Trading assets as volatile as cryptocurrencies requires some skill. Selecting a strategy, understanding the vast world of trading, and mastering technical and fundamental analysis are practices that come with a learning curve. But fret not if you are new to the cryptocurrency market and wonder what cryptocurrency trading is all about.
You’ve come to the right place! We’ll explain crypto trading meaning in a simple and digestible way such that ultimately, you’ll be able to decide for yourself if crypto trading is somETHing for you.
Crypto Trading Meaning
Cryptocurrency trading is an exchange of digital currency between traders. It allows them to profit from price fluctuations caused by demand and supply. Trading cryptocurrency is also risky and rewarding at the same time due to its volatile nature. However, risk can be mitigated by hedging or diversification.
Cryptocurrencies may be in the infant stage. Still, the recent BTC price soared has been catching a lot of buzz in the news. Beyond Bitcoin, there are thousands of digital assets, including altcoins, to trade on different trading platforms. Typically, a trader would buy a digital asset and sell it at a higher price in just minutes or weeks, depending on his trading styles.
How Does The Crypto Trading Market Work?
The cryptocurrency market, as most financial markets, is driven by supply and demand. When demand is higher than supply, the price of the asset moves higher. When the supply is larger than the demand, the price of the cryptocurrency tends to fall.
However, there are different ways to analyze the crypto market and recognize different trends. When a cryptocurrency moves higher for longer periods, then it is called a bullish trend. While a bearish market happens when the market falls for a longer time. Still, we can make some profitable trades during both bull and bear markets if you apply the correct strategy.
Trends are divided into impulse waves and corrections. In a bull market, the impulses are upward, and there are also dips – price corrections that are not large enough to start a bear market. In bear markets, the impulse waves are downwards, and the corrections are price spikes that are not strong enough to create a bullish trend.
Therefore, traders aim for the impulses or the overall trend picture rather than for the correction. That is because trend impulses provide a more significant price change for a shorter time.
Trading Crypto vs. Investing in Crypto
Cryptocurrency trading refers to traders who often take advantage of small mispricings in the market by entering and exiting a position over a short timeframe. It involves conducting deals on margin without actually owning the asset, speculating on the price moves. In most cases, trading refers to opening and closing positions often based on the different market conditions.
While investors seek larger returns over an extended period through buying and holding. It also means an investor would purchase and own a digital asset with the belief that its price will increase. Then, sell it for a substantial amount of profit.
How To Trade Crypto?
Firstly, you will certainly need capital to trade with. If you don’t have savings and start trading with money you can’t lose, it can have a seriously detrimental impact on your life. Trading isn’t an easy feat – an overwhelming majority of beginner traders lose money. You’ll need to expect that the money you put aside for trading can vanish quickly, and you may never recover your losses. This is why it’s recommended to start with smaller amounts to test out the waters.
SomETHing else you’ll also need to think about is your overall trading strategy. There are a lot of possible avenues to take when it comes to making money in the financial markets. Depending on the time and effort you can put into this undertaking, you can choose between many different strategies to achieve your financial goals.
Lastly, here’s an additional point. Many traders are at their best when trading isn’t their main source of income. This way, the emotional burden is easier to bear than if their day-to-day survival depended on it. Eliminating emotion is a core trait of successful traders, and it’s significantly harder to do when one’s livelihood is at stake. So, especially when you’re starting out, you could think of trading and investing as a side venture. And remember to start with small amounts for the sake of learning and practicing. It may also be beneficial to look into ways of making passive income with cryptocurrency.
What Is A Trading Strategy?
A trading strategy is simply a plan you follow when executing trades. There’s no single correct approach to trading, so each strategy will largely depend on the trader’s profile and preferences.
Regardless of your approach to trading, establishing a plan is crucial – it outlines clear goals and can prevent you from going off course due to emotion. Typically, you’ll want to decide what you’re trading, how you’re going to trade it, and the points at which you’ll enter and exit.
What Is Technical Analysis (TA) In Trading?
The practice of technical analysis can be applied to any financial market, and it’s widely used among cryptocurrency traders. Technical analysts work with a different approach in comparison to fundamental analysts as they don’t try to find out the intrinsic value of an asset.
The core idea behind technical analysis is that historical price action may indicate how the market is likely to behave in the future. Instead, they look at the historical trading activity and try to identify opportunities based on that. This can include analysis of price action and volume, chart patterns, the use of technical indicators, and many other charting tools. The goal of this analysis is to evaluate a given market’s strength or weakness.
