How to Trade Cryptocurrency in 2024 - Complete Guide

What Is Cryptocurrency Trading and How Is It Different From a Standard Purchase?

Cryptocurrency trading involves speculating on the price movements of digital currencies using online brokerage platforms. It is completely different from buying and holding cryptocurrencies via an exchange. Holding cryptocurrencies on an exchange has its advantages, such as the ability to take out loans using your assets as collateral, but it’s not the same as trading derivatives.

Trading does not require you to own any digital assets. It generally involves buying and selling cryptocurrency derivatives offered by brokers to capitalize on the fluctuating market. For the uninitiated, derivatives are securities that derive their value from an underlying asset. They are used to hedge risk and speculate on the price of the tethered asset. Traders can use broker platforms to instantly buy and sell crypto derivatives, making it a much faster way to make profits than holding cryptocurrencies on an exchange.

There are three ways traders can use broker firms to cash in on the price fluctuations of cryptocurrencies:

• CFDs–A Contract for Difference (CFDs) is an arrangement that allows traders to bet on an asset’s price movement without having to buy or own the asset. For example, you can buy CFDs when the price of a digital currency is dipping and sell it when its value goes back up, then keep the difference.
• Futures–A futures contract gives a trader the option to buy a digital asset at a set price and sell it at a specific future date. The contract has a binding expiration date, and like CFDs, traders make profits from the price difference.
• Options–Options are like futures, but they are non-binding. They’re a popular choice because they allow traders to close their position at any moment or let it lapse if the market moves in an unexpected direction.

The first step to becoming an effective cryptocurrency trader is to find a trustworthy broker platform that is registered in your jurisdiction and is subject to legal oversight. Using a reputable broker will protect you and your assets from fraud, theft, and scams.

Trading platforms offer different features to traders depending on variables like location and risk profile. The type of derivatives a platform offers and how much leverage it gives will determine your risk exposure. With all this in mind, it’s important to come up with a trading strategy in advance to make sure you get the best out of cryptocurrency trading.

New traders often copy trading strategies used by seasoned traders. Profitable investing requires insight, discipline, luck, and most importantly, experience. It’s a smart approach to mirror the strategies of experienced investors. However, it’s also important to remember that veteran traders have deeper pockets and a wider margin for error. They typically have safety nets in place to prevent them from suffering catastrophic losses. Blindly copying experienced investors could be to your detriment, so tread carefully.

Our Step-by-Step Guide on Cryptocurrency Trading

To help you understand how crypto trading works, we’ve created a handy step-by-step guide.

1. Combine Fundamental and Technical Analysis

Whether you are trading in traditional stocks, forex, or cryptocurrencies, two strategies are typically used to obtain information: fundamental analysis and technical analysis.

• Fundamental analysis–This type of analysis tries to determine the intrinsic value of an asset. It works on the premise that the market may have incorrectly priced a cryptocurrency due to internal or external factors, but it will eventually “correct” itself. Traders use this information to create a strategy that will yield profits.
• Technical analysis–This type of analysis looks at historical trends, patterns and ranges to predict the future price movement of a cryptocurrency. It’s essentially the study of an asset’s current and previous prices using indicators such as moving averages, relative strength index, Bollinger Bands, etc.

Fundamental analysis and technical analysis rely on very different methodologies, but they both provide data relevant to trading. It makes sense to use a mix of both to look at the bigger picture and identify the best points for entering and exiting trade positions.

2. Choose a Trading Strategy

Trading strategies are integral to successful trading. Every trader uses trading strategies to turn a profit, and there are plenty to choose from. Here are some examples of a few popular crypto trading strategies:

• HODL–A strategy made famous by a typo of the word ‘hold’ in a post on an online Bitcoin forum. ‘Hodling’ involves holding on to your cryptocurrency and waiting for its value to increase over time (months or years). The gist of this strategy is to hold on to your coins until there is a huge rush, then sell digital currencies for a tidy profit. You can buy them back when the price trends down.
• Scalping–Scalping takes advantage of minor fluctuations in market price that occur over a few seconds or minutes. Scalpers use those fluctuations to make numerous small trades and earn tiny profits that add up to a good amount by the end of the day.
• Day trading–This is similar to scalping, but traders open and close positions over a few hours instead of minutes. Day traders take advantage of the volatility of cryptocurrencies to make and close as many trades as possible in a day.
• Swing trading–Swing trading is similar to day trading, except it capitalises on price fluctuations that occur over several days or weeks. It’s a more passive investment strategy that is often favoured by beginner traders.
• Hedging–Hedginginvolves taking a position opposite to another trade and is used to protect capital if the trade does not go in your direction.

There are many other trading strategies, such as trend trading, copy trading and more. Every strategy has its benefits and drawbacks. Experiment with a few and find ones that best suit your trading style.

3. Select an Appropriate Platform for your Needs

Having good trading strategies won’t amount to anything if you don’t have a platform to use them on. Decide whether you want to use a derivative cryptocurrency exchange or a broker platform. Although both provide similar services, broker platforms are geared toward experienced traders.

