How To Trade Cryptocurrencies? The Beginner’s Guide
Learn all you need to know before start trading bitcoin, Ethereum or any other cryptocurrency. The complete guide for beginners looking to start trading.
The value of cryptocurrencies has increased so much in recent years that they have made the headlines and have attracted more and more traders. If before market trading was something reserved to the financial elite, with the arrival of online currency exchanges and trading platforms, everyone has been able to join the market speculation. Of course education remains very important to avoid huge disappointments when entering the markets.
How Cryptocurrency Trading Works?
When you trade currencies (or cryptocurrencies in this case) you exchange currency that you own into another kind of currency. The aim is that you will than exchange it back when the price will increase: if that happens you will make a profit. In the world of the traditional currencies this is known as forex market trading.
Foreign exchange also known as forex is the market trading where you can buy or sell currencies. It is simply the exchange of a currency that you own into another and than exchanging it back at a later date hoping for a profit. Forex market trading normally happens with traders that use online platforms.
How do you make a profit with forex trading?
The best thing for you to understand how you can make a profit with forex trading is to do an example. Let’s say that on January 5, 2018 you own $1,000 and you decide to change it into euros (EUR) with a rate of EUR €0.9565. After that transaction you will be with EUR €956.50. Than on November 27, 2018 the value of the US has fallen from EUR €0.9565 to EUR €0.8380. You than decide to change those back into US dollar and make a profit with the difference. Your EUR €956.50 will now be worth $1,141.40 which will leave you with a profit of just more than 14%.
How do you trade cryptocurrencies?
Trading cryptocurrencies works in the same way as with normal currencies. The only difference that instead of buying and selling normal currencies you do buy and sell cryptocurrencies like bitcoin, Ether (ETH) or Litecoin.
Similarly to forex market trading, when you trade with cryptocurrency you exchange one currency into another and back. Normally you start by exchanging a normal currency into a cryptocurrency and than you change it back into a normal currency even though there are also traders that allow cryptocurrency-to-cryptocurrency trading.
What are the two types of trades in cryptocurrencies?
There are 2 types of trading strategies that are available to traders that are involved in cryptocurrency market:
Long-term trading – Long-term traders do buy and than hold cryptocurrencies for long time. There isn’t a precise time of how long they are going to hold but it can be for weeks, months and sometimes even years. Those type of traders study the price trends over a long period of time and make informed decisions without being affected from short-term price change in value.
If for example you do believe that the value of a cryptocurrency will improve over a long period you don’t want to be stressed and affected by short-term value change and you will hold until you come to a decision that it is the right time to sell.
Short-term trading – In the short-term trading traders focus on the short-term opportunities rather than the ‘long-view’.
With this strategy traders are focused in taking advantage of the short-term price movements so they do buy and sell cryptocurrencies over few minutes, hours or just few days. So this strategy use the volatility of cryptocurrencies and traders go in and out of the trade very quickly.
What are the main advantages of trading cryptocurrencies?
There are many risks but also many advantages in trading cryptocurrencies and below we have highlighted the main ones:
- Cheap fees and fast exchanges. Even if the exchange platform you are going to use is going to charge a small percentage as commission for the service provided it is still significantly cheaper than when trading normal currencies. The reason is that the fees for moving cryptocurrencies (which are normally transferred via wallet payments) are far cheaper than credit card and bank transfer. This is why trading fees for cryptocurrency are cheaper than forex trading fees.
- Massive volatility. Traders make their profit when the price of a currency swing significantly. Cryptocurrencies are very volatile assets as they do experience very last price movements. Surely this also carries huge risks as the large price movements can also happen downwards as we have seen in recent times but if things go in the right direction it will allow traders to make lots of profit even with a very low bankroll.
- Always open. Stocks and commodities can only be traded during business hours and forex can only be traded during weekdays. With cryptocurrencies there aren’t limitations as they can be traded 24/7 from anywhere. That opens up lots more opportunities.
