Learn All About Trading Bitcoin and Cryptocurrency
What Is Cryptocurrency Trading?
Trading makes it possible to make money when the price varies. This is something that has become popular with cryptocurrencies. Bitcoin is the first and largest cryptocurrency, but there are hundreds of others on the market.
Some popular cryptocurrencies to trade are Ethereum, Ripple, and Litecoin. In this guide, we will explain all the benefits of cryptocurrency trading and how it works.
There are two different ways to make money with trading. Either you earn money by buying low and selling high (this is called a long position). The price difference will be your profit.
You can also make money when the price drops by selling high and buying low (this is called a short position). When you take a short position, you sell cryptocurrency that you bought for borrowed money. If the price drops, you can buy it back cheaper and earn money on the price difference.
You earn money on the price difference when you buy and sell cryptocurrency. This means that traders want to see big price variations, also called volatility.
If there is high volatility, there are strong price movements. Therefore volatility is used as a risk measure. High volatility means big price variations but at the same time a big opportunity to make money with trading.
This is the difference between trading and investing. If you invest in a cryptocurrency, you want the price to increase, but at the same time have low volatility.
As a trader, you earn money on volatility and high risk. Trading is a risky business which doesn’t fit everyone. It’s important to understand the risks with trading.
If we compare the stock market to the crypto market, there are many advantages with the trading cryptocurrencies. We will go through everything you need to know to get started with cryptocurrency trading.
Learn about technical analysis, trading strategies, trading software, market psychology, leverage trading, best trading platform and much more.
Why Trade Cryptocurrencies?
As mentioned, there are many advantages of trading of Bitcoin and cryptocurrency. Above all, many things make it easier to trade cryptocurrency than other assets.
First and foremost, it is very easy to get started. You can open an account at a Bitcoin exchange and start trading right away.
Opening an account with a broker on the stock market can take a long time. Also, there are closing times, and the market is not opened during weekends.
The crypto market, on the other hand, is open 24/7 every day of the week. You have the freedom to trade Bitcoin and hundreds of cryptocurrencies whenever you want.
Another advantage of trading cryptocurrency is that it is both faster and cheaper to transfer money. Withdrawals and deposits are performed directly, and it costs almost nothing to move cryptocurrency to and from Bitcoin exchanges.
You don’t have to wait for the bank to open and approve your transfer. With cryptocurrency, no central authority can limit or deny your transaction.
Here we have listed some of the reasons why trading cryptocurrency is better:
- Lower fees and smaller spreads – Transaction fees are significantly lower than with conventional stockbrokers. Besides, the price difference between buying and selling is usually less, which reduces the risk. Keeping costs low is very important for traders.
- Absence of institutions and algo trading – Many institutions and major players in the financial market are still outside the crypto market. There is also less robot trading and manipulation of cryptocurrencies than ordinary currencies. This leads to a fairer and easier market for trading.
- More people with little market experience – Because there are many small savers within cryptocurrencies, technical analysis works better. Trends and patterns are much easier to analyze. Individuals without experience make many mistakes on the market.
Cryptocurrency Trading is faster, cheaper and easier than other options. Below we explain how to get started with trading Bitcoin and cryptocurrency.
How to Start Trading Bitcoin
The success of Bitcoin has led to many other cryptocurrencies. Bitcoin is still the primary digital currency, which means that all cryptocurrencies are traded against Bitcoin.
Therefore, we recommend starting with Bitcoin if you want to get started with cryptocurrency trading. Before you start trading, you need a strong foundation to stand on.
You should be well-read about the cryptocurrency you want to trade. But above all, you need to understand technical analysis to analyze the price and chart patterns. We will go through what technical analysis is and how it works.
The first thing you need to start trading Bitcoin, Ethereum, Ripple and all other cryptocurrencies is a digital wallet.
We strongly recommend buying a hardware wallet and that you don’t store money in online wallets on exchanges. In this guide, you will learn everything about Bitcoin wallets and how to protect your cryptocurrencies.
When you have a safe and private wallet, it’s time to choose an exchange for trading. Different exchanges are good for different cryptocurrencies, but you should use multiple exchanges to spread the risk. For a better insight into cryptocurrency exchanges, read the guide on Bitcoin exchanges.
