share many similarities, but are also quite different. To get a better idea of what cryptocurrency trading is, let’s start with traditional trading, the older cousin.
What is trading?
Everyone trades in everyday life. For example, you trade when you’re buying something in a shop. And while most people buy a product to consume it or use it, some may choose to later sell those goods at a higher price and get profit. Trading in the financial markets works the same way.
Buying and selling are the primary activities of participants in financial markets. The difference is that they’re dealing with financial products. Additionally, traders don’t buy and sell at any random time. Rather, they wait to buy and sell until the price changes in their favor. If you buy at a low rate and then sell at a higher one, you gain profit.
Who is a trader?
Now that we’ve defined what trading is, let’s draw a portrait of a trader.
Let’s now take a closer look at who traders are. As far as trading is buying and selling financial assets, traders are those who buy and sell them. They can engage in these activities on their own or act on behalf of a company or clients. Does trading now seem an easy activity that anybody can handle?
Let’s dive a bit deeper into the profession. Traders don’t simply buy and sell when they want to. They look for profitable opportunities. Since they risk their personal money (or the money of their clients), they must be confident about the results of their actions. So they analyze information, develop strategies, and often must make quick decisions once a situation turns favorable.
Cryptocurrency trading vs traditional trading
When it comes to the basics, cryptocurrency trading is much like traditional trading. Even so, it has many distinctive features to which beginners should pay attention. Here are some of the similarities and differences.
Common features
Traditional financial trading and cryptocurrency trading share the same goal and make use of similar strategies. They also both require basic knowledge of trading concepts as well as strong emotional intelligence.
The goal
No matter what assets they trade, the goal of traders is to profit from price changes.
The strategies
Cryptocurrency trading mirrors trading in the financial markets. That’s why traders make use of developed strategies and follow them to succeed.
The basics
To make it in trading, traders should understand how the market works and thoroughly research the assets they’re dealing with. They should also keep an eye on the trends in the field.
Traders’ skills
Last but not least, traders need skills in processing and analyzing vast volumes of information and managing risks. They should also work out trading plans and take responsibility.
Specifics of trading in the crypto market
Cryptocurrency trading makes use of the main principles of trading traditional assets. But it also has many specific features that make it more exciting.
- Crypto trading is brand-new. Unlike trading of traditional assets, it’s unregulated, which allows for higher volatility.
- Most players in the market are newcomers who have little to no experience as traders. So there’s much room for success.
- Crypto assets differ from traditional financial assets in many respects. They’re more volatile and depend on the news and market changes significantly.
- Cryptocurrencies are said to have no “real-world” value. Their value derives from people’s interest and demand.
- Though starting to gain popularity, cryptocurrencies still lack support of most people. People always need time to start trusting new things.
- The cryptocurrency market is available 24/7. This means that traders don’t need to close their positions at a pre-determined time.
- Entering the cryptocurrency market is quite easy. It’s also less expensive to get started trading crypto than trading traditional assets.
These features add to the complexity of cryptocurrency trading. In any case, trading cryptocurrencies may bring success if one knows how to trade. The important thing is to understand how to do it right.
Preparing for successful crypto trading
As we’ve already discussed, trading cryptocurrencies can be profitable if approached with the right strategy. But before entering the market, there are a bunch of things to do.
Understanding the nature of cryptocurrencies
Cryptocurrencies are quite different from traditional financial assets. Mind this when jumping on the crypto trading bandwagon.
- Cryptocurrency prices are hardly predictable. The value of fiat currency is supported by a government, but there is no such regulator for cryptocurrency. Prices move up and down depending on people’s interest and demand.
- The primary value of cryptocurrencies is in enabling decentralization. Still, many experts say that the cryptocurrencies with the brightest futures are those that have actual utility. Ethereum’s ETH, Stellar’s XLM, and Ripple’s XRP are examples of such coins.
- The news impacts cryptocurrency rates significantly. News about exchange hacks or blockchain upgrades can turn prices in the opposite direction in the blink of an eye, as can a shift in the treatment of cryptocurrencies by banks or regulators.
- Price changes in the cryptocurrency market can be intense. Over several years, cryptocurrencies like Bitcoin and Ethereum have grown in value hundreds of times. But they can likewise collapse.
These are the main aspects to consider when thinking about cryptocurrency trading. Once you know all of this, you’re halfway to success.
Understanding trading and exchanges
First, you need to understand how trading works. Start with learning the terminology you’ll be using every day. You can find many websites explaining the most important trading and cryptocurrency terms.
You should also get familiar with technical and fundamental analysis. Those are the two basic instruments of traders. Technical analysis allows you to read the charts on exchanges, recognize trends, and pick the right moment to buy. Fundamental analysis provides a deeper understanding of the assets you’re trading and defines long-term trends. Applying both tools will ensure effective decision-making and help you develop a strategy.
Once you have the theoretical foundation, choose an online exchange. An exchange is a place where trading actually takes place. Exchanges are platforms for trading cryptocurrencies. They also offer instruments to help traders be successful.
Popular strategies for trading crypto
The final step before you start trading is developing a strategy. Some strategies that work well in cryptocurrency trading include scalping, arbitrage, swing trading, following trends, position trading, and HODLing.
- Scalping
This strategy is based on the idea that small but instant profits add up to significant gains. The basic rule is that you sell the cryptocurrency right after its price rises a little bit. Using this strategy, you don’t need to wait long for a result. You gain small profits in seconds or minutes, but you should have a well-thought-out exit strategy.
- Arbitrage
When you employ arbitrage, you buy crypto on one exchange and then sell it on another at a higher rate. This is possible because the prices and trading volumes differ across markets. Your gain is the difference between the buy and sell prices. Still, this is a risky strategy, as arbitrage opportunities come and pass quite fast.
- Swing trading
Whereas scalping involves instant profits, swing trading brings benefits in several days. Swing trading brings higher profits from a single trade in a short time. However, since swing trading extends for several days, it implies higher risks. So you should be good at technical analysis to play it right.
- Following trends
This strategy allows traders to take advantage of big price moves and gain large profits. But to succeed at following trends, you should be a technical analysis whiz. You should be able to identify trends and adapt your strategy to them. Ideally, you should buy when the growth trend starts and then sell when the downward trend emerges.
- Position trading
Position trading may take months. If you opt for this strategy, you should have deep knowledge of technical and fundamental analysis. As a position trader, you’ll use weekly and monthly charts to find the best moments to buy and sell. You should still be confident about your actions, as minor price fluctuations can be stressful and discouraging.
- HODLing
This is the strategy that many crypto enthusiasts follow. You just buy any cryptocurrency and keep it until the price increases to what you’re expecting. However, this strategy only brings revenue over the long term. To keep to this principle, you should have no shadow of a doubt that your crypto will grow in value.
You can apply many more strategies to cryptocurrency trading. Make sure to test any strategy and remember that you may sometimes fail. Still, most traders treat failure as a way to improve their performance and achieve better results in the future.
If you’re determined to become a successful cryptocurrency trader, you have much work to do. Start with the basics of trading and learn about cryptocurrencies as an asset. Once you feel you have the necessary knowledge, you may want to start trading. Before you do, make sure you understand all risks associated with crypto trading. Then, with every trade, you’ll get more experience. Just work toward your goal and you’ll have every chance to succeed.
This article is an overview of cryptocurrency trading and trading strategies and should not be seen as trading or financial advice. Everyone should make own research before engaging in trading.
