With the rise in popularity of Bitcoin and a vast array of alt-coins, many investors have discovered the potential of crypto currency trading for increasing the value of one’s portfolio. By studying market conditions, tracking industry and financial news, and identifying suitable cryptos to trade, the astute trader can develop a trading strategy that features low risk but the potential for steady growth. In this article, ideas for creating such a strategy will be presented; pitfalls and obstacles will be discussed; and a range of useful sites and resources will be introduced. By studying and following the methods contained herein, the new or experienced crypto currency investor will learn the skills required to grow a strong, diversified portfolio.
Crypto currency collectors and investors come from a wide range of backgrounds, from Bitcoin faucet collectors, to wealthy, experienced traders, and everything in between. Some come into ‘the game’ with hundreds or thousands of dollars of capital; others bring just a few bucks or satoshis of BTC. Regardless of the starting point though, the underlying principles of crypto currency trading apply equally to everyone. Universal laws of effort and reward do not care about the type of shoes a trader wears; where they live; or what type of roof is over their head at night. Crypto trading is a level playing field. If a trader learns the rules of the game and sticks to them, they can expect the same profit potential as any other trader. Conversely, disregard the principles of wise practice and you can expect your holdings to wither and die. Choose to be great!
Crypto Currency Trading – Keywords
The fundamental principles of crypto trading can be summed up in a short list of keywords – some positive and some negative.
- Hail Mary!!
The relevance of each keyword listed should be self-evident, but a brief explanation is given here.
Patience is required for successful crypto trading because it takes time to learn the ropes, analyze charts and study market conditions. Rushing displays a lack of patience, and will often result in fingers getting burned.
Discipline is required to minimize risks. Some losses are inevitable given the volatile nature of the crypto market, but these can usually be mitigated in part by sticking to the methods and strategies. Many crypto exchanges provide tools such as ‘stop loss’ bids – these will be covered in detail later, but for now, think of them as an emergency brake that can automatically be activated should a coin-pair take a nose-dive. The trader who makes decisions based on emotion instead of maintaining a disciplined approach can expect to develop a lop-sided portfolio lacking solidity. The old addage, “Don’t fall for the FOMO (the Fear Of Missing Out),” is particularly poignant when thinking about crypto trading.
“Don’t fall for the FOMO”
Successful traders develop and use effective systems to track their progress, and thus are able to evaluate and replicate successful trades time and again, whereas disorganized traders run haphazard operations, with less reliable tracking data on hand. Those type of traders are less likely to be as successful in the long run than their well-organized counterparts.
Wise traders use the principle of diversification to build a strong portfolio. By spreading the value of a portfolio across a range of coins, they reduce their exposure to loss if any particular coin loses value rapidly. Conversely, the trader who uses a ‘Hail Mary‘ approach, or in other words, puts “all their eggs in one basket,” runs the risk of losing a large portion of value in the event that their coin suffers a big price hit. A diversified portfolio is less likely to see huge gains very quickly but also has less risk of getting wiped out. Each trader should determine their own level of acceptable risk, but a general rule of thumb might be to hold no more than ten percent of one’s total fund in any single coin.
Crypto Trading Philosophy
The mechanical actions required in crypto trading are actually very simple, and can generally be done in just a few minutes. Placing a buy or sell order only takes a few seconds, there is really no great skill in the mechanics of it. However, the ability to place a bid – to ‘make’ or ‘take’ a deal – does not in itself give the trader any solid foundation on which to build expectations of upcoming profits. The skill – the determination to study the market and formulate a strategy for successful trading – is where money is really made or lost… education is they key, and that topic is discussed here.
“Education is the key”
In order to trade successfully, the trader must be armed with knowledge about the current state of the crypto market. Knowing the shape of things gives a trader a good starting point. For that purpose it is recommended to visit sites such as World Coin Index and Coin Market Cap frequently. These sites are known as ‘aggregators’, which means they import data about coin prices from a range of crypto exchanges, combine and present it in an easily digested format to give traders and investors a quick snapshot of the crypto market. The image below shows the type of information shown on aggregator sites…
It is worth noting on a site such as World Coin Index that the user has the ability to select the price unit from a dropdown menu. In the image above, ‘”USD” is selected, but the user could also choose to display coin prices in another Fiat currency or in BTC.
Another important factor in educating one’s self about the crypto market is to keep up to date with current affairs and news related to the crypto and financial industries. CoinDesk and CoinTelegraph are popular crypto news sites that are updated regularly, but there are many others. A wise trader will spend some time digging for background stories that might be relevant to certain cryptos before trading.
The wise investor/trader is the one who studies the market prior to trading. The more knowledge and information a person has on hand – the better placed they will generally be to make informed trading decisions. On the other hand, an uninformed trader will be ill-equipped to accurately consider the state of the market, and is more likely to make mistakes. Ultimately, it is the responsibility of each trader to do their own research – everything depends on it!