What are the things you have to be careful of when trading cryptocurrencies?
As mentioned before there might be lots of opportunities in trading cryptocurrencies but there are also risks to be aware of. When it comes to cryptocurrency trading you could find yourself gambling instead of trading which will lead eventually to burn all your money. It needs to be clear that trading is not a game and even if there are lots of money to be made there are also real money to be lost. Trading has to be approached in the right way in order to be successful: you will need to do your own research and also follow the education so that you can be aware and avoid the pitfalls of cryptocurrency trading. Below we have highlighted what are the biggest risks when trading with cryptocurrencies:
The first thing to remember when trading with cryptocurrency is that their price is extremely volatile. Compared with forex where it can take months for a trade strategy to come to fruition, in cryptocurrency trading it can only take few hours. Surely this is beneficial if things are moving in your advantage but it can also be a huge problem if the price moves the other way.
For example in September 2017 Litecoin’s value went down more than 50% in the space of just 2 weeks. So not only Cryptocurrencies do move up and down very fast but they also do this in very short time so make sure your strategy is set up to deal with this peculiarity.
Do not always trust patterns: surely patterns are useful and there are plenty of market-trading books and guides that explain the different chart-reading techniques and patterns that professional traders use to try to predict market movements. The market in some cases do follow patterns but remember that there is never a guaranteed outcome. If you are not prepare to limit your exposure when things take another route you could be losing lots of money to follow a pattern that in reality do not exist.
Always limit your exposure: limiting the exposure is probably the most important thing when trading. There are two concepts that you always have to keep in mind:
1 – You should never invest more than you can lose. The best way to go about it is to consider the money you have invested as lost money. If you are uncomfortable with this than you shouldn’t trade or you are trading more money than you should. It is a key element as it will help you to trade without stress
2 – Always set up a ‘take profit’ and ‘stop loss’ orders. In many professional trading platforms you will find easy ways to set those and it will allow you to avoid losing more than you are comfortable losing if things will go wrong and also it will help you to avoid missing to lock out profit opportunities.
Stay well away from leverage: leverage is basically money that a broker will loan you. Although this can be useful for a professional trader that doesn’t have to come into the market with a huge bank it can be extremely disruptive for a beginner trader. Our strong suggestion is that you stay well away from leverage until you have learned very well how you can making trades and possibly generate profit with your own money. Surely leverage is a tempting tool and can allow you to make greater profits with short cryptocurrency movements but it can also hugely amplify your losses if the trade goes against you. If you are not familiar with the concept of leverage let’s look at this example below:
You decide to trade £2,000 to BTC. Than you leverage another £10,000 from your broker. This will now allow you to buy 1.6 BTC at £7,500/BTC. If you than sell at £8,500/BTC you can than return the £10,000 to your broker and you are left with a total of £3,600 which makes a profit of £1,600 from your initial £2,000. The issue is that it could go exactly the other way around which in this case could create you a loss of £1,600. So always remember that leverage can amplify your winnings but can also amplify your losses in the same way. As a beginner trader the risk of using leverage it is just not worth as it is far too early in your trader’s career.
You have to know when to cash out: a very important thing when trading is understand when it is the time to close the trade. Everyone can get into the trade but knowing when to get out of the trade that is much harder. You should learn those two different aspects:
- How to close a trade in profit – It is very important longer term that you take your winnings out of a trade. Especially when dealing with assets volatile like the Cryptocurrencies you need to move very fast to lock your profit. Surely you don’t want to be late in cashing out a trade. On the other hand you shouldn’t close the deal too early as you can miss out on extra profit. There are many techniques that will guide you in this critical decision so spend time to familiarise with those
- Cutting your losses – if a trade is going wrong and you are not stopping the loss the situation could become dramatic. On the other hand tough you might not want to get out too early in case the cryptocurrency will recover. There are many guides and books to guide you in this critical decision so do spend the necessary time to improve on this fundamental area of trading
How to start trading with Cryptocurrencies?
