What is crypto trading?

The act of speculating on cryptocurrency price movements via a contract for difference (CFD) trading account, or buying and selling the underlying coins via an exchange is known as cryptocurrency or crypto trading. CFD trading is a type of derivative that allows you to bet on Bitcoin (BTC) price changes without possessing the underlying currencies. 

For example, you can go long (buy) if you believe the value of a cryptocurrency will rise, or short (sell) if you believe the value will fall. Both are leveraged instruments, which means that you only need a little deposit, known as margin trading crypto, to have total exposure to the underlying market. However, because your profit or loss is still determined based on the total size of your investment, leveraging trading crypto magnifies both earnings and losses. 

Furthermore, cryptocurrency options are used by investors to reduce risk or increase market exposure. Crypto options trading refers to the “derivative” financial instrument that derives its value from the price of another asset — in this case, the underlying cryptocurrency.

Before even thinking about venturing into crypto trading, it is important that one has a comprehensive understanding of the assets and technologies involved. Bitcoin is the soil from which thousands of other cryptocurrencies have grown. 

As with stocks and other financial markets, trading cryptocurrency can be complex, involving a variety of components and requiring knowledge. Bitcoin launched in 2009 as the first crypto asset and remains the largest cryptocurrency in terms of market capitalization and prevalence. 

Over the years, however, an entire industry of other digital assets has come into existence with the assets being tradable for profit. All other cryptocurrencies that are not BTC are known as altcoins, the largest of which is Ether (ETH).

This guide will explain crypto trading strategies and familiarize you with crypto trading platforms and applications, the components of a trade, the styles of trading and the role of technical and fundamental analysis in creating a comprehensive trading strategy.

How to trade cryptocurrency for beginners

Many different approaches exist in terms of how to trade cryptocurrencies. In order to start trading cryptocurrencies, one first needs adequate knowledge of the subject. It is also critical to know the associated risks and the laws that may apply based on one’s jurisdiction and decisions should be made accordingly.

trade increases in size and complexity, so does a trader’s risk exposure.

First, let’s go over some basic concepts.

Structure of a crypto trade

A cryptocurrency trade consists of a buyer and a seller. Since there are two opposing sides to a trade — a purchase and a sale — someone is bound to gain more than the other. Hence, trading is inherently a zero-sum game: There is a winner and there is a loser. Having a basic understanding of how the cryptocurrency markets operate can help minimize potential loss and optimize for potential gain.

When a price is agreed upon between a buyer and seller, the trade is executed (via an exchange) and the market valuation for the asset is set. For the most part, buyers tend to set orders at a lower price than sellers. This creates the two sides of an order book.

When there are more buy orders for crypto than sell orders, the price usually goes up, as there’s more demand for the asset. Conversely, when more people are selling than buying, the price goes down. In many exchange interfaces, buys and sales are represented in different colors. This is to give the trader a quick indication of the state of the market at a given moment.

You may have heard the common adage in trading: “Buy low, sell high.” This saying can be difficult to navigate in that high and low prices can be relative, although the adage does give a basic representation of the incentives of buyers and sellers in a marketplace.

Simply put, if you want to purchase something, you want to spend the least amount possible. If you want to sell something, you want to make as much out of the deal as possible. While this is generally good wisdom to follow, there is also the added dimension of longing an asset vs. shorting an asset. 

To go long on an asset (longing) means buying an asset and earning profit based on its upward price movement. In contrast, going short on an asset (shorting) essentially means selling an asset with the intention of buying it back when its price falls below the point at which you sold it, profiting from a price drop. Shorting, however, is slightly more complicated than this brief description and involves selling borrowed assets that are paid back later.

Reading the markets

To the layperson, “the market” may seem like some complex system that only a specialist could ever hope to understand, but the truth is, it all comes down to people buying and selling. How to trade crypto might seem like an esoteric concept at first. Once you begin to understand it, however, the idea becomes a lot simpler.

The totality of active buy and sell orders is a snapshot of a market at any given moment. Reading the market is the ongoing process of spotting patterns, or trends, over time, which the trader can choose to act upon. Overall, there are two market trends: bullish and bearish.

