Welcome to CryptoGlobe’s Beginner’s Guide To Trading Crypto. In this guide, we will take you by the hand and show you everything you need to start trading cryptocurrencies today.
Trading cryptocurrency is not easy. There are a million factors to consider, and so many ways to make money in this market. So, to break you into this space, this comprehensive guide will provide a backdrop for this entire industry. Here’s how it’s broken down:
- What are Cryptocurrencies?
- How Much Money Should You Allocate to Cryptocurrencies?
- Understanding Market Cap
- Portfolio Tracking
- Portfolio Allocation
- A Word on Diversification
- Everyone’s Least Favourite Topic: Taxes
- Regulated Instruments
- Four Types of Exchange
- Currency Pairs
- Fundamental Analysis
- Using The Exchange
- Technical Analysis
- Other Ways of Trading
- Principles for Success
1. What Are Cryptocurrencies?
Cryptocurrencies are digital assets. Using blockchain technology, they create provable scarcity that makes them valuable to investors and speculators. There are hundreds of different cryptocurrencies out there, and they all do different things. The oldest, largest, and most famous cryptocurrency is bitcoin. Launched in 2009, bitcoin is responsible for this entire market’s explosion.
In this article we’ll review the basics required to get you up and running, but if you’d like to learn more about Bitcoin, start by reading the Bitcoin Whitepaper.
It can be a little daunting to the non-technical, but everyone can gain something from reading about bitcoin in the words of its creator. This paper was the first public announcement of Bitcoin, and explains the technology behind this revolutionary currency. After that, the best place to learn about the technology behind Bitcoin is Jameson Lopp’s Bitcoin Resources page.
Jameson posts all kinds of Bitcoin resources that’ll help you understand the history, technology, and value of Bitcoin.
For the sake of this article, here is some beginner vocabulary that you should be familiar with:
Cryptocurrency – the umbrella term for all digital currencies, including Bitcoin.
Altcoins – any cryptocurrency that is not Bitcoin. Altcoin is short for alternative coin.
Fiat – fiat is the commonly used term for paper money, like USD or JPY.
Wallets – a wallet is where you store your cryptocurrencies. One of the best all-around wallets is the Ledger Nano S, but more on that later.
Exchanges – websites where you can buy and sell cryptocurrencies. Cryptocurrencies aren’t traded like stocks and bonds, which can be purchased from your investment account, so you must access exchanges to buy and sell.
2. How Much Money Should You Allocate To Cryptocurrencies?
One of the most common questions is, “how much should I invest?”
This is a very hard question to answer and really depends on you, your financial situation, and your current investment portfolio. Paying off debts and making sure that you have a strong savings account takes precedence over investing in cryptocurrencies, so make sure you’ve got your finances in order first.
Once you’re ready, it’s best to invest in the cryptocurrency market alongside other markets.
Make sure you remove risk by investing in low risk markets like stocks and bonds. From there, you might be ready to invest in cryptocurrencies.
Now – we here at CryptoGlobe are not financial advisors and we cannot make decisions for you. However, we can offer a few guidelines to decide how much money you might want to invest in the cryptocurrency market.
How much time you have to actually manage your portfolio?
If you’re actively managing your portfolio, you might be able to invest more money into the cryptocurrency market. This is a fast-paced market, and if you can’t stay on top of everything that’s going on, it’ll pay off to be more conservative.
How risky is your portfolio?
If your investment portfolio contains other high risk investments like marijuana stocks, or venture capital, you might want to avoid investing too much in cryptocurrency. Risk adds up, and you don’t want to be overexposed to high risk markets.
How old are you?
As is the case with traditional investing, younger people can afford to shoulder a riskier portfolio. They don’t need to live off of their investment accounts, so losses don’t weigh as much as they would for older folks who use their retirement accounts to pay the bills.
3. Understanding Market Cap
One term that you’ll hear mentioned over and over in cryptocurrency is market cap. Market cap is short for market capitalization, and in crypto, this metric is used to measure the different cryptocurrencies’ values.
You might be thinking, “can’t we just judge them by price?”
The answer is no, for one simple reason: supply. If a coin has a lower supply than another one, then each unit will be worth more (since it’s more scarce). So, in order to compare cryptocurrencies to each other, market cap is used.
Market cap is calculated by multiplying supply times price. Let’s go over some examples.
Example 1: Bitcoin. Let’s say 1 BTC = $6,000, and there are currently 17 million bitcoins in circulation. That means the market cap is $6,000 times 17,000,000, or $102B.
Example 2: XRP. If 1 XRP = $0.40, and the supply is 40B, the market cap is $16B.