Trading Bitcoin and cryptocurrency requires patience. The most common mistake for beginners is that they do too many trades. Trading is a statistical game with probabilities. Don’t take unnecessary risks.
Just like everything else, it will take time to get good at trading. Everyone makes mistakes at the beginning. The important thing is to learn from your mistakes.
You need to continually develop and adapt to the market as a trader. Cryptocurrencies constantly fluctuate in price, but experience and knowledge consist.
Bitcoin Price and Volatility
The price of Bitcoin will be what people are willing to pay. How the price changes will depend on many factors, but above all, future expectations.
If the market expects improvements and increased users of cryptocurrencies, the price is likely to increase. At the same time, there are external factors that affect the price.
There is a strong correlation between Bitcoin and other cryptocurrencies because they all are traded with Bitcoin. The price can develop in the same direction or opposite to each other. However, because cryptocurrencies are part of the same market, they usually trend together.
We can see that Bitcoin increases and decreases in price based on how other cryptocurrencies are traded. If a cryptocurrency is sold, the money will usually be transferred to Bitcoin, which can create a buying pressure.
The strong correlation of cryptocurrencies makes it necessary to monitor the price of Bitcoin no matter what cryptocurrency you’re trading. Although the long-term trend is common, prices may vary widely over shorter periods of time.
Volatility is usually higher in smaller cryptocurrencies, mainly due to increased risk. Another reason is that orders affect the price more because the market value is less.
This leads us to the order book which shows all active orders in the market. In trading exchanges, you will see a list of all orders. It shows volume at different price levels and is good to keep track of to see supply and demand of cryptocurrencies.
There is always a certain trend that determines the direction in which the price moves. The trend along with volatility creates a trend channel. This becomes an area in which the price usually moves within.
A strong reaction in the market may cause the price to fall outside the trend channel. In this case, the trend direction can change. Otherwise, the cryptocurrency is overbought or oversold. In trading, the price can be described as a rubber band.
The price tends to move in waves and return to the middle of the trend channel. If the price increases much faster than the average, the rubber band will be tense, and then the price can be considered overbought.
This is why the moving average is one of the most popular technical indicators in trading. More about technical analysis in the next section.
Bitcoin Technical Analysis
There are two different methods for analyzing an asset, Fundamental Analysis (FA) and Technical Analysis (TA). Fundamental analysis is to evaluate the asset’s underlying value. For example, company reports are used to determine the fair value of a business.
With technical analysis, you let the market evaluate the financial asset and instead analyze price and volume to predict price movements. Technical analysis is based on statistics, and you use different parameters to see which price change is most likely.
You analyze the graph to see trends, patterns, and formations in the price. There are numerous technical indicators for analyzing trends and formations. To analyze the price, traders use candlesticks because it contains more information than a regular line graph.
As you can see in the image, the graph consists of green and red rectangles, and they are called candlesticks. Each candlestick represents a time interval, usually one day. If the color is green, the price has risen during that period and at red, the price has fallen. The trend of the price depends entirely on the time interval you analyze.
There are four different ways to speculate on the price with various time settings; Investing, swing trading, day trading and scalping. If you invest, you look at the big trend with a time horizon for several years. Swing trading is more short-term because you are speculating on the price for a few days or weeks.
Day trading, as the name suggests, is trading during the day. You watch the daily trend and close all orders at the end of the day. An even shorter time setting is scalping when you try to capture small movements in the price. Traders then use leverage to earn money on these small moves. With borrowed money the risk increases.
The shorter the time, the more difficult technical analysis becomes. If you’re just starting out with cryptocurrency trading, you should not trade on less time than 1-day candlesticks.
Traders can’t look into the future. Instead, they know the odds of the future, just as you can count on cards in Black Jack. You will make bad trades all the time, but if the odds are to your advantages, you will make money over time.
Technical analysis works because several people look at the same technical indicators. Because several traders respond to the same price levels, it becomes a self-fulfilling prophecy.
Risk Management and Trading Strategy
Your trading strategy is the plan you have before you start trading Bitcoin and cryptocurrency. You need a clear plan before you begin a trade. What will be the buying and selling prices for this trade?
