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How To Trade Cryptocurrency - Step-by-Step Guide

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The overall price-volatility of cryptocurrencies makes them an excellent asset class for the trading community. For anyone who is starting out in the trading world and is keen on learning how to trade cryptocurrency in 2021, this detailed guide should serve as a useful starting point. 

You can trade tokens on cryptocurrency exchange platforms by buying/selling their ownership, or through leverage trading on brokerage websites. Please note, trading involves doing thorough analysis to make accurate price predictions, and can be a time-consuming activity. So, venture into it only after giving it a considerable amount of thought.

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Cryptocurrency Trading Summary

You may be able to use trading to generate a regular income if you’re sure about what you’re doing. Some crypto trading strategies commonly seen being implemented in the market include day trading, arbitrage trading, swing trading and spread scalping.

The majority of trading activity on brokerage websites involves taking long or short trading positions via derivative products like futures, options, and CFDs. These instruments enable you to leverage trade in cryptocurrencies, and avail of large market exposure without investing the full value of trades.

Start Trading in 3 easy steps

1
Choose a Trading Strategy

You can use any trading strategy you like depending on how well-versed you’re with it, and whether or not it’s proven to work with the coin under consideration. Irrespective of the one you choose, you’d need to make timely entries and exits into and from your trades, to benefit from the activity. It will also demand having full clarity and understanding of your goals, market indicators and analytical tools.

2
Register on an Appropriate Platform

With no ownership transfer of cryptocurrencies involved in leverage trading, you just need to register on a reliable brokerage platform, and have some working capital ready, to begin. You will need to verify your identity by providing basic documents and then you’re ready to trade.

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Long - Short

You can begin taking long or short positions once you’re through with the registration process and have an operational trading account on a broker platform. Some brokers may also allow you to use their demo version to get acquainted with their service.

Cryptocurrency Trading Explained

An activity that once used to be solely about buying bitcoins on some crypto exchange and saving them in a wallet, in the hope of the BTC price to appreciate, cryptocurrency trading has come a long way over the past one decade. Today, you trade cryptos on top-notch broker trading portals, through derivatives such as CFDs, futures and options, and profit from the price volatility of hundreds of different cryptocurrencies. 

Using these derivatives is essentially about a kind of trading activity referred to as leverage trading. It allows you to speculate on the cryptocurrencies’ price movements and gain large exposure by depositing just a tiny percentage of the actual trade value, known as margin. However, please remember that such large exposure magnifies both the loss as well as the profit potential of such trades.

In Contracts for Differences (CFDs), you speculate on whether the coin’s price will increase or decrease, and open the corresponding ‘Buy’ (long) or ‘Sell’ (short) positions accordingly. You profit if the market moves in the direction you had predicted, else incur a loss. When using such financial instruments to trade cryptocurrency, it becomes even more important to avoid mistakes like emotional trading, lack of a good strategy, overexposure and incomplete due diligence.

Trade Cryptocurrency: Establish a Proper Plan

Being successful at cryptocurrency trading will require thorough technical & fundamental analysis of the coin being traded. Not to forget, the correct implementation of a tried-and-tested trading strategy too. Let’s go over these aspects below.

Understand What Moves the Price of Cryptocurrency

Fundamental Analysis is aimed at determining the objective and authentic value of a cryptocurrency against its market price. This information helps in gauging if the coin is over or undervalued, so you can take a strategic entry or exit position in the trading market. Below are some well-known fundamental factors which contribute to the price movements in the crypto market:

Hashrate – This is often employed as a good measure for checking the health of a ‘Proof of Work’ cryptocurrency. A higher hashrate makes it more difficult to launch a 51% attack on the coin’s network. A constant increase in hashrate can be indicative of growing interest in its mining, most likely because of low costs and better profits. A drop in the hashrate points at miners going off-line, as they can no longer profit from the activity.

Whitepaper – The Whitepaper of a crypto project is a technical document that gives you a fair idea about the cryptocurrency. A properly drafted Whitepaper clearly defines the network’s goals and gives you a fair insight into its use cases, the technology used (if it’s open-source or not), distribution and supply of the coins and its roadmap going forward. All this info can be referenced against the ongoing discussions about the project in the trading community, to find out any potential red flags.

News – Any breaking news on the cryptocurrency industry is bound to have a corresponding positive/negative impact on the coin you are trading as well. Simultaneously, news stories related to its development activity, community, software, future growth etc. will indicate its future potential, and hence impact its trading value.

Use cases – A cryptocurrency’s use case plays a key role in its long-term success. You should know the value proposition of the project and how it’s being used to optimise engagement. Check whether the platform regularly introduces novel improvements and features to its protocol, and is committed to the expansion of its user base. Many cryptocurrencies are launched with perhaps one or two main features, but more get added along the way, significantly increasing their use cases.

Technical Analysis: Read the Charts!