With that said, technical analysis isn’t only a tool for predicting the probabilities of future price movements. It can also be a useful framework for risk management. Since technical analysis provides a model for analyzing market structure, it makes managing trades more defined and measurable. In this context, measuring risk is the first step to managing it. This is why some technical analysts may not be considered strictly traders. They may use technical analysis purely as a framework for risk management.
Types Of Cryptocurrency Traders
Position Traders
Position traders buy an asset and hold it for long periods until the market reaches the price level they were waiting for. The positive point is this trading strategy does not require traders to be actively involved in trading. The key is to invest from a holistic point of view by assessing the trends.
You can simply buy an asset and hold until they consider it is time to sell (usually when the price moves higher). The main difference between position traders and hodlers is related to the attachment that position traders have with their assets. A position trader is not attached to the asset as a hodler might be.
Consequently, it is much easier for a position trader to sell his funds as soon as the opportunity is present in the market.
Day Traders
Day traders open and close their trades within the day. A day trader would have his position open for just a few hours. In some cases, only a few minutes. These traders need to be very disciplined. They must have an exact selling point to realize their profits. A small tick of 0.1% is sometimes enough on their positions to make a few hundreds of dollars per day.
Additionally, day traders work with very tight stop loss. That allows them to reduce their risk and be ready to open a new position if the market does not move in their expected direction.
Swing Traders
Swing traders are different from day traders. The main difference is related to the time they can wait for an open position.
Swing traders are the ones who keep their trades from more than one day to sometimes a month. The goal is to understand where the market is going in the next few days and aim for that move. Usually, these traders wait for larger profits. Let’s say that a trade that is open for three days and registering a 2%profit could be considered a successful swing trade.
Since swing traders aim for higher price moves with their trades, they also tolerate higher risk. A swing trader can mitigate a more significant price fluctuation against his trade, where the day trader will already be out of the market.
Scalp Traders (Scalping)
Scalp traders are day traders that open and close trades every single hour. These traders are searching for minimal price fluctuations that would allow them to make small profits on their funds.
Dozens of positive scalp trades could help the scalper get as much money as a day trader. The goal is to catch as many positive trades as possible in a short time. In many cases, scalp traders can make hundreds of transactions per day. Also, they would never leave a position open for the next day.
Costs To Start Crypto Trading
You can start trading cryptocurrencies with small amounts of money. Nevertheless, the larger the funds you invest, the larger the possible profits you can make. However, this might be a risky activity.
Exchanges are allowing users to deposit small amounts of digital assets. Thus you can eventually start trading with just $10. Nevertheless, this is not recommended, considering that you might not be allowed to purchase more funds if you lose part of your investment due to being lower than the $10 threshold.
Investing between $100 and $1000 would be much more logical.
The Risks of Crypto Trading
Cryptocurrency trading, like any other trading activity, incur risks and unlike stocks, the crypto market is fluctuating more violently. When we open a trade, we need to know that there is a high possibility we will not close it profitably. That means we might lose money on our trade. And since the cryptocurrency market is very volatile, you should be aware that you can gain from the difference quickly within minutes but can also be liquidated if the market goes sideways and you did not set a stop-loss.
While start-ups or newer released tokens have wider rooms for price growth, it also means it can be just another pump and dump situation where the market is manipulated for personal gains. This means the price of the asset would move up very fast, and early buyers would sell at the top. This leaves late investors with large bags of tokens that are now worthless.
Cryptocurrencies can also be affected by forks or discontinuation. When a hard fork occurs, it’s likely to have price volatility around the event. For example, Bitcoin Classic (BCH) is a hard fork of Bitcoin. And BCH has split into two blockchains again causing a significant plunge in its price.
Closing Thoughts
Crypto trading might be overwhelming at the beginning. But as soon as you start trading with smaller amounts, you would be able to understand the processes, the tools, and how trading platforms work. If everything goes well, you can always set higher budgets and aim bigger.
You can always do it as long as it works. If it is not working and you are not profitable, you can always reconsider your trading approach and decrease your trading sizes again. You will find your best cryptocurrency approach. But one thing is 100% sure – it will all start with an attempt, similar to how you’re taking the first step by reading this article on crypto trading meaning!
