Bitcoin Trading Explained
Bitcoin trading involves taking trade positions that speculate on the up and down movements in price. In the early days of crypto trading, traders purchased BTC and held onto it on exchanges or wallets to sell when prices increased. The expansion of the market via derivatives like CFDs, futures, and options provides more speculative opportunities as prices continue to rise and fall.
Today broker platforms and derivatives exchanges account for a huge number of traders going for derivative products.
Trading Bitcoin derivatives also involves leverage and margin. Leverage is a financial offering that allows you to gain a significantly large exposure in the market with only a fraction of the amount of premium (capital) needed. The deposit you put forth to get the full exposure is called margin. Brokers will offer you leverage depending on your account, and the potential is there for huge profits. However, a large exposure also magnifies the risk and losses.
You can take your trading position by deciding to buy or sell. This allows you to go long or short. When you buy/long, you expect Bitcoin’s price to increase over a given period. If you sell or short, you think the price will decline.
If the price falls or rises as you “predicted,” you get a profit on top of the premium placed. The opposite is that you lose your position (loss).
Some of the trading mistakes to avoid include starting trades without a plan or strategy, not researching the asset, going for overexposure, and allowing emotions to dictate your trading.
Trade Bitcoin: Establish a Proper Plan
To trade Bitcoin profitably, you need to establish a proper trading plan. You also need to know the market and asset you are trading, as well as what strategies work best for that asset. Here are two things you need to make money trading Bitcoin.
Understand What Moves the Price of Bitcoin
To trade in Bitcoin and benefit from the massive opportunity it offers, you need to understand the cryptocurrency and what moves its price.
You can do this by looking at the factors and components of its fundamental strength to determine its intrinsic value. This is called “Fundamental Analysis,” a trading approach by which you focus on things like supply and demand, network growth, use cases, network stability, and hashrate to see whether at current prices Bitcoin (or other assets you are trading) is overvalued or undervalued.
Combining fundamental analysis with technical analysis can therefore give you a fairly accurate prediction on price movements- whether short term, medium, or long term.
Specifically, here are some of the main factors that move Bitcoin’s price:
Supply and demand. In the market, like other tradable assets, price is driven by the principle of supply and demand. The price will increase with the rise in demand and fall with an increase in supply. But Bitcoin supply is capped at 21 million, with only a given number of bitcoins released every 10 minutes and that figure halved approximately every four years. The finite supply metric means demand will rise with scarcity, impacting long term BTC price.
News. Bitcoin prices can rise or fall drastically based on breaking news regarding cryptocurrency- adoption, regulation, network security, and generally any news events that can impact investor sentiment across the crypto market.
Adoption and Integration. This is also tied to the news item (as happened with PayPal in 2020), where announcements about mainstream adoption or integration of Bitcoin have helped buoy sentiment and rocket prices. Long term, the integration might increase the use of Bitcoin and thus impact its price.
Hashrate. In a Proof of Work coin like Bitcoin, hashrate provides information about network health. A higher hashrate means more miners are securing the network and are likely profitable because prices are rising. Miners can also sell their positions and contribute to price decline- so it’s good to watch this metric.
Technical Analysis: Read the Charts!
As well as fundamental analysis, traders use technical analysis tools to get a sense of potential price movements. Using technical analysis a trader can relate past trends and candlestick patterns to predict future trends and thus get a hint of what could constitute an entry or exit point.
TA relies on several indicators, including volume profiles, moving averages, Fibonacci levels, pivots, and support and resistance levels. Other widely used indicators are the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD). RSI will for instance tell you when an asset is oversold or overbought.
Moving averages can tell you about shifts in momentum and thus trends. For example, if a shorter MA like the 50-day MA cuts above a longer one likes the 200-MA from below, it points to a possible bullish flip. This is called a “golden cross,” which is the opposite of a shorter moving average cutting below a longer one from above to indicate a potential bearish trend via a “death cross.”
Traders also check volume levels, Fibonacci retracement and extension levels, the RSI and MACD to identify key support and resistance levels.
You can undertake technical analysis by yourself using these tools on platforms like TradingView, or access expert opinion from other analysts. But remember that technical analysis in itself isn’t 100% accurate and thus cannot guarantee success.