So now you know well how the Cryptocurrencies are working and if you believe you can get good results you should start trying out and trade cryptocurrencies. Let’s take a look now what are the things you need to start trading cryptocurrency:
How to find a cryptocurrency broker?
You can’t trade cryptocurrencies if you don’t have a deal with an online broker that do provide a trading platform. Here is a full list of fully trustable cryptocurrency brokers so go ahead, read the reviews and ultimately pick the one that most suits you. All those brokers do provide cryptocurrency trading however before you go ahead make sure you check the following things:
- Cryptocurrency options – does the broker have a good range of cryptocurrencies? Most importantly does he let you exchange the cryptocurrency you would like to trade? You should consider only brokers that let you trade at least the most common cryptocurrencies which are bitcoin, Litecoin and Ethereum. Those are by far the most stable and the easiest to find a broker to trade on.
- Leverage – If you want to take full advantage of the smaller price movements than you should consider a broker that will provide you leverage. If however you are just a beginner you should avoid using leverage until you have acquired the necessary experience.
- Negative balance protection – this is absolutely a must for a beginner. With negative balance protection you will ensure that you will never lose more than you have invested.
- Starting capital – make sure to pick a broker that do not require a minimum starting amount that is higher than the amount you have decided to invest.
Learn how to use a trading platform
After you have picked the cryptocurrency broker the next thing you need to do is to learn to use the trading platforms that are offered by the broker. Every broker has a system slightly different from another and learning how the platform works and what feature it has will be a key part of your trading success.
It is normal to feel overwhelmed when you get for the first time into a broker’s trading platform but after sometime and with the right education you will get very proficient and this will have a significant direct effect on the profitability of your tradess.
Is it the right time to start trading Cryptocurrencies?
Even with Cryptocurrencies it is important to ‘buy low and sell high’. Don’t just enter the cryptocurrency market at any time: buying cryptocurrencies when they are at an all-time high is a receipt for disaster. In the same way do not sell them when they are at an all-time low. Remember Cryptocurrency markets are very volatile and this has to be considered in the analysis of when entering or exiting the trade.
Open a Cryptocurrencies demo account
Surely the theory is important but once you have done your homework the best way to learn is to actually trade. You will need to get your hands dirty and you can do that without risking real money as you can try your strategies by using a demo account that every top broker will provide you for free.
What is affecting the price of a cryptocurrency?
Cryptocurrencies are a very volatile asset by nature and this is hardly surprising as they are not as stable as normal currencies that have centuries of history at their back. Bitcoin is the oldest cryptocurrency in the market and it has only been around since 2009. Having said that there are a number of things that can affect the price of cryptocurrencies:
- Regulation – when a government do make a statement or push a particular regulation that do have an effect on cryptocurrencies than the price of it will react. This is normally in the positive side but can also be negative like when China banned ICOs: in that particular circumstance the price of Ethereum feel by 41% in the space of only 15 days.
- Media influence – similarly to government law changes also exposure in media can have a big effect on cryptocurrency’s price. This is for example if a public figure make a statement about a particular cryptocurrency or if a major retailer adopt cryptocurrency as a form of payment. All those things normally see the market responding.
- Changes to the technology – if there is a big change in a cryptocurrency’s core technology than the price can be affected. It can be for example an update or a flow being found
So as you have learned here trading cryptocurrencies is very similar to trading normal currencies. So if you are getting involved in cryptocurrencies trading you will find useful to learn the theory that is behind trading currencies. Surely there are great trading opportunities with cryptocurrencies however profits can never be guaranteed when trading so in order to make it long term you have to take steps to protect your money from the heavy losses that can happen in the market. Also, you should be aware of the risks of leverage especially if you are still at the beginning and don’t have enough experience on how the markets move.
Cryptocurrency can be extremely profitable but only if you are play the right cards and have the right education. Now that you have gone through this beginner’s guide you should be in the position to open a demo account with a cryptocurrency broker and start this exciting adventure.