Technical Analysis combined with fundamental analysis constitutes the backbone of crypto trading research. The primary aim of technical analysis is to gauge the market sentiment by studying trends and patterns, thus enabling the trader to make accurate predictions about the future price movements of a cryptocurrency. You are required to regularly examine historical data such as volume and price.

For this purpose, you can use statistical indicators and/or chart patterns. Line, candlestick and bar charts are the most actively used ones by crypto traders. Each is supplied the same data but presents it in a different, yet useful way. Standard Deviation, Average Directional Index, Relative Strength Index (RSI) and Bollinger Bands are some of the commonly utilised technical indicators which help traders in deciding the right entry and exit points. Some more statistical tools used in this regard include volume-weighted average price (VWAP), moving averages, MACD, time-weighted average price (TWAP) and Fibonacci ratios.

Though these charts and indicators may seem complicated to the new traders, they are essentially about basic economics, focused on the principle of demand and supply, but presented as fancy terms. Furthermore, please keep in mind that no amount of analysis can guarantee sure-shot success. Hence, you must always factor in expert opinions to make sound trading decisions. Social trading has emerged as a profitable approach for a great multitude of new crypto traders. It involves copying the market actions of some seasoned trading experts. eToro’s well-known ‘Copy Trading’ service is an excellent example of this.

Common Strategies to Trade Cryptocurrency

Day Trading

In day trading, you open and close your trading positions within the same day (normally 24 hours in the case of cryptocurrencies). Day traders aim to register quick profits with the help of technical analysis and price action strategy. You may often see them opening and closing multiple trades inside the same 24-hour window.

Cryptocurrency Swing Trading

Swing trading is another short-term crypto trading strategy that is longer than day trading. It involves holding onto your contracts for many days or weeks before using the right opportunity to cash out. As a result, it attracts overnight fees too. Uncovering profitable swing trading opportunities necessitates good working knowledge of both fundamental and technical analysis.

Scalping

Scalping is a trading strategy wherein you seek price differences in the cryptocurrencies listed on different broker platforms, to profit from the overall market inefficiencies. Arbitrage and spread scalping are a couple of very good examples of such a strategy. In arbitrage, you look out for price discrepancies on multiple brokerage websites, while in spread scalping, you seek out inconsistencies on the same platform.

Choose a Platform that Fits your Trading Strategy

There are all kinds of online platforms where you can trade cryptocurrency today. However, when it comes to leverage trading, you can go with any of the reputed brokerage websites and/or derivative exchanges, depending upon your specific requirements and the strategy you’re planning to implement. Brokerage platforms are normally recommended over exchanges as they are regulated and are more secure.

Exchanges on the other hand are often easy targets for unscrupulous elements, as they lack regulation. It is not uncommon for traders to sometimes lose all their holdings on such unregulated trading platforms. You may also be asked for trading fees and/or additional charges for deposits/withdrawals on crypto exchanges.

Set Up Your Trading Account 

You can easily set up a trading account on any of the reputed brokerage platforms listed above, by following the below-provided three steps:

Registration – To register on the platform, you will need to input some basic info like your name, phone number, address etc. first.

Verification – After you have provided all details, the trading platform will verify your identity in compliance with its KYC measures. At this point, you may need to provide it with a valid identity proof issued by a government authority.

Funds deposit – You take this step after your account has been opened and your identity verified. To begin trading, you will need to deposit funds into your trading account in a currency and through a payment method approved by the broker.

Open your First Cryptocurrency Trade

The majority of brokerage sites have self-evident ‘Buy’ and ‘Sell’ buttons which allow you to open Buy/Sell trades and take long and short positions. What holds more importance is your trading strategy and analytical approach.

When you use Contracts for Differences to trade cryptocurrencies, you may be offered different leverage options depending upon your account type. Every platform may have a unique user interface (UI), but would essentially fulfil the same purpose, which is to facilitate easy execution of trades. It may also make available some handy tools to facilitate well-informed trading decisions. Ensure that you set up appropriate ‘stop-loss’ and ‘take-profit’ points to cover risk and book profit. 

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Order type

An order is an instruction given to the concerned broker platform to open or close a trading position, by executing a certain type of buy/sell CFD trade. It can be of multiple types including stop-loss order, trailing stop loss order, limit order, market order, immediate or cancel (IOC) order and All or None order.

Whereas a market order is an instruction to instantly buy/sell a CFD at the current market rate, a limit order is an instruction to buy/sell a CFD at a predefined price point or a better one. As can be expected, many traders choose limit orders over market orders as the former fetch better price for the trader.

Buy or Sell?

Buy or Sell, in the context of brokerage platforms, can be perceived as an instruction to buy/sell the concerned contract, to open/close a long/short trading position. Crypto exchanges normally have similar instructions named ‘Bid’ and ‘Ask’ for their platforms.

Spread is the name given to the price difference between the buy and sell prices of a cryptocurrency on a brokerage trading platform. It is also a commonly employed revenue generation medium by these portals. An order book is a list featuring all the ‘buy and sell’ orders currently existing on the platform, and is updated in real-time, as those orders get fulfilled or cancelled.