“Ultimately, it is the responsibility of each trader to do their own research”
In the image of World Coin Index, as shown above, a small graph shows the price action for each crypto currency over the last 7 days. Each graph shows a number of spikes and dips. The spikes indicate that the value or price of a particular coin was at a point higher than at a time indicated by a dip. The essence of trading is to ‘buy’ a coin when the price is low, and sell it when it is high. Looking at the image again, in particular at the second currency in the list, ‘Ethereum’ – we see that the coin had a relatively large increase in value early in the week, followed by a lot of little ups and downs. The latter part of the week could be describes as being more or less ‘flat’, in that the price only fluctuated a small amount but that the trend was generally ‘sideways’; neither up nor down. When a coin moves sideways, there is less opportunity for fast gains or losses than when it changes price drastically. A coin that is moving sideways or ‘flat lining’ is said to have little volatility. Volatility is the power that drives crypto currency trading. So to recap, for the past week, there was a good rise in Ethereum at the beginning of the week but little change in price for the latter part.
In contrast, looking at the bottom of the image, we see a crypto called TRON listed at number 7. The price action chart for TRON shows a much different trend than the chart for Ethereum. The TRON price action chart shows a strong upward trend right through the week. The value of TRON at the end of the week was relatively more than at the beginning of the week. Any trader who purchased TRON at the start of the week and sold it at the end of the week would have made a profit. They capitalized on the volatility of the market; they bought LOW and sold HIGH.
“Volatility is the power that drives crypto currency trading”
How to begin with crypto currency trading
To begin trading cryptos it is advisable to create an account on an established and popular crypto currency exchange. There are literally dozens of crypto exchanges, perhaps even hundreds, but each one has its own features, and offers certain benefits to traders, as well as certain risks. A new exchange may offer lower transaction and withdrawal fees, but may be less financially stable than older exchanges. On the other hand, newer exchanges may be more innovative, and may support a range of more contemporary coins. In any case, there is no limit to the number of exchanges a trader can operate on, so it is generally a good idea to start with a well established exchange while a trader is in their early learning stages. One example of a popular exchange with relatively low fees is KuCoin, which you can join by clicking this link.
KYC – Know Your Customer
Most crypto exchanges are required by regulators to take steps to verify the identity of their users in a process called ‘Know Your Customer’. This means that new users are asked to provide one or more forms of identification before all the functions of the exchange will be accessible to them. A passport or driver’s license are the standard types of acceptable ID, and often a user will also be asked to take a selfie of them holding their identification. These steps are supposed to counter money-laundering and other undesirable activities. The process can seem a little draconian and intrusive but it is what it is.
Once you have created your account and submitted your ID documents, you may need to wait a few days for your KYC details to be verified. Generally though, you will be able to deposit some currency and begin trading in small amounts. Deposits are almost accepted in BTC and a wide range of alt-coins (which will vary across different exchanges). *Most exchanges will at least accept the same major coins: BTC, LTC, ETH, BCH, DASH, ZEC… and usually DOGE as well, plus many ‘minor’ alt-coins. Also, a lot of exchanges do allow you to buy BTC and some alt-coins using a credit card. If you need to buy cryptos with a credit card before joining an exchange you can easily do that on a site such as Coinmama, which you can visit by clicking here.
Once you have a coin balance in your chosen crypto exchange, you can begin making trades. It is a good idea to study the market on your exchange – they all operate slightly different. Each exchange has a different userbase, and trading activity can follow different patterns than you might see elsewhere. Exchanges that have their own chatrooms can be prone to higher levels of volatility than those without them, so keep an eye out for ‘pump-and-dump’ groups – groups that can attempt to work together to pump up the price of a coin by creating a lot of hype – and then sell all their coins quickly for maximum profits, which can then cause the price to plummet. There are risks everywhere, but by starting small and learning all you can, you will become better armed for success.
Tracking your progress
Before you begin trading cryptos, it can be very helpful to create a spreadsheet on your PC to keep track of your trades. Dates, prices, profits and losses. The more information you track, the more data you will have to base future analysis on. It may also be a good idea to track your investments in crypto to make sure you can comply with any tax laws that operate in your country and local area. (Please check with your local tax department on their policies regarding crypto investment).
(I will create a spreadsheet template for tracking crypto investments… soon!)
How to use a crypto exchange
We now get to the fun part – the actual trading. Trading crypto currencies involves a few steps as detailed below:
- Log into your exchange;
- Deposit some Bitcoin or alt-coins (or buy on the exchange using a credit card);
- Finding a coin pair (aka a binary) that you think might be worth buying;
- Make your first trade;
- Watch market conditions;
- Sell your position (the coins you bought in your first trade);
- Rinse and repeat!
