Cryptocurrency Trading 101: How to Crush The Markets
What Is Cryptocurrency Trading
Cryptocurrency trading is the process of exchanging cryptocurrencies with one or more other traders.
It’s the same principle as trading fiat or physical currencies in that you agree to an amount then send or receive the currency.
There are a few extra things to be aware of when trading cryptocurrencies however as I’ll cover in this article. But it’s really as simple as agreeing to an exchange with another person and following the necessary steps.
What Do You Need to Get Started Trading Cryptocurrencies?
There are two key things you must have to start trading:
- One or more cryptocurrency wallets
- One or more cryptocurrency exchanges to trade on
A cryptocurrency wallet is needed to store your private keys and the public keys you’ll be sending or receiving money from.
You can also store your cryptos at the exchange but we recommend keeping them in a private wallet as you don't want to get MT.Goxed or BTC-Ed.
Wallets are pieces of software that you can look at as operating in a similar way to a personal wallet in that they handle your currency, but you manage them online.
There are a few different ways to manage your wallet. You can install it locally on a desktop, use it via your mobile, have it based on the cloud, or use a piece of hardware. Either way, you’ll have access to it as long as you have an internet connection.
It’s worth noting that crypto wallets do not actually store currency, transactions are stored on the blockchain. Your wallet stores the keys that allow you to make transactions with other blockchain users and write new transactions.
The balance in your wallet is updated when the transaction is written to the blockchain, and it’s also worth noting that there is no going back on the transaction from that point.
Cryptocurrency exchanges or digital currency exchanges (DCE) as they are known are the platforms where you can exchange currencies with other traders.
I recommend sticking to the popular crypto exchanges when starting out for obvious reasons. Different platforms have various advantages or disadvantages however, so take the time to read the terms and conditions or look up some user feedback if you want to be adventurous.
For anyone new to cryptocurrency trading, here are a few of the key things to be aware of that are different to conventional financial trading:
The Cryptocurrency Market Can Be Very Volatile - While there is a steep learning curve for managing any financial investment, the cryptocurrency world has a history of being very volatile.
It’s always advisable for new traders to start small and stick to the larger currencies. At the start of 2018 there were more than 1,300 different cryptocurrencies, so do your research to minimize your risk and not feel overwhelmed.
You're Not Trading on the Stock Exchange - If you have experience trading on the stock exchange you’ll have an understanding of trading fundamentals. But you need to be aware that cryptocurrency trading is very different to the stock exchange.
Coinbase is one of the best exchanges for beginners - There are various places to buy and sell cryptocurrencies. Coinbase is one of the largest platforms, it’s long-established and trusted, and therefore one of the best places for new traders to get started.
Now that you have set up your wallet and created an account at an exvhange you are ready to trade right? Hold your horses and let's look the different types of orders and how to use them.
Market Order: This is the most straightforward type of order. When you are placing a market order you buy or sell the selected amount of cryptocurrency at the current price immediately.
This type of order can be used by people watching the price action and think it is at a crucial point and also for people looking to get in at a coin as soon as possible.
Limit Order: This is another basic type of order that enables you to buy at a lower price than the market price and sell at a higher price.
Example: If the price of a crypto is $100 and you think there is a massive support at $90 you can put a limit buy at $90 and buy when it reaches that price. On the other hand if you think there is a resistance at $110 you can put a limit sell at $110 and sell your coins when price reaches this point.
Stop Order: With this type of order you can buy at a higher price than the market price and sell lower. This type of order is often used as a stop- loss.
Example: Lets say the price of a crypto is $500 and after you made your analysis you came to the conclusion that if the price breaks the $550 resistance it will skyrocket, you can place a stop buy order at $550 and moon. Contrarily if you think that if it breaks the $450 support it will sink you can put a market sell order at $450.
There are other more advanced orders like One Cancels the Other (OCO), Trailing Stop and Stop - Limit. Master the 3 basic types of order and you can learn more advanced stuff to our private training.
Cryptocurrency Margin Trading
Margin trading is one of the ways you can increase the amount you’re investing without having the funds readily available yourself.
You do this by adding what’s called “leverage” to the investment. This essentially means you’re borrowing funds from a lender on the exchange.
Lenders are willing to do this because they charge interest on their loans, much the same as you would expect to see with a bank loan.