Before you buy a cryptocurrency, you need to decide where you sell and within what timeframe. If you want to get started with trading, we can recommend to scale in and out of your positions. Many traders prefer this instead of buying and selling the entire position because it reduces the risk.
The hit ratio for trading strategies will vary depending on the risk. We strongly recommend that you use a trading journal to record all orders. It’s important to evaluate how your strategies work.
When you record your trading, you need to keep track of your risk/reward ratio. How big the risk is in relation to the reward per trade. This simple formula is essential because it helps you make rational trading decisions.
You should always use a stop loss to manage your risk. This means that the cryptocurrency is automatically sold at a predetermined price.
Let’s say you buy a cryptocurrency at $100, have a stop loss at $99 and a price target of $ 102. You can earn $2, that will be your reward. And you can lose $1, that will be your risk. This means that your risk/reward ratio will be 1:2 ($2 / $1 = 2). In other words, the potential profit is twice as high as the loss.
This is a risk/reward ratio that is usually recommended by traders. But let’s say that your trading strategy has a ratio of 1:6 (risk/reward). This means that the potential gain is 6 times as high as the risk.
In that case, you can lose 80% of your trades but still earn money. Since a winning trade generates as much money as 6 losing trades, the hit ratio can be low. However, it’s usually better to minimize losses than maximizing profits in trading.
The best trading strategy depends on your preferences and risk level. Start slowly but surely and try different trading strategies. Don’t risk all your capital on single trades.
In trading, the guideline is to use 2-5% of your total capital per trade. This is an important rule to follow in order to make long-term money on trading cryptocurrency.
The size of your losses determines if you are a good trader. Not the size of your winnings.
Bitcoin Trading Softwares
There are many software and tools for trading. At the same time, it’s easy to use unnecessary many tools that don’t actually improve your cryptocurrency trading.
All traders need at least one technical analysis program. The most popular software for technical analysis is TradingView. It contains all the technical indicators and chart settings you need for trading.
TradingView also has a social network for traders where you can find many trading ideas from experienced Bitcoin och cryptocurrency experts. If you want to start trading, we strongly recommend TradingView.
When you start with Bitcoin and cryptocurrency trading, you will use many different exchanges. Different trading exchanges are good for different cryptocurrencies, and you should use several exchanges for security reasons.
Coinigy is a software that can help you manage accounts at multiple exchanges. It’s a trading platform that connects with your trading exchanges through their APIs.
This simplifies the trading with cryptocurrencies because you don’t have to use different accounts when you want to trade a cryptocurrency. In addition, you get a good overview of the crypto market.
If you want to take the next step in trading, there is automated robot trading. This means that you create trading bots that apply your strategies to Bitcoin and cryptocurrencies. This is nothing for beginners, but with the knowledge, you can make a lot of money with robot trading.
The best software for bot trading in cryptocurrency is Cryptotrader. You get access to several trading algorithms that are active in the market and many other features.
The crypto market, like software programs for trading, is under continuous change and improvement. We recommend that you test multiple software and learn how to use their various tools. Take the opportunity with these software tools and improve your cryptocurrency trading.
Trade Bitcoin with Leverage
There are several exchanges that offer leverage trading. This is also called margin trading and means you borrow money for trading. Margin trading can be a good tool for traders.
You will realize that you can earn a lot more money by using leverage with cryptocurrency trading. At the same time, you can lose a lot more money. Margin trading increases the risk.
Let’s say you think the price of Bitcoin will go up. Therefore you open a long position with 1:2 leverage with $100 in your account. That means you buy BTC for $100 of your own money and borrow another $100.
There are also exchanges that offer margin lending. This means that anyone can lend money to traders on the platform. One exchange offering margin lending is Bitfinex.
The interest rate for margin trading varies depending on supply and demand. But because it’s an open market, interest rates tend to be low.
Margin trading is risky, especially if you use a big leverage. Bitcoin is very volatile, and the price can be changed hundreds of dollars in a few hours. In other words, your money can disappear quickly.
NOTE! We strongly recommend that you always use stop loss when trading Bitcoin and cryptocurrency with leverage.
Starting trading Bitcoin with leverage is easy. In most cases, you open a margin account at your exchange and can immediately start buying and selling cryptocurrency with leverage.