It is advisable to use TA alongside other aspects of gauging market sentiment and trends. If you are new and inexperienced, don’t worry at all. You can get started via social trading.
Social trading is a trading strategy in which a trader follows the investment behaviour and patterns of a peer or expert. Inexperienced traders achieve this through copy trading, which has been made very popular by eToro. Here is how it works.
Common Strategies to Trade BTC
Hodling is a trading strategy that traders and investors adopt because all indications are the prices will increase significantly over a long period.
It is very popular with Bitcoin traders, especially after the 2017 bull market. After crashing to lows of $3,800 in 2020, Bitcoin surpassed its peak price of $20,000 four years ago to hit an all-time-high of over $61,000. Analysts forecast the price will surge even higher, which means a hodler can hold their position towards the new peak.
Hodlers sell high and buy low during dips, earning profits and increasing their positions even further.
Trend trading is a strategy that allows a trader to benefit by holding a position for as long as possible during an uptrend or downtrend. Trend traders often pick a timeframe as Bitcoin’s price can change several times in an hour, day, week, month, or months.
Short term trend trading relies on technical outlook and news (positive or negative) that shape market sentiment. Long term traders using this method mostly look at Bitcoin’s fundamental strength- network growth, adoption, and regulatory clarity to gauge where price might trend in the future.
Day trading is a strategy that allows a trader to pick a timeframe for the day- hourly, 4-hour, or daily- to open and execute as many trading positions as possible. If you pick an hourly approach, you will look to have several trades within the hour, or 4 hours and so on.
Day traders buy and sell (or go long and short) on multiple positions, the distinguishing factor is that all positions close during the day. There are no overnight positions, which is good when a trader wants to maximize on breakouts and sudden reversals.
As in trend trading, technical analysis and breaking news events can greatly benefit a day trader. The returns can be significant, but day traders also take on higher risks to maximise their time-limited trades.
Choose a Platform that Fits your Trading Strategy
Choosing a trading platform is part of the setup and you need to decide whether you will use a broker or a derivatives exchange. Both derivatives exchanges and brokers offer access to numerous products on Bitcoin trading, including leverage and margin. However, brokers are seen as better platforms due to being licensed and highly regulated financial companies.
That factor adds to the security aspect that is important when trading in a market environment where nefarious actors are on the prowl.
Trading with unregulated platforms also has that risk of turning out to be a scam. Regulators can also shut the platforms down, a scenario that can see traders lose money.
Set Up Your Trading Account
Set up a trading account by registering for one at a broker or derivatives platform.
Sign up for an account with your email, name, and password.
Verify your identity, a critical KYC procedure demanded of all licensed financial providers.
Once the verification process is done, go to your profile and proceed to deposit funds.
On most platforms, there is a clear “Deposit” button that allows you to choose the deposit method and currency.
Proceed to specify the amount and submit. It takes less than a day to have funds in the account and ready to start trading.
Open your First Bitcoin Trade
To open your first Bitcoin trade, go to your funded account on the chosen broker platform. Once you log in, the dashboard will display BUY or SELL buttons. Press the green BUY to open a long position or SELL to open a short position trade.
The UI of different brokers will differ, but how they work is almost similar. Navigate the display to see charts, order books, spreads, trade/mark price, and what open positions you have. Manage your risk via the settings to set stop-loss or take-profit for example.
Here is a screenshot of how the trading display looks.
An order is an instruction to buy or sell. There are different types and a trader would need to know how each works.
A market order is a buy or sell order that traders place when they wish to have it executed immediately and at the best available market price. On the other hand, a limit order is used when you want to buy or sell a position at a specified price, (or better). If that price isn’t met in a given time frame, then it’s not executed.
Many traders prefer the limit order over the market order for the obvious reason that it allows for the best buy/sell opportunity.
Other types of orders include the IOC (Immediate or Cancel) Order, the stop order, the stop-limit order, trailing stop order, and All-Or-None (AON) order.
Buy or Sell?
When trading, opening a ‘buy’ position means you are going “long” on an asset. A ‘sell’ position shorts the trade (the belief that price will fall).