Lets see how this work:
Lets say you have $100 to invest and you have the reason to believe coin X that costs $100 will go up, and your broker gives you the choice to use a 2x leverage.
So you can "buy" (you don't buy the actual cryptocurrency it's most like betting that it will go up) 2 coins.
Let's say you were right and after 2 days your coin moons to $150 and you decide to take profits. You "bought" 2 coins at $100 and "sold" them at $150 so you have an almost $100 (minus spread fees etc.) gain.
But what happens if things doesn't go your way?
Using the above example you "bought" 2 coins at $100 but the price goes down suddenly what will happen?
The amount you invested is $100 and you "bought" 2 coins. The exchange will forcefully close your position when you lose the $100 you actually have, in this case if the coin goes to $50 (2 coins * $50 loss at each one).
Of course it is not so simple there are also other things exchanges use like maintenance margin limit and initial margin limit but we will cover these in another article.
Some of the reasons people do this is to take advantage of investment opportunities they would otherwise not be able to afford.
It sounds easy, and for the most part, it is. As you would expect, there are some safeguards in place to stop reckless margin trades from the lender’s side.
Due to the increased risks involved when margin trading you can only do so on a margin account or an exchange set to accept margin trades. Margin accounts make it easy to lend cryptocurrencies and benefit from interest on the loans.
Margin Trading Tips for Beginners
Be aware of the risks - As mentioned above, there is a greater risk when trading on margin as you’re essentially putting up funds you may not have that can potentially be lost.
Keep a Close Eye on Your Account - Cryptocurrencies can be volatile at short notice, and this is doubled when trading on margin. Margin trading is better suited to someone willing to check on their investment at least daily.
Manage your funds - You can lose all the funds than you have in your account. Do you have a backup plan if this were to happen?
Should You Consider Margin Trading?
It sounds like a great way to get a head start in cryptocurrency trading, right? Especially if you’re used to borrowing funds to trade and are experienced in the stock market or other investment marketplaces.
However, it’s not recommended unless you’re also experienced with crypto trading. With the crypto market being more volatile than traditional trading there are magnified risks and you need to be prepared to lose your investment.
There are success stories too. By making smart investments you can also see greater returns on your investment than you would have had you not added the extra leverage of a margin trade, that’s the nature of the risk.
Advantages of Margin Trading
- With the leverage, you can buy up more times the amount as you would with cash.
- You are able to move quickly on short-term opportunities that arise in the market.
- You can build a more diverse portfolio by using your margin account to add positions in other coins.
- You can utilize carry trades which refer to borrowing at a lower interest rate and investing in an asset that may produce higher returns.
Which Coin to buy and When?
This is probably a million dollar question that everyone wants to know. There is no certain, neither a right or wrong answer for this.
You will not hear a certain coin or a certain price to buy from us, but you will learn how to do your own analysis and make the critical decision. So let's break down this question in two parts.
The first one is "which coin to buy?"
Before buying a coin you should do your due diligence and find if it is the right one, like you do before buying an ICO. The due diligence process is also called Fundamental Analysis. Below we have broken down the process in detail.
The second part of the question is "when?".
After you did your homework and decided on the coin you like you have to find out at which price you will buy.
Is the price too high? But if it gets higher and i miss? Maybe it will sink and i will lose my money.
These are some of the most common questions comes to our readers minds at this point. You can answer these questions by doing sentimental and technical analysis. These techniques will help you get a more clear picture of the price action and "predict" the movement of the price.
Fundamental analysis is a technique used to analyze the performance of a cryptocurrency by carrying out some due diligence using certain methods.
This may include looking at the historical value, future forecasts, and any other metrics that help you understand the economic strength of the coin and how it’s performed to-date.
It’s important to carry out your own fundamental analysis before investing in any currencies to minimize your risk and give you a good picture of what to expect in return.
In principle, it’s the same with traditional financial investments. You would look at the economic strength of the company you’re looking to purchase stocks in and what kind of return you can expect.
With cryptocurrencies however, in practice, there are some fundamental differences from traditional investing to be aware of. Such as:
Lack of history - Even Bitcoin, the first decentralized and most well-known cryptocurrency only dates back to 2009. There isn’t the kind of historical data to work with as you’d find with companies, stocks, and shares.