A “bullish” market, or bull market, occurs when the price action appears to steadily increase. These upward price movements are also known as “pumps,” as the influx of buyers increases the prices. A “bearish” market, or bear market, occurs when the price action appears to steadily decrease. These downward price movements are also known as “dumps,” as the mass sell-offs result in the price going lower.

Bullish and bearish trends can also exist within other larger opposing trends, depending on the time horizon at which you look. For example, a small bearish trend may occur within a broader long-term bullish trend. In general, an uptrend results in price action making higher highs and higher lows. A downtrend makes lower highs and lower lows.

Another market state called “consolidation” occurs when the price trades sideways or within a range. Typically, consolidation phases are easier to spot on higher time frames (daily charts or weekly charts) and they occur when an asset is cooling off after a sharp upward or downward trend. Consolidation also takes place ahead of trend reversals, or in times when demand is muted and trading volumes are low. Prices essentially trade within a range during this market state.

Technical analysis

Technical analysis (TA) is a method of analyzing past market data, primarily price and volume in order to forecast price action. While there are a wide variety of TA indicators, ranging in complexity, that a trader could use to analyze the market, here are some basic macro- and micro-level tools.

Market structure and cycles

Just as traders can spot patterns within hours, days and months, they can also find patterns over years of fluctuating price action. There is a fundamental structure to the market that makes it susceptible to certain behaviors.

The cycle can be partitioned into four main parts: accumulation, markup, distribution and decline. As the market moves between these phases, traders will continuously adapt their positions by consolidating, retracing, or correcting as they deem necessary.

The bull and the bear are very different creatures and behave in opposition to one another within shared environmental conditions. It is critical that a trader knows not only under which role they fall but also which one is currently dominating the market.

Technical analysis is necessary not only to position oneself within this ever-changing market but also to actively navigate the ebbs and flows as they occur.

Chasing the whale 

Price movements are largely driven by “whales” — individuals or groups who have large funds with which to trade. Some whales operate as “market makers,” setting bids and asking on both sides of the market in order to create liquidity for an asset while turning a profit in the process. Whales are present in virtually any market from stocks and commodities to cryptocurrencies. 

A cryptocurrency trading strategy must be aware of the tools of the trade favored by whales such as their preferred TA indicators. Simply put, whales tend to know what they’re doing. By anticipating the intentions of whales, a trader can work in concert with these expert movers to turn a profit with their own strategy.

Psychological cycles

With a zoo full of metaphors, it can be easy to forget that real people — for the most part — are behind these trades and, as such, are subject to emotional behaviors that can significantly affect the market.

This aspect of the market is represented in the classic chart “Psychology of a Market Cycle:”

While the bull/bear framework is useful, the psychological cycle depicted above provides a more detailed spectrum of market sentiment. While one of the first rules of trading is to leave emotion at the door, the power of group mentality tends to take hold. The rally from hope to euphoria is driven by FOMO — the fear of missing out — from those who have yet positioned themselves in the market.

Navigating the valley between euphoria and complacency is crucial to timing an exit before the bears take hold and people panic sell. Here, it is important to factor in high-volume price action, which can indicate the general momentum of the market. The “buy low” philosophy is quite apparent, given that the best time to accumulate within the market cycle is during the depression following a drastic drop-off in price. The greater the risk, the greater the reward. 

The challenge faced by the serious trader is to not let emotion dictate their trading strategy amid the deluge of hot takes and analysis by the media, chat rooms, or so-called thought leaders. These markets are highly subject to manipulation by whales and those that can affect the pulse of the market. Do your homework, and be decisive in your cryptocurrency trading actions. 

Basic tools 

Being able to detect patterns and cycles in the market is crucial for having clarity from the macro perspective. Knowing where you are positioned in relation to the whole is paramount. You want to be the experienced surfer who knows when the perfect wave is about to arrive instead of paddling listlessly in the waters hoping for something great to happen.

But, the micro perspective is also crucial in determining your actual strategy. While there are a vast number of TA indicators, we will only go over the most basic.

Support and resistance

Perhaps two of the most widely used TA indicators under the terms “support” and “resistance” relate to price barriers that tend to form in the market, preventing the price action from going too far in a certain direction.

The support is the price level where the downward trend tends to pause due to an influx of demand. When prices decrease, traders tend to buy low, creating a support line. Conversely, the resistance is the price level where the upward trend tends to pause due to a sell-off.