What Is Cryptocurrency Trading?
Cryptocurrency trading involves buying and selling cryptocurrencies from exchanges or other traders by taking advantage of short-term price movements. Unlike traditional markets, crypto trading can operate 24/7 on decentralised exchanges, giving users the chance to capitalise on market trends, often within minutes or hours.
Generally, there are two main types of crypto trading. The first one is trading derivatives, such as perpetual futures or CFDs. They allow users to speculate on crypto price trends and movements without owning the underlying digital asset itself. Here, they can take a “long position” if they think a crypto will rise or a “short position” if they think it will fail.
On the other side, buying and selling cryptocurrencies via a cryptocurrency exchange requires users to create an exchange account first, purchase and hold the actual coins. This way, users have full custody and ownership over the assets and can participate in staking or use the coins for purchases.
Difference Between Trading and Buying
Crypto investing involves buying and storing digital assets for a longer period. The expectation here is that it will have big growth over time. With crypto investing, investors’ significant focus is to identify promising projects in the cryptocurrency market, invest in them via crypto exchanges and secure big returns over time.
This way, crypto investing is more passive compared to short-term trades. Users hold digital assets for an extended period, often for months or years. Here are the differences summarised in a few points:
- Timeframe: Trading focuses on a short-term trading activity, while investing requires a long-term perspective.
- Profit: Traders want to make quick profits with price fluctuations of crypto assets, while investors generate long-term profits through passive income streams.
- Approach: Trading is more reactive, and it relies on technical analysis, news, and market trends. Investors identify promising projects and try to predict price movements for the long term.
- Risk: Short-term strategies for trading require a more robust risk management approach. The crypto market is volatile, so trading involves more leverage. Investing is less risky, but it may be less profitable than short-term trades.
Choosing the Right Exchange for Trading
Not all exchanges are built for actively trading. So, the criteria you need to focus on when choosing an exchange for trading are different to what applies to exchanges for beginners and require you to pay attention to the following factors:
Liquidity in the Pair you Want to Trade
Never trust the platform’s overall volume. When an exchange has high liquidity in a pair, it means there is a deep volume of buy and sell orders sitting in the order book.
Order Types Available
To manage risk effectively, your exchange needs precision tools. Look for platforms that offer limit, stop-loss, and stop-limit orders, which allow you to strictly dictate your entry and exit prices rather than relying solely on standard market orders.
Fee Structure for Active Trading
The best trading exchanges don’t charge a flat fee. They split their users into two categories: makers and takers. Makers are the so-called “liquidity providers”, and they are charged lower crypto trading fees, while takers are the “liquidity consumers”, who must pay higher fees.
Charting and Analysis Tools
A platform focused on crypto trading contains extensive charting tools directly in the trading screen. You can see the indicator trigger, draw lines and execute a trade in the same interface.
What You Need Before You Start Trading
Now that you know the principles of crypto trading, let’s take a look at the pre-trade checklist, which is key for any trader:
- Crypto trading routes: You can trade on the assets’ prices using CFDs or buy digital currency from an exchange. Both require active trading principles.
- Crypto wallet & exchange account: If you decide to trade cryptocurrency on an exchange, you will need to select one that not only supports buying. Then, create an account and set up a wallet.
- A trading plan: The plan must include risk management tools, your goals, preferred crypto, and the methodology for entering and exiting trades.
- Position size: Understanding the position size helps users manage risk better. To know your optimal position size, you need to know your account balance, the maximum balance you are willing to risk, and the stop-loss distance.
Four Trading Strategies Beginners Can Actually Use
Crypto trading strategies can help you decide when to enter and exit a certain position. Here are some useful strategies that both new and experienced traders can apply.
Spot Trading
When users place a spot on an order, they are buying the asset itself. The crypto tokens are then instantly transferred to the exchange spot wallet. Then, they can be withdrawn and moved to a private wallet. Spot trading operates through so-called “trading pairs”. They consist of a base asset and a quote asset. For example, BTC can be the base asset that is bought or sold, and USDT can be the quote asset used to price the BTC.
Swing Trading
Swing trading requires more patience from traders. This is an active strategy where you need to hold positions for days (sometimes even weeks). The goal is to capture large price movements or “swings”. There is no need to sit in front of charts all day, every day, but you will need to rely on daily general charts. Many traders using the swing strategy buy at the bottom of a price pullback and sell near the top.
HODLing
HODLing is a long-term crypto strategy that sees users buy digital assets and hold onto them indefinitely. Regardless of market volatility, crashes, or price spikes, the decision remains the same “don’t sell”. The core principle of HODLing is that the long-term adoption of cryptocurrencies will drive prices significantly up. This is the complete opposite of day trading, so HODLing falls more under the investment category.
Dollar-Cost Averaging
This strategy involves users buying a fixed dollar amount of a digital currency at set, automated intervals, regardless of price. By being regular and automated, users spend the same amount of money every time, so in the long term, they buy more crypto when the price is low and less when it is high. People who don’t have time to watch daily charts often opt for a DCA strategy.
What Makes Crypto Prices Go Up and Down?
With cryptocurrencies being decentralised, there are several factors that can determine their prices:
Supply and demand
An auction process on exchange order books determines prices through supply and demand. The balance of buying and selling power sets the current price. An order book contains “bids” (demand) and “asks” (supply). When good or bad news reaches the market, buying or selling pressure increases, so prices change.