This example shows you how to effectively compare the size of different cryptocurrencies. All of them have different supply schedules, so market cap is the best way to compare them side by side. Thankfully, cryptocurrency websites like CryptoCompare calculate cryptocurrencies by market cap, and even rank them side-by-side, so you don’t have to.
4. Portfolio Tracking
One of the problems with cryptocurrency investing is that you’re completely in charge of your holdings. With traditional markets, a broker (like Fidelity) usually holds, tracks, and monitors your holdings for you. With cryptocurrency, there is no broker, and the coins are held on exchanges or in personal wallets. This means that you’ll have to monitor your portfolio yourself.
CryptoCompare’s app allows you to easily monitor the performance of the cryptocurrencies you hold. It’s free to download and is an essential tool in helping you keep track of your holdings.
5. Portfolio Allocation
One of the biggest questions investors have in cryptocurrency is how their portfolio should be set up. Some people start investing in cryptocurrency and start buying hundreds of different coins. There’s more than two thousand cryptocurrencies available, so it’s easy to get overwhelmed. To help you decide how to organize your portfolio, here’s what we consider to be a strong portfolio split.
50% – Bitcoin and Bitcoin Only
Bitcoin is king in this market. Whichever way Bitcoin goes, the market follows, and this correlation has not been broken for years. We suggest always holding around 50% of your holdings in Bitcoin, so as to consistently take advantage of broad market movements. Bitcoin is the lowest risk cryptocurrency, so it should make up the majority of your portfolio.
30% – High Cap Altcoins
As you move into smaller altcoins, the risk increases, so your allocation should be smaller. The second rung of your portfolio should be high cap altcoins. This means 30% should be given to coins that are in the top 10 or 20 altcoins by market cap. These are coins that have been around a long time, and have more buy support under them.
15% – Smaller Altcoins
Outside of the big names like Monero (XMR) or Litecoin (LTC), a small piece of your portfolio might be given to even smaller altcoins. These are riskier assets. By limiting your exposure to riskier positions, you reduce the amount of money you can lose. Stick to a small percent for smaller cap altcoins.
5% – Gambling
The final rung of your portfolio should be for gambling. Yes, this is for the riskiest stuff on the market. This includes coins that are high risk but high reward, or ICOs (and maybe STOs) that haven’t even launched yet.
This category also includes margin trading on sites like BitMEX. Margin trading (which we’ll discuss later in greater detail) is where you borrow other people’s money to trade larger positions than you could normally afford. Utilizing margin trading can be an efficient way to trade, but the risks are much higher, so margin trading should be treated with caution.
Whatever you invest in this category should be considered a “longshot,” but your exposure should be so small that it doesn’t matter if you completely lose the entire position. That’s why it’s five percent.
This portfolio split doesn’t have to be treated as law, but it’s a great guideline for beginners to start with. You can modify it however you like, but it’s important to understand the differences in risk between cryptocurrencies.
6. A Word On Diversification
When people get into cryptocurrency, they want to apply traditional investing concepts to this new, cutting-edge market. Unfortunately, these strategies don’t always work out as planned.
Diversification is one of those concepts.
Any experienced financial planner will tell you to split up your investments across different companies, niches, and industries to reduce risk. Investors come to cryptocurrency and try to do the same thing, buying up 100 (or more) different cryptocurrencies to “reduce risk.”
Unfortunately, this doesn’t help out at all with crypto. The entire cryptocurrency space is correlated, and although there are some that outperform others, the entire market still moves as one. Instead of trying to spread out risk among coins, it’s better to follow the suggested portfolio strategy above. Then, if you really want to diversify, do so in other industries. Stocks, bonds, precious metals, and real estate perform independent of the cryptocurrency market. You reduce risk in the cryptocurrency market by buying other assets, not by buying more cryptocurrencies.
7. Everyone’s Least Favorite Topic: Taxes
Although often overlooked, traders must remember that cryptocurrencies are taxable assets. In most countries, anything that can be bought and sold at a higher price is liable to be taxed. Cryptocurrencies are no exception. For the sake of brevity, we won’t go into much detail about taxes.
Instead, it might be better to consult a certified tax professional in your jurisdiction so you can prepare a tax plan before you start trading.
In many countries, short term trading might be too expensive for many to pursue. For example, the United States offers lowered tax rates for assets held over one calendar year. That means it might be better to ‘HODL’ (a deliberate misspelling of “hold”) cryptocurrencies for at least a year in order to save on taxes. However, check with your local tax professional to confirm what your country and state dictate.
8. Regulated Instruments
One of the biggest challenges about trading cryptocurrency is that the space is extremely unregulated. Since everything is so new, this truly is the Wild West of finance. With traditional markets, you can log onto your Chase Investment account and easily buy and sell products at the click of a button.