Buyers are also called bulls, while sellers are referred to as bears. If buys (prices slightly above market price) keep growing, prices go up. If sellers consistently outperform bulls by opening short positions, prices begin to fall as order books fill.
An order book is a list of the “buy and sell” orders on an exchange or broker platform. It updates every split second as the buy and sell orders get cancelled or are filled up. A buy order is referred to as a “bid” while a sell order is an “ask.”
A spread, also called the bid-ask spread, is the difference between the highest bid and lowest ask. The smaller the bid-ask spread, the greater the coin’s liquidity, which translates to how easy it is to buy or sell. Large spreads indicate low liquidity and thus buy or sell orders take time to fill or trades become expensive.
Brokerages often set a minimum trade size, minimum trade amount, and maximum trade amount for accounts based on the type of account, e.g margin accounts need more.
But you’ll find that the exact limit of the amount you can trade is open for you. In this way, you need to always look to begin small and grow your investment as you go. Taking trades based on the very minimum trade sizes helps reduce risks such as negative balance or margin calls.
Leverage on Bitcoin
Leverage is when a trader is allowed to open positions demanding far more money by only putting down a small deposit. This deposit is called margin, and what a trader earns or losses depend on the full trade.
In trading, the margin is determined by the leverage amount. To calculate margin, take the leverage amount allowed and divide by 1. Thus, 10:1 leverage has a margin of 0. 1. To get a margin percentage, multiply the Margin allowed by 100%- a 0. 1 margin has a margin percentage of 10%.
(1/10= 0.1*100% = 10%)
The margin requirement is the amount you need to get the exposure offered via the leverage. For example, if you have $10,000 and the broker needs a 10% margin, then your margin requirement is $1000.
Since your leverage is 10:1, you can buy up to $100,000 worth of positions with $10,000 in your account. This kind of exposure can be great. However, the risk it carries is equally huge. You can earn profits or lose all your positions.
As a caution, a trader should try not to use the maximum leverage as a small change in price can wipe out the whole position. Such losses can be avoided by using reduced leverage ratios so that even substantial price movements do not clean your position and lead to huge losses
Stop-Loss and Trailing Stop-Loss
A stop loss is a limit order that traders use to limit losses when they have open positions. It works with two prices: a stop (market) price and a limit (worst scenario) price. You set this order using the support or resistance levels.
A trailing stop-loss is an order a trader set to lock profits and to check on potential losses. The trailing stop loss is a great tool because it moves with the market if it is in your favour and caps losses when the market turns against you. When a trade flips, the order becomes a market order and executes when price action hits a stop price.
The take profit setting allows traders to maximise profits by exiting trading positions as soon as a set price is reached. Traders set these price limits according to an assessment of support and resistance levels in technical analysis. The setting triggers automatically and therefore limits exposure to sudden price shifts that might be detrimental to a trader’s position.
Brokerages and derivatives marketplaces provide numerous products on trading cryptocurrency and Bitcoin. Do your due diligence on the one you choose before proceeding. Also remember that you will be charged trading fees or commissions on some platforms, while others offer zero-commission trading.
As you pick a broker platform, check on the contract size, or lot. This means you need to know how many bitcoins are included in the trade. The other thing to note is the spread of the pips. A pip is a measure of the price movement against a trading unit. For example, if 1 pip is $0.1, then BTC price moving from $20,001.78 -$20,101.78 means it has moved 1000 pips.
If you know that, you can decide how many pips to trade and set your stop loss or take profit. If you take the TP as 1000 pips when the price is at $20,001.78, it means you could win $100 if the price rises to $20,101.78.
When you trade on margin, it is wise to note that margin requirements change with trade sizes and available equity.
Open Your Bitcoin Trade
Once you have the trade set up ready, check that you have the order size and order type properly indicated, proceed to the next step. This is where you execute the trade by clicking on the prominently displayed button. Before you click on the button though, just go over the order to ensure everything is as you need it.
You can close open positions manually, or have them automatically closed when you have a stop-loss or limit order in place. There are two ways to manually close the orders: for short positions click on buy to close and “sell” to close long positions. Check the brokerage you are using to find out how to close the orders.
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