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Whether you're branching out from traditional markets or new to investing, you may be curious about crypto trading.
Before getting started, it's important to note that trading crypto is notoriously unpredictable and not suitable for everyone. Prices can fluctuate wildly in a short period which means that profits can be made quickly, but losses incurred just as fast.
This guide aims to provide an overview of where to begin, including choosing a trading style, devising a trading plan and what to look for in an exchange.
Crypto trading refers to the buying and selling of cryptocurrencies through an exchange or trading platform. Similar to traditional stock trading, crypto traders aim to profit from price fluctuations in the market by buying low and selling high.
Trading typically involves using technical analysis tools and market research to identify potential opportunities and make informed decisions. Traders can choose from various styles, including day, swing and position trading, as well as strategies such as range trading or mean reversion.
Cryptocurrency trading has become increasingly popular in recent years due to its unique characteristics, including decentralised networks and the potential for high volatility. Here are some of the most common reasons people trade crypto:
Crypto trading involves buying and selling digital assets through a cryptocurrency exchange or trading platform, while stock trading involves buying and selling stocks through a stock exchange. Cryptocurrency markets are open 24/7, while stock markets have set opening and closing hours.
A major difference between them is that stocks represent fractional ownership of a publicly listed company. In Australia, this comes with certain consumer protections and shareholder rights. Conversely, the use cases for cryptocurrencies are incredibly diverse and ownership doesn't necessarily entitle you to anything other than the asset itself.
Crypto and stock trading both rely on identifying trading opportunities and managing risk, but crypto trading is generally considered higher risk due to these markets' inherent volatility and comparatively low liquidity.
Crypto trading involves buying and selling digital currencies, like Bitcoin, Ethereum and other altcoins. Traders aim to capitalise on market price fluctuations by speculating on the future value of these assets.
They can either go long, venturing that the price will increase, or short, anticipating a decrease. Crypto trading operates 24/7 and offers opportunities for short-term and long-term investments.
There is no one-size-fits-all approach to trading, as each person has a unique market perspective and strategies often differ depending on market conditions, risk tolerance and investment goals.
Let's say you have done your research and identified Ethereum (ETH) as a potential buy opportunity. You believe it has strong fundamentals, including an upcoming development advancement and potential for long-term growth. You've also evaluated the technicals and identified a bullish chart pattern and positive indicators.
You decide to enter a long position on ETH by buying 10 coins at a price of $1,000 per coin, using a total of $10,000 of your trading capital. You set a stop-loss order at $900 to limit your potential losses.
A few days later, the price of ETH rises to $1,200 per coin. Following your trading plan, you close your position and take profits. You sell your 10 coins for a total of $12,000, making a profit of $2,000 (20%) on your initial investment.
In this example, you used fundamental and technical analysis to identify a potential buying opportunity and managed your risk by setting a stop-loss order. You also had a profit target in mind and closed your position when the price reached your target.
It's important to remember that not all trades will be profitable. Implementing a solid trading plan and risk management strategy is crucial to success.
Choosing the best crypto to trade depends on several factors, including your trading strategy, risk tolerance and market conditions. Here are some key factors to consider:
Remember, there is no one-size-fits-all approach to choosing the best crypto to trade. It's essential to have a plan and risk management strategy that aligns with your goals and trading style.
Crypto investors are typically divided into 2 groups – long-term and short-term traders. While every trader has a unique approach to the market, basic guidelines for these groups are as follows:
Long-term crypto trading involves holding cryptocurrencies for extended periods with the aim of making a profit in the future or using them for future transactions.
This style of trading is suitable for investors who believe in the long-term growth potential of a particular coin or token and are less concerned with short-term price fluctuations.
This style of trading requires a sound understanding of the crypto market, extensive research and picking the right crypto to invest in.
Short-term crypto trading involves buying and selling, usually within a day, with the aim of making a profit from price fluctuations. This style of trading is most suitable for investors who prefer an active approach and are comfortable with taking risks.
Short-term traders or day traders often use technical analysis and market trends to make quick decisions. This requires a high level of knowledge, discipline and the ability to manage risk effectively. Short-term trading may also involve complex strategies such as arbitrage, where traders aim to exploit price discrepancies between exchanges.
Day trading crypto involves buying and selling within a single trading session – usually within a few minutes to a few hours. Day traders, otherwise known as scalpers, use technical analysis, order flow and other tools to identify short-term opportunities and make quick trades based on market conditions. Charts used by scalpers are typically 1 minute to the hourly.
Although day traders' profit targets are generally much smaller than swing traders, the aim is to take advantage of small price fluctuations many times throughout a trading session. This advanced style of trading is often associated with the use of leverage and derivatives.
Swing trading is a strategy that involves longing or shorting Bitcoin and other cryptocurrencies over a medium-term period, typically several days to weeks, to profit from price movements.
Swing traders aim to take advantage of more significant price movements than day traders while minimising the risks associated with long-term investments. Swing traders use technical analysis and charting tools to identify trading opportunities, usually monitoring charts from the 1 hour to the daily.
Position trading involves buying and holding cryptocurrencies for a long-term period, typically several months to years, with the aim of profiting from long-term trends and growth in the crypto market.
Position traders use fundamental analysis and market research to identify promising cryptocurrencies and hold through market fluctuations. This strategy requires a strong conviction in the long-term potential of the assets being held and a willingness to weather short-term volatility.
Position traders monitor a range of high timeframe charts, as well as news events and market fundamentals.
Crypto derivatives allow traders to speculate on the price movements of an underlying asset without holding the asset itself. For example, an Ethereum derivative contract will represent the price of ETH but will not be able to be withdrawn or transferred on the Ethereum blockchain.
Derivatives include crypto futures, margin and options and often involve leverage. This trading style is more complex and risky than traditional spot trading and requires a good understanding of the underlying assets and market dynamics.
Diving into the world of crypto trading requires a solid understanding of the various analytical tools at your disposal. Key tools for reading the crypto markets include technical, fundamental and on-chain analysis. These approaches can help you make well-informed trading decisions, optimise your strategies and navigate the volatile digital asset landscape.
Technical analysis is a trading technique used to forecast future price movements based on past market data. Technical analysts use patterns, trends and indicators to identify potential trading opportunities and manage positions.
Fundamental analysis involves analysing the underlying factors that affect the value of a cryptocurrency, such as technology, adoption and regulatory developments. Following the fundamentals can help you make more informed decisions about buying or selling based on its intrinsic value and potential long-term growth prospects.
On-chain analysis is a method of analysing a blockchain to gain insights into its network activity, such as transaction volume, miner and staker activity and wallet balances. Due to the transparent nature of blockchains, on-chain data can provide valuable information, such as the cryptos held by a whale or institutional investors.
Cryptocurrency trading incurs many of the risks of trading on any other market as well as some unique challenges.
Trading Bitcoin and other cryptos can be a lucrative venture. However, cryptocurrency markets are highly volatile and the risk often outweighs the reward – even the most experienced traders aren't immune to losing streaks.
Before trading cryptos, ensure you're familiar with the market and have a solid trading plan and risk management strategy implemented. Choose an exchange or trading platform that suits your strategy and practise trading on small size or a demo account to get a feel for the platform and its features.
Never rush into trades. Monitor the charts and wait for an opportunity that aligns with your strategy before executing – the crypto market never sleeps, so there's no need to feel like you're missing out if you don't have an open position.
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