Cryptocurrency is not so easy. You have to register on an unregulated exchange, and even then, custody is your responsibility. Some people reading this might not want to deal with this headache and would prefer to interact with regulated products that can be bought from traditional brokers. Thankfully, there are a few options which we’ll review here. Both of these products do not require the customer to store their own coins.
GBTC – available only to accredited investors, this product provides audited exposure to Bitcoin through Barry Silbert’s Grayscale investment firm. Traded on the OTCQX market, this product is designed to follow the price of Bitcoin, but often diverts from the spot price. Despite that, it’s still a legitimate, regulated, publicly traded instrument that appeals to many investors.
CBOE & CME – Launched in December 2017, both the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange (CME) offer futures products that track the price of Bitcoin. As futures, these contracts allow traders to go long (buy) and go short (sell) the price of Bitcoin. Although easily accessible, these products do have large contract sizes. 1 CME Futures contract is worth 5 BTC, and the CBOE contract is worth 1 BTC. This limits smaller players who may only want a fraction of a Bitcoin in their portfolio.
Before we get into the nitty gritty of how to become a cryptocurrency trader, there’s one thing we have to discuss before getting started: security. By far, the number one way to lose money trading cryptocurrency is poor security. Since Bitcoin launched in 2009, billions of dollars have been lost via hacks. However, this money isn’t lost in the sense that users themselves lose it. The biggest victims of cryptocurrency hack are the exchanges themselves.
The exchanges are prime targets for hackers. They store massive amounts of cryptocurrencies in one place, usually in hot wallets. Hot wallets are cryptocurrency wallets that are actively connected to the internet. This makes them much more susceptible to hacks, as hackers can more easily find their way into the wallet.
A hot wallet is like the leather wallet you keep in your pocket, it’s easy to use, but risky to keep large amounts of money in. You wouldn’t put your life savings in your pocket, and you shouldn’t put your cryptocurrencies in hot wallets. Later, we’ll cover which wallets are best to use.
The exchanges utilize hot wallets to store money, and even worse, most of the exchanges aren’t insured. Once money is taken from an exchange, there’s nothing the owners can do about it.
That’s why security for cryptocurrencies is so important. When you place money on an exchange, that money is no longer in your possession. The exchange is responsible for its custody, and unfortunately, that isn’t very safe. So, to protect your cryptocurrency exchange accounts, here are three easy ways to prevent hacks:
- Hardware wallet – When you aren’t trading, your cryptocurrencies should always be stored offline. The best way to do this is in a hardware wallet. Click here to learn which hardware wallet we recommend.
- Google Authenticator – Every exchange allows you to use 2-Factor Verification with your account. This means that once you log in, the exchange will send a six-digit code to your cell phone. By default, the exchanges do this via text message, but this method opens you up to hackers swiping your SIM card. Fix this by installing and using Google Authenticator.
- Password Manager – The last way to protect your cryptocurrency exchange accounts is to use a password manager. Most people use the same, easy-to-crack password on every single website they use. Instead, use different passwords on every website, and make sure they are complicated, employing letters, numbers, and symbols. A password manager like LastPass or KeePass does this for you.
- Most important, remember to always store your cryptocurrencies offline. They are 100x safer in a hardware wallet than they are on an exchange.
10. Four Types Of Exchange
Before we really dive in, let’s discuss the different type of cryptocurrency exchanges that exist.
There are hundreds out there, and you might get confused by all of them. This section will explain the difference between the various exchanges, and which ones you should use.
The first group of exchanges are the fiat on-ramps. This means exactly what you’d think it means – that these exchanges allow you to purchase cryptocurrencies with fiat. Depending on your jurisdiction, you may have to use a different cryptocurrency exchange, but the ones that accept fiat deposits are: Coinbase, Binance, Gemini, BitStamp, Bithumb, and Bitfinex, and more.
To start trading cryptocurrency, you’ll need to get into the ecosystem by buying cryptocurrency with fiat. The exchanges listed above allow you to buy the top currencies with fiat. Options include BTC, ETH, LTC, and a few others. Your best bet is to buy bitcoin. To this day, there are more bitcoin pairs than any other cryptocurrency, so stick with BTC for ease of use.
Now that you have some bitcoin, you can start trading on the altcoin markets. There are some exchanges that only deal in cryptocurrencies, with no fiat. This is because obtaining licensing to trade with fiat currency is expensive and difficult. There’s so much federal regulation that it’s easier to open an exchange that deals with cryptocurrencies ONLY.
That’s what many of the altcoin markets do. They bypass regulation by trading cryptocurrencies. To make up for lack of fiat, they list tons of different altcoins. If you’re looking to buy small cap altcoins, this is where you’ll find them. Examples include KuCoin, Binance, Cryptopia, CryptoBridge and others.