Cryptocurrencies are decentralized - You need to be comfortable with the fact that cryptocurrencies are decentralized. Their values are not determined by an organization behind them generating revenue, but rather the community activity behind them.
You’re not investing in a corporation - There are no corporations behind cryptocurrencies. You can’t hold a single body responsible for losses and gains with adds to the volatile nature of cryptocurrencies for both the good and bad.
How to Carry out Fundamental Analysis on a Cryptocurrency
Here are a few of the things you can do as a starting point to gather some key information on a coin.
Read The White Paper - Tokens and cryptocurrencies have white papers. These papers are written up to include everything you need to know about them and either you, or your lawyer should always read the paper.
White papers include details on what the goal of the cryptocurrency is, why the team behind it think there is a need for it, their milestones, how they intended to operate, if there will be ICOs, and more.
Get Involved in the Community - Communities play a large part in the success of a coin, and they are a great place to ask questions or read up on what other people are saying.
Find Their Slack Channel - Most development teams use Slack as their main communication channel. Get involved and if you have any questions ask the team directly and see how responsive and helpful they are.
From these three avenues you should have a clear picture on the team behind the coin, their experience in the cryptocurrency market, the coin supply, a timeline for future development, the technology they are using, how the team intend to use the funds, and have any additional questions you may have should get answered.
Follow the news - Make sure to know all the news about the cryptos you are looking to invest. Is there any major update on the road? Was there a hack? Maybe some bugs were fund. News can affect a coin's price big time so make sure to learn about them as early as you can.
Technical analysis is a method used by cryptocurrency traders to evaluate the market, gain a better understanding of how it’s performing, and ultimately make an informed decision before investing.
Typically you will look at the history of a coin, price charts, trading volumes, and other metrics to predict the future price movements and make smarter trades.
The Difference Between Fundamental and Technical Analysis
If you think technical analysis sounds similar to fundamental analysis as covered above it’s similar in that you’re doing due diligence to make smarter trades, but you’re analyzing different metrics.
The main differences are that with technical analysis you’re not concerned with placing a value on the coin now, but rather trying to predict where the value will go in the future.
Understanding Dow Theory
To better understand technical analysis you need to know the fundamentals of Dow Theory. If you're not familiar with Dow Theory, you need to get to grips with the following principles:
- Multiple variables are included in a coins price. This means past, current, and future demand, as well as any other forces that can affect the market.
- Prices are always following trends. Maybe these trends are long or short, but movements in prices are not random.
- History will likely repeat itself, making it possible to predict the movement of a market and react in a similar way as the last time.
- Volume affect prices and vice versa. For example, a weakening trend can be identified by a drop in volume.
Using Trend Lines
You can see the highs and lows of a coin and plot a line of best fit to give you an idea of the projected future for the coin.
There are some other variables to take into account and trends come in many forms, this is an integral part of technical analysis.
As you can see in the picture above we drew the trend like of bitcoin during a down trend by drawing a line that connects all the high pivot points. During an uptrend you should connect all the low points.
This trend line is used as a resistance we expect prices to bounce when coming close to it and when price action breaks above it we have a trend change.
Using Moving Averages
Another technical analysis method is to look at the moving average of a cryptocurrency. To do this you look at the average price of a coin over a set time period, then connect all the averages for each day in that period.
This is one of the quicker and easier analysis tools, so it’s great for beginners to get a feel for how the price of a coin is changing.
Moving average is calculated based on the closing prices for a set period of time. For example to calculate the moving average for 15 days you will take the closing price of a coin for the previous 15 days and then divide it by the number of the days. The truth is this indicator is pre-built in trading platforms but it is good to know what an indicator indicates.
Moving average is a lagging indicator meaning because it is calculated based on previous prices it lags to price action so you cannot predict future price action with it.
You can use moving average as a support and resistance anf go long when price breaks above it and short when price breaks below it.
Also keep in mind that moving average is the basis for MACD that is widely used by crypto traders.
Using Resistance and Support Levels
Another way of looking at a trend line is to analyze the resistance and support of a coin. This is similar to identifying the supply and demand in most cases.
For example, where there is high demand for a currency it will be high on support. However, once demand starts to drop as the coin hits its floor of buyers it enters the resistance phase.