Many exchanges offer cryptocurrency trading with leverage. A popular trading exchange that offers margin trading is CEX.IO.
Cryptocurrency Market Psychology
Most price movements are because of market psychology. This is evident when we see herd behavior and seasonal patterns which are not rational. People buy and sell cryptocurrency based on emotions. This is one reason why Bitcoin is volatile.
Because traders earn money on volatility, this is positive. By not trading with emotions, we can instead make money from overreactions in the crypto market. Even if investors have made a rational value, they can’t avoid psychological factors.
You need to eliminate all the feelings and have a clear trading plan. In many cases, it’s all about avoiding herd behavior that leads to bubbles in markets. Bubbles are created in all markets, and they create opportunities to make money.
If you look at the image, you see how a bubble is created in the market. Initially, smart money and investors buy the asset because it’s undervalued. Market psychology begins seriously when it’s mentioned in the media.
When all the media start writing about Bitcoin, the big mass notice the cryptocurrency. This increases the buying pressure, the price increase continues, and the market becomes euphoric but also greedy.
A problem with all-time highs is that there are no support or resistance levels. Technical analysis becomes more complicated because the price is in uncharted waters.
Sooner or later, when the price drops for some reason, you can expect powerful movements. The market takes the stairs up and the elevator down.
One old saying is “buy the rumor, sell the news“. When the news begins to talk about something, it’s a red flag on the market. Market psychology is a major part of trading that should not be underestimated.
Many traders have made the mistake of buying at the top and selling at the bottom. What separates a successful trader from someone who loses money is that the person learns from his mistakes.
“Be fearful when others are greedy and greedy when others are fearful” – Warren Buffett
Best Trading Exchange
As a trader, you continuously need to adapt to the market. The same applies to exchanges in the crypto market. There are constantly opening up new trading exchanges, and you need to stay up to date.
With cryptocurrency trading, it’s important that there are high trading volume and high volatility. If an exchange has low volume, the spread increases, which means that the price difference between the buying and selling price increases.
If the exchange doesn’t have enough trading volume, it becomes more expensive to buy and sell cryptocurrencies. At the same time, it’s important to have good liquidity at the exchange to ensure there are a buyer and seller at all price levels.
You don’t have to worry about trading volume and liquidity if you use one of the larger cryptocurrency exchanges. Don’t spend too much time choosing the right exchange for trading.
There is no trading exchange that is superior to others. Different exchanges offer different cryptocurrencies. Trading platforms also have different chart tools and features.
Also, using one exchange for all your money is risky because the company can go bankrupt. Therefore, we strongly recommend that you use multiple exchanges and store your cryptocurrencies in a secure wallet.
Trading Tips for Beginners
We have several trading tips to help you get started. If you follow our tips and advice, you have good chances to make money with trading. As a trader, you need to continuously develop as the market is always changing.
You need to continue to learn new things and, above all, develop your skills in technical analysis. This is nothing that comes naturally, it takes time to learn trends and patterns in price charts.
Below we have compiled a starting kit for beginners in cryptocurrency trading. Including the most popular hardware wallet Ledger which secures your Bitcoin and other cryptocurrencies.
Here is a list of tips and advice to succeed in cryptocurrency trading:
- Learn about Bitcoin and blockchain technology – We recommend you to read our guides; What is Bitcoin? and How Do Bitcoin Work?
- Learn technical analysis and use candlesticks – You need to learn technical analysis and use candlestick charts because it contains much more information than line diagrams.
- Use a trading journal – Write down all your orders, check your statistics and evaluate your trading strategies.
- Learn from your mistakes – All traders make mistakes, but it’s better to make mistakes in the beginning when your capital is less. Learn from your mistakes, you paid for them.
- Ignore untrustworthy sources – Many fake news and cryptocurrency scams try to fool other people through “pump and dump”.
- Have achievable goals with a reasonable time horizon – Many who start trading have too high expectations.
- Protect profits and limit losses – A tip is to start with lock-in winnings and always use a stop loss. You need to be consistent as a trader.
- Learn the correlation between cryptocurrencies – There are clear correlations between Bitcoin and different cryptocurrencies. This can give you an advantage when trading cryptocurrency.
- Don’t risk too much in the beginning – Start slowly but surely and improve your trading every day.