The last type of exchange is one that deals with derivatives or margin trading. These include Bitfinex, BitMEX, and OKEx. These exchanges allow you to borrow other people’s money (margin) or trade derivatives (like swaps) in order to short the market or take bigger positions than you can afford. We do not recommend beginners use these exchanges.
Decentralized Exchanges, also known as DEXs, are exchanges that aren’t owned by a centralized authority. The alternative are centralized exchanges, like Binance and Coinbase.
The benefits that decentralized exchanges provide are many, but the most important are that they don’t perform KYC/AML checks on users, and allow the users to list and trade whatever coins they want. This is a stark contrast to centralized exchanges, who require background checks on users and have an extensive vetting process for listing coins.
DEXs vary in how they’re built and governed, but all of them put more control in the user’s hands. Some of them even disburse profits back to users, through staking of exchange tokens.
Examples of DEXs include IDEX, CryptoBridge, and Bisq.
11. Currency Pairs
One of the most important concepts to remember when trading cryptocurrency is the concept of currency pairs. With stocks, every stock is denominated in dollars. In crypto, things aren’t so cut and dry. Many large cryptocurrencies are denominated in dollars. For example, anything on Coinbase or Bitfinex can be traded against dollars. This includes BTC, LTC, ETH, and other large cap cryptocurrencies.
However, most altcoins trade on cryptocurrency pairs. As an example, let’s look at a smaller cryptocurrency like Ravencoin (RVN). This asset is traded on Binance, but only on a RVN/BTC pair. This means that while holding altcoins, you have to consider how the altcoin is performing against BTC and the dollar. If RVN goes up against BTC, but BTC has gone down, it’s possible you’ve lost USD value.
This makes it difficult to monitor how your positions are doing, but as a rule of thumb, you should make sure your altcoins are outperforming BTC. If altcoins are losing value compared to BTC, you would have been better off holding BTC.
Another factor to consider when trading cryptocurrency is that the markets never close. In the stock market, there’s an opening and closing bell. The markets are only open a few hours everyday, they’re closed on weekends, and even have holidays. There’s no such thing in the cryptocurrency market, which is open 24 hours a day, 7 days a week, 365 days a year.
This means that there will be no gaps on the chart. It also means that activity will vary through the day, as traders in different time zones will wake up. It also means that your positions will be open overnight (if you sleep, that is), and even over the weekends.
13. Fundamental Analysis
In traditional markets, fundamental analysis is a tool used to judge an instrument’s investment potential by studying its financial statements, health, competitors, culture, CEO, etc.
Fundamental analysis studies everything except the price, and instead tries to determine if a security is priced above or below its intrinsic value.
Fundamental analysis in cryptocurrency is a bit harder. The market itself is so young that there isn’t much data to support fundamental research. Even then, there isn’t much to study between each cryptocurrency. The market is still undergoing massive price exploration, so it’s not easy to determine what is a cryptocurrency’s “true value.” Despite that, there are a few ways to do fundamental research on a coin.
One of the easiest ways to do fundamental research is to find out how the market feels about a certain coin. If people are talking positively about something, that means they’re buying. It doesn’t matter if something is a scam or the next big thing. If people are buying, the price will go up. Therefore, it’s within your interests to measure how the market feels about your favorite cryptocurrency.
There are a few ways to determine market sentiment. The easiest way to do it is to use social media. You can log onto Twitter and search for the coin’s cashtag (i.e. its ticker preceded by a dollar sign, like $BTC). This easy technique will show you every trader who’s talking about the coin in question. If you see a lot of positive feedback, or a lot of traders buying this coin, it’s possible that it will go up. On the other hand, if you see everyone calling it a scam, it means traders are staying away.
Beyond Twitter, you can also check other social media platforms. There are dozens of cryptocurrency Facebook groups you can browse. Inside, scan through and see which altcoins are being talked about positively. The other social media site to check is YouTube. Search the cryptocurrency’s name and you’ll be able to find many videos about it. On top of official developer videos, you’ll also find crypto YouTubers offering critiques about the coin in question.
The final place to check sentiment is in the chatrooms: on Telegram, Reddit, and Discord. These have a lot more chat volume, but you should be able to get in and see how the holders feel about this coin. Additionally, developers often spend time in their Discord channel. If you can manage to talk to the developers, you might learn something (bullish or bearish) about the cryptocurrency.
Trading The News
Another way to trade fundamentals is to trade news events. Cryptocurrencies often announce partnerships, upgrades, listings, or conferences that will affect the price (in either direction). By staying on top of the news, yoy can develop an edge over the traders who are unaware of news announcements.