To draw support and resistance levels you connect with a straight line the closing prices in the same area. A support/resistance area is an area that there is a lot of pressure from buyers/sellers and price action finds it difficult to surpass. Keep in mind that support / resistance is not a an exact value but more like an area.
Using Trading Volume
Identifying a relationship between trading volume and trends is another important element of technical analysis.
As you would expect, strong trends are accompanied by high trading volume and vice versa. You can also spot long-term trends happening such as volume decreasing during an increase signifying an upward trend in the long-term.
These are just some of the methods used when performing technical analysis. You’ll end up finding which methods work best for you and which give you the best information over time to help you get a better understanding of the market. If you want to learn how to create and execute a profitable technical analysis plan make sure to enroll to our lessons
Sentiment analysis (also known as opinion mining) is the third key element in a trader’s toolkit to getting a good understanding of the market and making informed trades.
It’s different from technical and fundamental analysis in that sentiment analysis largely involves analyzing the emotions and trends of other traders and crowds, and making decisions based your findings.
It’s an interesting concept because any experienced trader knows that you shouldn’t trade on emotion or be lead by your heart over your head. But people do, and if you can keep a level head you can take advantage of this.
For example, when sentiment is high for a cryptocurrency you will see a trend for people buying it, and vice versa when sentiment is low people will be selling.
Ways to Use Sentiment Analysis
Social media is one of the best ways to do sentiment analysis. Talk of cryptocurrencies is huge on social media, and you’ll often be able to spot a trend or get a feel for a wide public opinion on a topic.
Changes in sentiment on social media have correlated with changes in all kinds of financial sectors for some time, and it’s becoming a valuable tool for cryptocurrency traders.
A basic example of this is Twitter’s own Twitter Advanced Search tool. You can use this tool to find Tweets based on sentiment by typing in keywords.
You can test it out by typing in either a keyword or exact phrase you’re interested in for a set time period and bring back all Tweets with these keywords and see what people are saying.
Another interesting aspect to sentiment analysis is that although there are some useful tools to help gather a wide amount of information, it’s still hard for AI to understand human emotion based on words.
This is what enables some traders to get a competitive edge over others when they are willing to put in the time to analyze sentiment themselves and not just rely on tools.
There are two main ways tools help with sentiment analysis, these are:
- Looking for keywords across social media platforms to draw conclusions about how negatively or positively people are talking about a certain topic.
- Applying rules to certain words and categorizing them by their sentiment. Similar to the above point about keywords, but taking it a step deeper and drawing conclusions.
As I mentioned above, you can see the limitations with AI gathering all the text from social media platforms and categorizing it by sentiment.
By assigning a value or putting keywords into different categories you will get a general idea of the sentiment for a topic. But sarcasm, humor and other such emotions are hard to identify without a human eye.
Build a trading plan
Building a trading plan is the most crucial step that a lot of traders don't take and thus they fail. If you want to become a successful trader you should treat trading like a business, and like every successful business, building a "business" plan is the most important step.
The first question you have to answer is why you are trading. Of course you want to make money but you have to get more specific. You want to make some money to buy a car? You saw at the trollbox people claiming making money you want to do it also? You want to quit your job? Finding the "why" will help you get a better idea if you should start trading, and if you are really prepared to do all the sacrifices a successfull trader has to do.
The second question is what are your specific goals?. You want to double your money in a month? You want to gain a 10% per month? Answering this question will also define your trading style, is it gonna be long term?, scalping? etc.
The next step is to know your capital. Meaning how much money you are willing to spend. You might have heard it a lot of times but you should not sell your house to start trading. The money you will use for trading should be money that will not affect your current lifestyle. This is really important because you don't want your decisions get affected by thoughts like if things don't go my way i won't be able to buy diapers for the baby.
When deciding how much you can use for trading you should consider all expenses. Trading has a learning curve so you have to spend some money to educate your self. Buy some books, join a trading community, do some online courses like ours, buy a new computer etc.
You should also consider the time you are able to invest. If you have a 9-5 job you probably won't be able to spend more than 2-3 hours per day. Meaning day trading is out of the question at least for the beginning.You have to study larger time frames ,probably 4 hour plus to be able to set up some successful trades with 2-3 hour per day.
At last you have to create your actual trading plan. You have to choose the cryptos you will be trading and find the technical indicators you will use. Our opinion is that beginners should start trading ONLY bitcoin, period. It is the biggest crypto with the longest history and the highest liquidity. After you do trading for a while and know what you are doing you can add some other big coins like ethereum.