Market sentiment
When the general crypto mood is optimistic, traders suffer from fear of missing out and become impatient. They aggressively use market buy orders and chase the price. When fear and panic take over, traders stop buying.
Bitcoin influence
When investors want to enter the crypto trading world, they generally start with Bitcoin. Once they lock in profits on BTC, they may move profits into other altcoins like ETH or SOL. So, when BTC crashes, investors panic and pull money from their altcoins, which plunges prices down.
News and regulation
Regulation dictates whether crypto assets can safely flow through the country’s financial ecosystem. When governments restrict cryptocurrencies, widespread panic takes over, and prices go down.
Liquidity
This influences the prices by dictating the volatility of a certain asset. In a liquid market, there are millions of dollars of buy and sell orders, so even if a large amount of crypto is dumped, the order books can absorb it.
Remember that no one can predict market movements. The goal in crypto trading is to take advantage of momentum and make decisions while managing risks.
Understanding Order Types Before You Trade
Market order: Users buy and sell at the best available current market price. It is ideal for speed over precision.
Limit order: Only executes at the user’s specific price range or better. It sits passively in the exchange’s order book until the market fills it.
Stop-loss order: An automated “emergency exit” which is designed to protect your financial risk if a trade moves against you.
Risk Management Rules That Most Beginners Ignore
An upfront risk management strategy is what determines whether a trader will last. Here are a few tips to implement.
Never Risk More Than You Can Afford to Lose
This is the cornerstone of every crypto trading activity. Crypto markets can be volatile, and an asset that rises this week can significantly drop the next. The amount you place in a trade should be the amount you are comfortable losing. This rule applies regardless of whether you trade cryptocurrency or its crypto derivatives.
Use Position Sizing
To calculate the position size, you need to know your account size (the amount of trading capital), the account risk (displayed as a percentage, which shows the amount you are willing to lose on a trade), and the trade risk (also displayed as a percentage, which indicates the distance between the entry price and the stop-loss price on the chart).
Set Stop-Losses Before Entering a Position
Setting stop-losses before you even enter a position is another core risk management strategy. By doing so, you eliminate the risk of human emotion interfering with decisions, and it allows you to define your exit point ahead of time.
Avoid Leverage Until Confident
Avoiding leverage until you are confident and profitable on a constant basis is a good way to protect your trading account from sudden losses. Spot trading is a decent way to get started, so beginners should always build their way up. Over time, you can even opt for crypto margin trading, which sees you borrow funds from an exchange to open a trading position larger than your balance.
Five Simple Steps to Make Your First Trade
Below you can find a couple of easy steps that can help you start trading and build your trade history.
Once you select a secure platform for crypto trading and complete ID verification, you can select your payment method and input the deposit amount before confirming the transaction.
Now, you should see an advanced trading interface beyond the simple Buy feature. Find the asset you want to trade and click on the exact pairing that is your funded currency. Usually, stablecoins are used as quote currencies, while BTC and ETH are the base currencies.
You must now select one of the three core order types: market order, limit order, or stop-limit order. Select the Buy option and submit the amount of crypto you want to purchase.
Market orders will be processed immediately after submission, while limit and stop orders will stay in the open orders queue until you hit your target price. You can use this queue to check on the status of your order, see your execution prices from history, or even cancel an order.
Common Mistakes New Traders Make
New crypto traders lose funds due to poor operational habits. Here are some common pitfalls to avoid:
- Trading without a plan: Before trading, you must set your entry trigger, stop-loss, take-profit, and position sizing parameters.
- Letting losses run and cutting profits short: Fear and hope can lead new traders to decisions that inherently mean taking a massive gamble on a bad asset just because they cannot accept a loss.
- Overtrading: This is a process of doing too many trades, even when the market provides no clear opportunities.
- Ignoring fees: Unforeseen fees when frequently entering and exiting positions can minimise the profits of trading.
- Using leverage before understanding spot trading: Leveraging can multiply your potential profit, but it can also accelerate your losses. Don’t get greedy from the start; begin with spot trading first.
If you find yourself at the start of your trading and investment decisions, you can take advantage of crypto trading tools. They are apps that allow short-term traders to follow crypto-related stocks, manage risk, and track portfolio performance.
Final Words
Starting to trade crypto is a simple process, but developing the discipline to be a successful trader is a longer-term process. Resisting emotional decisions, reviewing trades honestly, and not getting greedy are the small differences between a pro and an amateur trader. If you want to learn more about crypto exchanges and tips for investing, you can always check out our other crypto guides.
How to Start Trading Crypto FAQs
How Much Money Do I Need to Start Trading Crypto?
There is no strict minimum exchange imposed, but beginning with a micro-capital of up to $50 will allow you to test the waters and learn how to navigate trading interfaces on the platform.
Is Crypto Trading Profitable for Beginners?
There is no way to predict whether a trade will be successful or not. Being disciplined and spending funds reasonably is crucial here.
What's the Difference Between Spot Trading and Futures Trading?
Spot trading involves buying and selling the crypto for immediate delivery, but futures trading involves buying and selling contracts for the asset’s future price, without owning it.
Do I Pay Tax on Crypto Trades?
This depends on your country. Some governments impose capital gains taxes on crypto profits.