For example, XRP had an amazing performance in Q3 of 2018. The bullish movement was an outlier from the rest of the market, which was moving sideways. The reason for XRP’s breakout could’ve been their SWELL conference, held every October, which hosted Bill Clinton in 2018.
The price of XRP surprisingly started climbing a week before the conference, and continued throughout. If you bought XRP before the conference, in anticipation of its event, you profited nicely.
Unfortunately, it’s not always easy to learn of every single coin’s news events. That’s why CoinMarketCal exists. This website combines all events into one place, so that you can easily browse upcoming news stories. This site allows you to filter by cryptocurrency or date range, so you’re prepared to trade anything that happens.
Supply & Demand
The last piece of fundamental analysis that you can use to trade is supply and demand. This topic perhaps isn’t discussed enough in cryptocurrency markets because it’s not well understood.
In any given market, there is a certain amount of supply and demand at once time. Supply is defined as how much is available, and demand is how much buyers are looking to acquire. The two cannot be easily measured, but there is one factor that causes price movement in cryptocurrency: emission.
99% of cryptocurrencies have inflation schedules. To incentivize security of the network, they provide fresh printed coins to miners/stakers/users. The more a currency’s inflation is, the more coins miners will have to dump on the market. Therefore, it’s worthwhile to monitor your cryptocurrency’s inflation schedule to determine how the price will react to an influx of supply.
This isn’t discussed much because most trading is done on BTC. Bitcoin’s inflation schedule only changes once every four years, so it’s unlikely that the price will react as such. However, altcoins are not as consistent. For example, Ethereum has hard forked twice to lower their emission schedule, which affects price over time.
14. Using The Exchanges Like A Boss
Alright, now it’s finally time to get onto the exchanges and making trades like a pro. To help you get situated on the exchanges, this section will review some of the features common to them that might confuse you.
On the exchange, the order book is the list of all the orders that are waiting to be filled. When orders are placed that are priced higher or lower than the current price, they are left unfilled, and placed on the order book.
For example, here is what you see on Bitfinex for BTC/USD.
There are orders above and below the price waiting to get filled. As buyers and sellers become more aggressive, they will slowly push the price up or down the order book.
Monitoring the order book might give you an edge. Maybe you see that there are a large amount of sell orders at a certain price, meaning that the price won’t climb much above it. To visualize what the order book looks like, you can check the depth chart. The depth chart looks something like this:
In this example, you see that there are currently more buys than sell orders. This means that the price might be tempted to move up. You’ll also find there are large buy and sell areas marked on the chart. This is where price movement may stop, as those large orders are being eaten up.
Watching the depth chart is useful, but remember that traders may come in and use market orders to push the price up or down. What are market orders? Glad you asked…
Once you’re all set up on an exchange, you’ll want to start buying cryptocurrency. When you look at an exchange, you’ll often see that there are usually two different types of orders: market orders and limit orders. Both of these use different mechanisms to place your order, and it’s critical that you know the difference.
A market order will execute your order ‘at market.’ This means that the exchange will use whatever orders are on the order book to fill your order. If you’re buying, it’ll start at the lowest sell order and move up. The benefit of market orders is that you get into your trade instantly. You don’t have to worry about waiting for your order to fill. The downside is that market orders often experience ‘slippage.’
Slippage connotes the difference between the expected price of a trade, and the price you actually get when it’s executed. This happens when there aren’t enough orders to fill your order, so you end up getting in at a worse price.
Depending on the liquidity of the market, this could make a huge dent in your buy or sell price. The other negative of market orders is that exchanges often charge higher fees for market orders. Check with your market to see how much each order type costs.
A limit order, unlike a market order, executes only within a price limit. For example, if you place an order to buy BTC for $6,000, the exchange will match you with any sell orders below $6,000.
If there’s nothing available below $6,000, you’ll be placed within the order book, where you’ll be until someone starts selling at $6,000. This means your $6,000 could get filled at $5,999 if available at the moment, but you’ll most likely be put on the order book.
Limit orders are recommended in most cases. They not only provide you with a discount on fees, but they’ll guarantee that you get in at a certain price (removing slippage from the equation). In addition, using limit orders will prevent you from making rushed decisions and jumping into irresponsible trades. Limit orders allow you to choose an entry point and stick with it.
A commonly used term in trading is “stop-loss.” This term is slang used for any order that takes you out of a losing trade automatically. It’s recommended to place stop-losses below your entry point so that you stop losing money if a trade goes against you. More on that later.
