Cryptocurrencies the hottest topic of late 2017 and they are climbing back to the pub. There are tons of opportunities to make money from cryptocurrencies, like mining, investing, renting equipment to mining, or trading. Today let’s talk about the most dynamic way of making money in crypto market – trading.
What is crypto trading?
Crypto trading is basically act of buying and selling cryptocurrencies in order to make profit from price change. Crypto trader makes profit as market moves in his predicted direction. Cryptocurrencies trading, based on typical trades length, could be divided into three main categories: scalping, day trading and swing trading.
Scalping is a short-term type of trading. Scalper makes money from small changes of cryptocurrency price in a short period of time, usually from several seconds to minutes, using higher trade volumes. In other words scalper buys bigger quantities and goes for a smaller profit. While scalping cryptocurrency a trader could make anywhere from 10 to thousands of trades per day and it all goes by logic that many small gains accumulate to big gains. Scalping is super intense type of crypto trading, it is mentally challenging and it requires strict discipline from a trader.
Common techniques of scalping consist of several technical indicators and a precise exiting technique. Most commonly used indicators are Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD).
Scalping for sure is the most risky, but also rewarding type of crypto trading. Automated trading is also an option as more and more traders are starting to use crypto trading bots for scalping, because a human while working under the pressure ( as I mentioned scalping is usually nothing more than pure pressure) could do costly mistakes, bot otherwise works by the set of pre-programed rules, so it won’t care about barbarous nature of the trading world. I will talk more about trading bots soon.
Day trading is a mid-term trading technique. By definition day trader buys and sells cryptocurrency within span of a day. As scalper day trader takes advantage of small price movements and as scalping day trading cryptocurrency is a high risk business, where anything could go wrong really fast, so day trader must have well-executed exit strategy.
Day traders use technical indicators as well, among already mentioned RSI and MACD, there are commonly used classical indicators such as Bollinger Bands (BB), Moving Averages (MA) and also Candlestick Patterns.
Day trading crypto differs from stock day trading, because cryptocurrency market is always open, so the trading volume spreads out throughout the day.
Crypto day traders usually choose coins that has big news coming up in a pursuit of higher volume. Many of them follow twitter feed, to determine which crypto is getting much attention and attention almost always means big vitality in the market. That’s why day trading isn’t only about technical analysis, fundamental analysis plays a big role in it.
By definition swing trading is a trading style where trader buys or sells financial instrument and holds it anywhere from several days to several months. Technical analysis plays biggest role in swing trading, but many traders use fundamental analysis as well. In fact any trading strategy requires both technical and fundamental analysis, thus there is no way around it, for successful crypto (or any other financial instrument) trading, you must know both analyzation methods.
Main goal of swing trading is to secure sizable portion of cryptocurrency move. That’s why the trades could last anywhere from days to months.
Crypto traders could search for opportunities in new promising cryptocurrencies, as well as in old developed ones, the only goal is to find coin that is going to do a tremendous move to one or another direction.
Swing trading is slow type of trading, but requires a lot of analytic along strategic thinking abilities from the trader.
How to trade Cryptocurrency?
As different crypto coin trading styles are explained I should talk how the trading works, where you should go to trade and how to execute your orders
As it comes to active trading you can choose between two options where to execute your trades: crypto exchange or trading broker, both options have their own pros and cons.
Cryptocurrency exchange is a business that allows to change fiat currency or cryptocurrency to other crypto. Usually these institutions make money from spreads (difference between bid-ask price) and/or commission fees. Both EU and USA governments have applied various regulations on exchanges, that’s why some of the exchanges moved their official business out of western countries.
Currency exchanges usually takes fiat payments from credit cards or bank transfers, and lets you to buy currency inside their system. You can withdraw fiat money to the same card or bank you used for a deposit or can make cryptocurrency transfer from crypto wallet.
The biggest exchanges are: Binance, Coinbase, Bittrex, Bitstamp, Upbit and others.
The pros and cons of choosing currency exchange for trading are:
- You buy and sell real crypto
- You can withdraw money to other crypto wallets
- More regulations makes you money safer
- More trading pairs
- No margin
- No short sell option
- Bigger trading fees, than brokers
As interest in cryptocurrencies began to rise many forex trading brokers started offering a cryptocurrency trading options. In the beginning you could only trade major currency pairs as BTC/USD or ETH/USD, but over the time trading brokers added more financial instruments to their portfolios and now you can trade broad spectrum of crypto there. As crypto exchanges, brokers make money from a spreads and/or commission fees.
The main broker advantages are trading leverage and short selling option. Main disadvantage is that trading brokers won’t sell you real cryptocurrency while you are trading. You are making contract with the broker where you betting on financial instrument price change.
For example Bitcoin now trades at 10000 USD and you make contract with your broker to buy 0.1 BTC, broker according to your trading leverage takes margin from you, if you are trading no leverage, margin will be 1000 USD, if leverage is 1:10 the margin will be 100 USD. The price goes to 10500 and know your contract is worth 1050 USD so broker pays you the difference, but if price goes down to let’s say 9000 USD, you will pay broker 100 USD. On the one hand this kind of trading is faster and cheaper, but on the other you are not getting anything real here, it is just a bet against your broker. And yet in some cases like margin trading, forex brokers is a viable option.
- Short selling
- Trading leverage
- Smaller fees
- Faster order execution speed
- You are not buying real crypto
- Less trading pairs
- Impossible to withdraw cryptocurrency
Okay so now we know pros and cons of currency exchanges and trading brokers, but the question remains what should you choose?