Amount

Unless you’ve been actively trading crypto CFDs for many years, you must start small and use the minimum possible trading sizes offered by the broker. It is important to bear in mind that CFD trading is a fairly risky activity, with immense profit as well as loss potential.

Leverage on Cryptocurrency

As shared earlier, cryptocurrency CFDs make it possible for traders to speculate on the price movements of a crypto pair. You can ‘go long’ if you’re confident that the coin’s price will rise, or else ‘go short’ if you expect it to decline. You get an opportunity to book profit in both falling and rising market conditions.

Before you start trading cryptocurrencies through CFDs, it’s important to gain a good understanding of a key concept called leverage. It can prove to be both a major benefit and disadvantage when it comes to this derivative product. To open a CFD trade on a broker platform, you must deposit a small percentage of the total value of trade, referred to as margin. It could be 20%, 10%, 5% or even less based on your account type. 

Therefore, for example, if you open a long position with $1000, through a CFD, and choose a leverage of 10:1, your trade will be actually 10 times your initial outlay. Hence, in this case, your actual exposure will be worth $ 10,000 rather than the $1000 margin you deposited upfront. Any gains or losses resulting from the position will also be based on the $10,000 trade value. As evident, whilst your profits can be huge (owing to bigger market exposure), the losses can be equally big too.

Stop-Loss and Trailing Stop-Loss

A stop-loss order is often used by crypto traders to limit their risk, by automatically closing their positions once they reach a specific level of loss. A stop-loss order can be of different types such as a basic stop-loss, a guaranteed stop and a trailing stop-loss order.

A trailing stop-loss is a kind of stop-loss order which automatically follows your trading position if the market moves in the same direction as you had anticipated, thereby securing your profit. However, it also does the job of a regular stop-loss order and closes out your position in case the market moves against you. 

Both these orders are set up with the inputs from support & resistance levels, established through technical analysis.

Take Profit

Using the ‘Take Profit’ setup for your crypto trade is about specifying a certain price level at which you’d prefer to book profit and exit the trade. Just like the stop-loss & trailing stop-loss orders, this setup is put into place with the help of inputs received from TA’s support and resistance levels. 

Finishing Touches

Let’s now throw some light on the concepts we’ve not yet covered in this guide, and which may depend upon the platform you eventually use to trade cryptocurrencies. As mentioned earlier, we’d like to highlight again that you may or may not be asked to pay fees or commission to trade on these portals. Although most broker platforms charge nothing more than a nominal spread, it’s always a good idea to cross-check before opening any trades. In addition, ensure that you’ve done detailed due diligence before selecting any derivative product or trading strategy.

The size of the contract, commonly referred to as a ‘Lot’, is another term you should be aware of. It is the number of units of the underlying asset (cryptocurrency) contained in each CFD. 

You should also know about ‘Pip’, which is a measure of the price movement witnessed by a cryptocurrency listed on a broker platform. To explain it with an example, if 1 pip equates to $ 10 for a certain crypto coin, that coin’s price moving from let’s say $300 to $400, would imply that its market value has appreciated by 10 pips. The pip value will come into play when you specify the ‘take-profit’ and ‘stop-loss’ points for your trades.

Lastly, every brokerage platform may have different margin requirements based on available equity and trade sizes.

Open Your Cryptocurrency Trade

Once you’re clear about the setup you need, including the size of your trade and the order type, you can go ahead and open your first cryptocurrency trade. It can be done fairly easily by clicking on the ‘Buy’ or ‘Sell’ button on the platform’s dashboard. On a side note, it’s never a bad idea to cross-check that everything is in order before you click on either of the buttons.

Closing Orders

You can close your open trades either manually or automatically. While the manual closure will involve logging into the platform and executing the concerned reverse trade/s yourself, automatic closure can happen through any of the pre-set orders like stop-loss orders and limit orders.

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Final Thoughts: Ready to Trade Cryptocurrency?

Let’s quickly recap what all covered in this guide. We started by defining three easy steps to start trading cryptocurrencies, followed by understanding how to locate the right platform to trade, the need of having a proper trading plan (covering fundamental analysis, technical analysis and some trading strategies), setting up a trading account, and the different aspects of opening your first crypto trade.

New traders should manage risk effectively as trading can also result in huge losses especially in the case of leverage trading. You can begin trading cryptocurrencies right away by clicking on the button provided below.

Alternative Cryptocurrencies

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Frequently Asked Questions

  1. Income earned from cryptocurrency may or may not be taxable depending on the platform you’re using and the local taxation laws in your country.

  2. As cryptocurrencies are essentially decentralised, free from any banking limitations, you can indeed trade them round-the-clock. However, most brokerage platforms have pre-specified working hours and days. So, it would be better to check with the platform you’re trading on.

  3. Yes, CFDs are legal in many parts of the world. Nevertheless, always check your local laws to get a clearer picture.

  4. Yes, many regulated brokerage platforms allow credit/debit card deposits.