Stop-losses are usually executed using a stop-limit or stop-market order. Both of these order types are executed exactly as described above, with one small difference: the stop. When you place a stop-limit or stop-market, the exchange gives you an option to choose a “stop price.” The stop price is defined as the price at which your order will fire. While traditional limit or market orders are executed immediately, stop orders wait until a certain price is hit before firing.
Position Size & Risk Amount
Ask any experienced trader what set him or her up for success, and nine times out of ten they’ll tell you that it was risk management.
Risk management is exactly what it sounds like: managing how much money you risk in your trades. Many beginners don’t know what risk management is because they don’t practice it properly, if at all. They usually determine their position size by flipping a coin or rolling a dice, and pick their stop loss by choosing a pretty number.
Instead, we’ll show you a quick and easy way to make sure you practice safe risk management.
First, let’s define some terms:
Position Size: the number of units you invest in an asset. In cryptocurrency, this is usually the quantity of the cryptocurrency in question. For example, 1 BTC, or 10 XMR.
Risk Amount: the amount of capital that would be lost if a trader exits the trade at the stop loss.
Reward Amount: the amount of capital that would be gained if a trader exits the trade at the target.
Risk/Reward Ratio: The reward amount divided by the risk amount.
Great, now that those are defined, here’s a rough and quick plan for risk management.
Whenever you enter a trade, especially a short term trade, you should follow these guidelines.
- Choose an entry point and stop loss. These should be determined by looking at the chart.
- Determine your risk amount as a percent of your trading portfolio. For example, if you have $100,000 in your trading account, and want to risk 2%, your risk amount would be $2,000.
- As a general rule, you should never risk more than 5% of your account on a single trade. 2-3% is better for beginners. Choose your risk amount and continue to step #3.
- Calculate how far away your stop loss is from your entry point by calculating the following:
Distance To Stop Loss (%) = (Entry – Stop Loss) / Entry
5. At this point, you’ve got your entry, stop loss, risk amount, and distance to stop loss. Now, find your position size by calculating:
Position Size = Risk Amount / Distance To SL
This will tell you how large your position should be. You can then take that position size and calculate how many bitcoins or altcoins you’ll buy to match your position size.
6. Lastly, make sure your risk/reward ratio is suitable. You should always be rewarded more than you risked in a trade. Calculate your risk/reward by dividing the distance from your entry to target by the distance from your entry to stop loss. We recommend risk/reward ratios being at least 1.5, but can be anywhere between 1 to 3.
You can calculate these values by hand or use Microsoft Excel to speed up the process. There are also websites that will calculate this for you, but we recommend you go through the process yourself so you understand what’s going on.
15. Technical Analysis
Simply put, technical analysis is the use of previous price history to forecast future price movement. Technical analysis is commonly referred to as charting because all of the work involved takes place on the chart. While with fundamental analysis a trader takes into account certain characteristics of the underlying asset, technical analysis looks at the price chart only.
You might be skeptical of technical analysis, as a lot of people are.
You might think there’s no way for the chart to be able to tell you what the price is going to do. The explanation for why technical analysis is simple: the chart is a graphical representation of how the market feels about an asset. A simple example is if the price is going up, that means that traders have confidence in its future. Once you start learning technical analysis, you’ll see how markets have been repeatedly making the same patterns for decades. That’s why technical analysis works.
Technical analysis employs a variety of tools to help the trader make accurate opinions about the market’s condition. In the next few sections, we’ll briefly introduce some of these tools so that you can start charting today.
Trendlines and Support & Resistance
The most basic and foundational skill in technical analysis is using trendlines to identify support and resistance. A trendline is drawn around the top or bottom of a range to locate possible areas where the price will reverse.
Support is defined as an area that the price has dropped to and subsequently bounced off. Resistance is the opposite, an area where the price has been rejected in the past, and might cause a drop afterward.
To draw a trendline, identify multiple (2 or 3) highs or lows. Go to the chart and draw a straight line that connects the two. You can use the wicks of the candle to identify the pure range, or draw the trendline through the candles to capture more traffic. Either will work.
For example, take a look at his BTC chart. We see that the price bounced off $6,200 twice. This prompts us to draw a trendline through these two areas. A few weeks later, the price came down again, and what did it do? It bounced off the trendline. See below:
Final note: trend lines are not perfect, and should not be taken to the exact penny.
Your line might be drawn incorrectly, or small variances in price will cause the market to move a bit above or below your trendline. This is okay. Instead of viewing trend lines as hard and fast definitions, look at them as areas. This gives you breathing room to see how the price reacts.
There are two types of moving averages commonly used. Simple moving averages (SMA, or MA) and exponential moving averages (EMA).
Simple moving averages take the sum of the prices over the selected period and divides by the number of periods to create the average.