Brokers often have higher liquidity and allow larger trade volumes for lower trading fees. Derivative cryptocurrency exchanges tend to be easier to use and have a lower barrier to entry. They also allow riskier trades through leveraging—leverage offerings can be as high as 200x on some crypto exchanges.

Whatever type of platform you end up choosing, make sure it is properly registered and is compliant with financial regulators. Many crypto platforms have been shut down for non-compliance, costing traders their entire investment portfolio.

4. Setting Up Your Account

Setting up an account on a broker or cryptocurrency exchange platform is pretty straightforward. All you need is a username, password and email address for account verification. The one additional step you need to go through is Know Your Customer (KYC) verification.

The KYC process is required by financial regulators to verify the identity and location of all traders. It is a preventive measure against fraud, money laundering, terrorism and other illegal schemes. It typically involves providing a copy of your government-issued ID and proof of residency. Some platforms may also ask you to provide proof of your income source.

Trading platforms either integrate the KYC process into the sign-up process or ask users to do it later. Once your identity is verified, you can finally deposit funds, via fiat currency or another crypto, into your account to start trading. Go to your account wallet and look for the deposit button. Use it to send money to your account.

5. Prepare your Trading Position

Check out the platform’s trading options after funding your account. There should be a trading interface that contains all of the relevant trading information you’ll need. While every platform has a different interface, they all share common elements, such as buying and selling options, order books, trading graphs and open positions.

All of this crypto trading jargon may be overwhelming for new traders. Below are some of the common terms that every trader should know.

Short or Long Position?

Taking a long position means you’re anticipating the value of a digital asset will increase. You buy derivatives knowing their value will rise over the next few days or weeks, and you can sell them for a profit. Taking a short position is the opposite. It means you expect the value to drop, so you acquire derivatives that you sell now and re-purchase once the price has dropped to your desired level.

Shorting is a great way to take advantage of a falling cryptocurrency market, but it’s also riskier than taking a long position. A sudden market dip could correct itself faster than you anticipated, and that could end up costing you a lot of money.

Limit or Market Order

In cryptocurrency trading, a market order is a transaction that’s executed immediately at the best available current price. A limit order is an order type that isn’t executed until a specified price or better is reached.

Limit orders are more preferred because they let you set your desired buy or sell price and give you more control over the trade. Depending on the conditions you set, a limit order can sometimes take a while to get executed. However, if your cost-benefit analysis is correct, then the wait should be worthwhile.

Trade Position Amount and Leverage

Trade position refers to the amount you place in your order. Many crypto trading platforms offer leverage, which lets you amplify your exposure to the cryptocurrency market. The platform extends credit to the trader, allowing them to trade crypto for higher amounts than they have.

Leverage is displayed in ratios. For example, 10:1 means you can get up to 10% leverage. If you hold $1,000, then you can open up a trade for up to $10,000. The platform gives you credit for the excess amount. If your trade position pays off, then you could get significant profits. But it goes both ways—losses are also amplified, and you could end up losing all your money.

Risk Management: How to Decide the Right Stop-Loss and Take Profit values for your Cryptocurrency Trade

A good risk management strategy is important for a trader’s success. At the very least, you should set up Stop-Loss or Take-Profit values for your trade position. These are specific price parameters that trigger when the market crosses the support or resistance level. The support level is the lower limit or “floor” of an asset’s market price. Its opposite is the resistance level, which is the upper limit or “ceiling” of the market price.

The support and resistance levels are determined through technical analysis. Set up your Stop-Loss value just below key support levels. If the value of a cryptocurrency crosses the support level, your order is triggered, and your positions are closed.

Another option is to use trailing Stop-Loss values, which automatically adjust each time the resistance level changes. A trailing stop-loss will continually move your closing position to match market fluctuations. This allows you to make as much profit as possible while mitigating any potential losses.

Review and Execute Your Cryptocurrency Trading Order

The last but crucial step before tapping the Buy or Sell button is to review all of your order details. Make sure you picked the correct order type. Input the right amount, limits, leverages, and any other factors. When you are confident everything looks good, place your order and open your trade position.

Close your Trade for Profits or Limit Your Losses

Trade orders can be closed manually or automatically, depending on the order type. Experienced traders usually set a Take-Profit limit to automatically close a position after it generates their target profits. They use the Take-Profit limit in tandem with a Stop-Loss limit to mitigate losses in a bear market.

For instance, when you place a limit order to sell, set a value slightly higher than the resistance level. The order will be executed when the conditions are met, netting you a small profit. On the other hand, you could set up a Stop-Loss limit at key support levels to close your order if the cryptocurrency market turns bearish.

Other Considerations

Many additional factors can affect your decision to pick the right crypto trading platform. These include customer service, security features, trading fees, deposit/withdrawal options, quality of provided data, and available trading tools.

There are also external factors that you should take into consideration, like government regulations or laws, cryptocurrency adoption, and other market-related news. All of these factors can have a collective impact on the market and your profit potential.