One of the biggest mistake made by beginners is to get overwhelmed by all these indicators, chart patterns fib levels out there.They try to fit all of them in a trading plan. The truth is that you have to create a plan that suits you and makes sense for you. You might choose harmonics or Elliot Waves or Fibonacci Levels, or just reversal patterns. Doesn't matter which indicators or patterns you will choose. You should study them in depth and stick with them. They will be your weapons and provide you with entry, exit points and help you set up your stop losses when things don't go your way.
How to Avoid the Most common beginners mistakes
We have talked above about the most common mistakes beginners do but in this section we gathered them and came up with some solutions to ensure that you will avoid them.
Not having a plan
We can't stress this enough. Not having a plan is like going to war without a gun. Answer the why's, define your budget, get training, choose a technical trading plan and stick to it and you are already some steps ahead from other traders.
Invest Only an amount you can afford to lose
Again really basic stuff. Invest an amount of money you can afford to lose. Let's say you spend around $200 per month on a hobby you have, this is the kind of money you afford to trade. Putting money that you can't afford will affect your trading, so make sure to avoid it at any cost.
Getting overwhelmed - over-analyzing
This one comes in hand with having a trading plan. Find the indicators and patterns that suits your trading style and STICK to them. Trying to find opportunities that don't exist by looking the charts all day is a recipe for disaster. If you have a technical plan you will have a clear picture of the price movement for the near future.
Don't let emotions guide your decisions
Sometimes things go the other way even if you had done the best analysis. This is a fact that you have to accept if you want to become a trader. Even the best traders have losing trades and a lot of them.
When this happens people start acting irrationally, they chase loses, see opportunities that don't exist and make weird choices outside their trading plan. Don't let emotions get the best of you, if you have a losing trade deal with it like an adult, close your computer and take the rest of the day off. The crypto markets will be there the next day and a lot of opportunities will arise again.
So you’ve decided you want to get started with trading cryptocurrencies and you have your trading plan ready. The good news is that it’s as straightforward and streamlined as it’s ever been to get started and it’s a lot of fun.
I’ve outlined everything you need to do to get started in this section. From where and how to buy some crypto, where and how to store your currency, and some of the best exchanges to start trading on.
Buying and Storing Cryptocurrencies
The first thing you need to do is buy some cryptocurrency. You may want to start out with Bitcoin as it’s the most well-known currency. Although there are plenty of other currencies to choose from if you want to do some shopping around.
Coinbase is the go-to marketplace or exchange for new traders. It’s the most well-established exchange, the interface is easy to use, and most importantly it’s trusted.
Just head on over to their website or use their smartphone app and follow the instructions. Once you register your debit card you’ll be the new owner of some cryptocurrency within a few clicks.
If you don’t want to use Coinbase to purchase your cryptocurrency for any reason, or just want to weigh up some other options, check out some of these other marketplaces:
Next, you need somewhere to store your cryptocurrency. Cryptocurrencies are stored on the blockchain in a ‘wallet’.
There are several types of wallet, but they all serve the same purpose. You can download the software and install your wallet on your PC locally, use a wallet on the cloud so you can access it from anywhere, use a mobile app, or pick up a physical hardware wallet which is effectively a USB plugin.
Your wallet doesn’t contain your funds as such, rather your public and private addresses you’ll need to make trades. Your public address is what other traders need to send you funds, and your private address is what you use to send funds.
An important reminder here; always keep your addresses secure and make a backup of them that you’re comfortable is secure. If you lose your addresses and keys you’ll lose access to your funds for good.
Best Places to Trade Cryptocurrencies
Here are some of the best platforms to trade cryptocurrencies:
Trading Platforms Which Allow Margin Trading
Margin trading is appealing to many people starting out with cryptocurrencies as it allows you to leverage your funds and invest more than you have available.
This comes with increased risk however. All I can do is advise you to carry out as much due diligence as possible and act with caution.
If you want to trade on margin I recommend checking out some or any of the following platforms that facilitate margin trading:
- Whale Club
- 1 Broker
That covers the basics regarding buying your first coins and where to start trading. I hope it’s answered some of the questions you may have had, good luck and happy trading!