The exponential moving average does the same calculation as the SMA, except that it introduces a weighting factor into the equation. This weighting factor makes it so that the most recent data in the series is given more precedence than the older data. What you’ll see is that because the EMA values recent data more than the SMA, EMAs will move “faster” than SMAs.
Which moving average you use is up to you. We recommend you experiment with both and see which technique works better for you.
There are two main ways to use moving averages. The first is as a trend indicator. When moving averages start increasing, that means that the trend is pointing up. The opposite is true for when the MAs curl downwards.
The second technique is to use them as support and resistance. Similar to how trendlines behave, the price will want to bounce off of moving averages.
With moving averages, you get to choose how many periods the MA collects data from. How many periods you choose will determine how “fast” the MA is. For example, a 10-day moving average will move faster than a 20-day moving average. That’s because the 10-day includes more recent data, so as the price starts moving up, a “fast” MA will have more rising prices to include in its data.
Using Bollinger Bands, created by the great John Bollinger back in the 1980s, is a technique that employs a moving average and volatility to define price action.
Here’s how the bands are created:
First, a 20-period simple moving average is drawn. Then, the top and bottom bands are created by adding and subtracting two standard deviations away from the moving average. The result looks like “bands,” as shown in the example below:
The bands can tell you a few things. First, the price’s relation to the middle line (the moving average) can tell you if prices are considered high or low. Second, the width of the bands tells you how volatile the market is. In crazy, raging markets, the standard deviation measurement will be larger, making the bands expand. In consolidation periods, the bands will tighten, signaling that a big move could be coming soon.
Used for decades, chart patterns are one of the most widely used tools in the technical analyst’s toolkit. The reasoning behind chart patterns is simple: in certain trends, the price tends to make similar patterns, signalling what the traders are thinking.
To trade chart patterns, first start by learning the various patterns. You can use the cheat sheet here as a guide. Then, when you see a pattern forming, draw it out on your chart. Once the pattern is completed, you can enter the trade where indicated by the pattern.
To conclude the section of technical analysis, a word of advice.
As you continue learning charting, you’ll see that there are an infinite number of indicators, techniques, tools, or tricks that you can use to for price analysis. It’s easy for the newcomer to get overwhelmed by all the data, and end up making bad decisions. That’s why it’s important to choose one (or two) strategies and stick to them.
Once you’ve taken a sample of each technique, you can start to get a feel for which strategy fits you best. The best way to grow as a trader is to choose your indicator of choice and dive deep into it. There’s no point in having 100 different indicators on your chart, and there’s no way you can interpret all of that data. A much better approach is to learn everything you possibly can about one strategy. Become a master of one technique and you will succeed as a trader.
16. Other Ways Of Trading Cryptocurrency
In addition to trading, there are a handful of ways to make profits in the cryptocurrency markets. All of these carry their own risks and benefits, so do your own research, but this guide wouldn’t be complete if we didn’t mention them.
In proof-of-work systems, like Bitcoin and Ethereum, miners provide computational resources to the network to organize and timestamp transaction blocks. Simply put, the miners run data through complex hash algorithms to create suitable solutions.
Once a block is found, the miner is rewarded the “block reward,” which is a specific amount of cryptocurrency denoted by the currency itself.
This means that miners who volunteer to the network can make money mining for the network. Since the mining algorithms require tremendous resources, this can not be done using your basic laptop. By building and optimizing specialized mining rigs, you too can make profit by mining cryptocurrency.
With proof-of-stake coins, there’s no proof-of-work. This means that there’s no miners. Instead, users verify transactions by staking their coins on the network. Staking is accomplished by holding coins in the native wallet, and making sure that your wallet is connected to the network.
Lauded for its energy savings, proof-of-stake has become more popular over the past few years, as users are rewarded for holding coins. Proof-of-stake cryptocurrencies pay their users based on how many coins they stake and how long they keep them staked. A great proof-of-stake coin is NEO, which pays around 4% ROI YTY (Return on Investment, Year-to-Year).
Many proof-of-stake coins employ masternodes. Masternodes are what they sound like – they’re nodes that have a LOT of coins in them. Masternodes require users to stake more coins, but give more ROI for users that qualify to deploy masternodes. Examples include DASH, PIVX, and XZC.
With masternodes, you receive frequent dividends just for holding the currency. However, that doesn’t mean these are ironclad investments. If you earn 5% ROI on a staking coin, but it goes down 10%, you’ve lost money. Keep an eye on these investments and don’t let the passive income blind you.
You know that there are many BTCUSD pairs available to trade on. If you look at different exchanges, you’ll notice that the prices aren’t exactly the same. This inefficiency allows you an opportunity to make profit – with arbitrage trading.