As mentioned before main advantage of trading brokers is fast order execution and leverage, so if during your trading day you are going to place lots of orders, trading broker is your go to option. On the other hand trading brokers often have overnight fees for open positions, so if you are a swing trader willing to hold your position for several moths the best option for you is currency exchange.
Graphics of your trading account
Visual rendering is something that you won’t be able to live without in a trading world. Easy to manage graphs are super important part in your technical analysis part.
Candlestick is a technical tool used to pack data out of several timeframes into one bar. A single bar represents Open price, Closing price, High price and Low price of a selected time frame (for example 1 Hour). It carries more information than traditional single line graphs of just closing price. Candlesticks are used by the professional traders because they make specific patterns that could be used to predict future cryptocurrency price.
Technical indicators are variety of tools used in the financial markets that helps to predict future movement of the financial instruments. There are huge variety of those indicators and they can be found in almost every trading platform.
Cryptocurrency trading techniques
In this section I will look at several common trading techniques that is simple to follow for a new trader. Trading is ever changing game and trader could not set for only one trading strategy. Here some classical trading techniques are presented, but it’s up to you to decide which one to follow and improve to fit to your trading style.
Support resistance levels
Support resistance levels are probably most commonly used and easiest strategy to follow. Main idea of the strategy is that price comes to certain historical levels and those levels will be a barrier for the price to pass. In order to execute this strategy right first of all you have to understand what support/resistance level is and how to mark it in your graph. Here is the example:
Japanese candlestick patterns (Price Action)
Cryptocurrency is a new tool in the trading world, but most of the trading techniques are taken from the stock market, CFD or forex markets. Japanese candle stick patterns are one of the oldest trading methods used by the traders a lot. Here we will look at the most common patterns you should search when trading crypto.
Pin bar is a candlestick pattern where main body is short and high or low “tail” is long, at least 3 times longer than the body. It is called a pin bar, from children tale about Pinocchio, because as you may know Pinocchio’s nose grew longer every time he lied. Similar to that, pin bar with long tails shows that the trend is lying to us and the price will soon turn to the other direction. Pin bar is reverse signal pattern.
Let’s take a look at some examples now. Bitcoin against USDT in one hour graph.
Inside bar is another popular price action strategy, it consist out of two bars the first one must be bigger and is called mother bar, than the second, called inside bar. Smaller bar must be within mother bar high and low. The formation of the inside bar means that market is consolidating before next move. In lower period charts inside bar could be seen as support/resistance levels formation.
This Price action pattern couldn’t be treated just as trend continuation or trend reversal pattern alone. In trendy market inside bar goes with a trend but near key support/resistance levels it is treated as reversal points.
Inside bar as other price action patterns shouldn’t be used alone, it is valuable addition to your overall crypto trading strategy.
Crypto trading bots
Another big topic in cryptocurrencies trading is trading bots. Trading bot is automated trading technique, pre-programed algorithm analyzes market action and could open trades on himself or create signals for you to trade. Automated trading is the best option for new traders, because it requires almost no knowledge of the market.
Among the advantages of automated trading I could mention 24/7 being on the market, trading bot are less time consuming and could analyze bigger data quantities than a trader. Market is dominated by the bots right now and if you invest a lot of time learning and studying the market you could probably beat them, but it requires literally hundreds of hours of work. So trading bots are go to option for 90% of the traders as competition is high and it’s keep getting higher every day.
Cryptocurrencies trading bots providers offers platforms for you to create your own algorithm with selected technical indicators or patterns, or lets you to choose out of some pre-programed bots. Some platforms are free, some has monthly fee some lets you to trade in more exchanges and some lets you trade in just in a few.
Crypto bot trading strategies
When choosing right crypto bot trading platform you have to define your trading strategy and there are several to choose from.
Arbitrage is multiplatform trading strategy, when crypto is bought from one exchange and simultaneously sold in another in order to make profit from an imbalance of the same asset. For example Ethereum is trading @300 USD in Binance and at the same time is trading @305 in Bittrex, so an arbitrage trader would buy Ethereum from Binance and at the same time sell it on Bittrex and get 5 USD profit. This crypto trading strategy requires for you to have accounts on multiple exchanges and your bot to run flawlessly.
Trend trading or trend following is a strategy when market is moving in one direction. As trend moves there are some fluctuations, called corrections. If the market is uptrend, for example, your bot would sell crypto before these corrections and buy again before trend starts moving again, this way optimizing your gains from a trend.
Reversal trading is a trading strategy that catches trend at turning point of the market. It is valuable, because well-established strategy gets you into trade in the beginning of the trend maximizing your profits.
Establishing crypto trading bot
Crypto bot providers made it easy for you to create bots, but it won’t be easy to find profitable one. Competition on the market always inflates and it becomes harder and harder to make money, so a profitable technique must be few steps ahead of the market.
In my opinion to build a profitable bot, one must have deep knowledge of the market. First step is to learn everything you can about cryptocurrencies. When it comes to programing your algorithm, you should be able to back test it. Back testing, although it isn’t too accurate, will show if you can expect profit from your strategy at least.
If the back tests are successful then you should demo test your bot. Most trading platforms will give you this option. How long you should demo test your crypto bot depends on the choice of you trading intervals. For scalping bots a month is more than enough, but for swing trading bots testing time should be as long as six months.
Trading with real money comes then and only then you’ve done all the testing and the results are promising. Just remember it is super easy to lose your money in financial markets so just don’t jump head first into them.
So, this article was dedicated to crypto trading beginners. We’ve talked about some basic trading terms, also there were introduced basic trading techniques and trading bots essentials. Consuming tons of information is the only way to survive in the financial markets. Everyone is competitive and tries to get your money here. It is a wild environment here and if you want to become the best crypto trader you must educate yourself a lot.