Here are the steps explained…
- Log in to your exchange. You should have already created an account on a good exchange, and gone through the process of ID verification/KYC. Once you are logged in, take a few minutes to click around the site to see where things are. You need to know where to access your profile settings, your coin account balances and deposit addresses, and where to see the actual exchange information.
- Many exchanges offer the ability to buy Bitcoin and some alt-coins right in the exchange itself. Now is the time to do so. A reasonable suggestion is to start with a modest amount, perhaps in the region of $100, but the amount can be more or less depending on your own situation. Keep in mind that exchanges do have a minimum deposit and trade amounts, and there are some fees applied each time you make a trade. On the other hand, I strongly recommend against depositing a very large amount until you are comfortable with the associated risk. A word of warning: crypto currency trading is risky – only invest money you are fully prepared to lose!
- For the example used in this guide I will be depositing Litecoin (LTC) but you might normally choose to buy or deposit Bitcoin (BTC) as your first transaction. Now, go ahead and take a look at the markets section of your exchange. You should see a list of various binaries such as BTC/BCH, BTC/ETH, BTC/LTC, etc. Each binary (coin pair) displays the price of a coin when compared to the other coin, normally Bitcoin, or in some cases, the price of a coin when compared to a Fiat currency such as $USD. There are various methods and tools that can be used to find a coin that has good potential, but for the purposes of this guide, the key to making profit is to buy a coin when the price is low and sell when it is high.
- Once you have identified the coin you wish to buy using your initial deposit, place your buy order in the appropriate section of the exchange. A fee will usually be calculated based on the value of your offer, and can be charged at the time of offer or the time when your offer is filled by a seller. Each exchange will have its own fee structure, which is normally between 2-5% of the transaction value. Sometimes you will find sellers who are already prepared to sell their coins at the price you offer; other times you might need to wait for sellers to accept your price; and sometimes.. you might find that nobody likes your offer at all, and you can either leave it to expire or you can cancel it when you get tired of waiting or change your plans. Keep in mind that when you cancel an order, you usually get your coins back in full, although some exchanges may keep the fee, so be mindful when making your offers.
- Once you have made your first trade, you will want to track the progress of your new coin. The price can vary up or down quickly, or there may be no change for some time. Some traders will often buy a coin and keep or ‘HODL’ it (HODL = Hold On for Dear Life!!) for a long time; whereas other traders may buy a particular coin hoping for fast and dramatic changes in the market that can cause the value of their coin to increase rapidly. There are various trading strategies, so take your time; do your research; and work out a plan that suits your own situation. Once you understand the mechanics of trading, the world is your crypto oyster!
- After some time, you may decide it is time to sell your coin back to Bitcoin (BTC); or, if the coin you had bought was rapidly dropping in value, you might decide to cut your losses and dump it, rather than risking a lot more. Most exchanges have a function known as ‘stop loss’ – which you can use to automatically sell your coins if they start dropping in price. Sometimes it is better to lose five percent than to lose fifty percent, right? Anyway, for the purposes of this guide, let’s assume your coin had seen a tidy price increase of 10%. To sell it, you simply go into the exchange marketplace again, and create a sell order in a similar way to the buy order you made.. then wait for someone else to buy. As before, you might need to wait for someone to accept your offer, or you might need to adjust your price downward a little bit if you want to sell quickly.
- Once you have made a successful trade it is a good idea to record the results in your spreadsheet on even in a notebook. That way, you will have a record of your progress, and can use the data to improve your strategy over time. Keep in mind that to actually make a profit requires you to make two trades: a buy and a sell. If you always sell at a higher price than you buy at – you will make profits. (Make sure to factor-in the fees when trading. Generally speaking you need to allow about 2% per trade to cover the fees).
Key points to remember
There are many ways to approach crypto currency trading, but the mechanics of it are the same no matter your strategy. Join an exchange; make a deposit; find a coin pair to trade; make your first trade and watch the market; sell for profit or to prevent losses; repeat until MOON!!
In order to protect your investments and funds, it pays to keep these basic rules in mind:
- Only invest money you can afford and are willing to lose;
- Don’t fall for the FOMO (Fear Of Missing Out);
- Don’t keep all your eggs in one basket – diversify!;
- Always keep your accounts protected – use Google 2FA or phone authentication;
- Use a proper anti virus and firewall on your PC;
- Don’t store your coins long term in an exchange – desktop wallets on your PC are better – hardware wallets are BEST!
- And always… ALWAYS.. do your own research!!
Crypto currency trading is an exciting endeavor that offers the potential to earn good rewards, but also includes an element of risk. By doing the required research, a trader can minimize that risk, and increase their chances of earning good profits. In this article we introduced some of the main concepts of crypto trading; identifying a number of risks and pitfalls to be avoided; we discussed a few points to consider when planning your own trading strategy, and provided a few resources and ideas to point you in the right direction. With more research you will be well placed to begin trading crypto currencies profitably. They key is to make a start; enjoy it; and keep learning.
All the best!