The idea is simple: if BTC is selling for $6,100 on one exchange, and buying for $6,200 on another, you can buy it for $6,100, transfer it over to the other exchange, and sell it for $6,200. This gives you a guaranteed $100 profit. Obviously, the spread (difference between exchanges) is not that large, but if done correctly and consistently, arbitrage trading can make some good profits.
The last way to make money in cryptocurrency is ICOs, or Initial Coin Offerings. Starting in 2014, ICOs have been all the rage, mostly due to the insane profits generated from them. To see what’s possible, check out ICOStats. You’ll notice that buyers of the Ethereum ICO, who purchased tokens for $0.30, are up 1000x! That’s absolutely insane, but ETH is an outlier as one of the best performing ICOs of all time.
Here’s a quick rundown on how ICOs work. Everything starts when the ICO raises funds, usually in separate fundraising rounds. Early investors (VC’s, hedge funds), receive a lower token price for participating early. Once the fundraising is complete, tokens are released. Sometimes not all tokens are released at once. Instead, they’re distributed over time using what’s called a vesting schedule. Sometime after the tokens are released to investors, the token is listed on the exchanges.
This should show the risks involved with ICOs. There’s no guarantees that you’ll make money. When the ICO token is released on the exchange, it’s up to the open market to agree upon what price the token is worth. This could be above the ICO price, sure, but it could also be much lower! For this reason we do not recommend ICOs for beginners. The risk is too high.
It should also be noted that 2018 was largely the story of the “ICO Bubble.” bursting. Starting in 2016, ICOs became very popular, for people in and out of the crypto world. In the past, there were only a handful of ICOs.. Things changed when nefarious – and often naive – fundraisers realized that ICOs were an excellent way to raise a lot of money in a short amount of time, with no investor ownership. This led to an ICO boom, where the number of ICOs and the amount of fundraising exploded.
For a while, ICOs were a great way to make easy money, since everyone wanted in on hot new coins. Nowadays, the market has become so saturated that ICO returns have disappeared. In addition, the ICO trend has slowly dissolved as the number of scams increased. ICO organizers have been known to raise money, launch the coin, and then abandon the project completely. This led to many ICO coins getting absolutely destroyed on the market, with some tanking to -90% below their all-time highs.
Be careful with ICOs and do not invest anything more than you can afford to lose.
STOs (Security Token Offerings), which acknowledge from the outset their identity as securities – and all the regulatory obligations this comes with – might offer a new avenue for returns – but it’s still early days for this new class of investment.
17. Principles For Success
To wrap up this guide, let’s review some of the guidelines that will help you become a professional cryptocurrency trader. You’ll soon learn that it’s not enough to have a good strategy, or buy the right coins. The majority of the challenge of trading is the psychological hurdles you’ll have to overcome. So, here are some of the principles for trading without losing a fortune.
#1 – You will lose money
The first thing to learn when you begin trading is that you will lose money. This is completely unavoidable. No one shoots 100%, especially in the game of trading. Remember, even Michael Jordan missed shots, but he stayed in the game long enough to become one of the greatest basketball players of all time.
When you first start trading, it’s easy to get angry at yourself over the losses. When you don’t have experience, and you lose trades, you begin to think that it’s all your fault. Maybe you even quit trading, thinking that you’re good enough. Don’t be too hard on yourself – accept the losses and keep growing as a trader.
In order to minimize the amount of money you lose, you can do two things. First, make sure that you don’t over-leverage yourself with massive position sizes. Make sure that if you lose the trade, you’re still breathing. Second, you should always…
#2 – Only invest what you can afford to lose
This is equally as important as rule #1.
Only put money into your trading account that you can afford to lose. This means that if Bitcoin is found to be broken, and plummets in price all the way down to $0.00, you should be able to walk away unscathed. Many people view trading or investing as their lottery ticket to riches, so they throw everything they own at it. This is how traders get burnt, and end up calling trading a scam.
Instead, only put money into the market that you can afford to lose. If this isn’t much money, focus on improving your personal financial situation before you start trading. Cut out unnecessary expenses, shop at Costco, cook for yourself, start using a family cell phone plan, get a raise, find a higher paying job. Do whatever it takes to make more capital so that you can put it into the markets. While you’re waiting to put more money into Bitcoin, you should:
#3 – Keep a journal
How can you tell if you’re growing as a trader? One way is to see if your portfolio is growing, but that doesn’t allow you to see which strategies or techniques are bringing home the bacon. That’s why it’s critical that you keep a trading diary.
Inside this diary, you should write down anything and everything about your trade. This can include time, date, exchange, entry, position size, moon position, what color shirt you’re wearing, whatever. The more data, the better.
Over time, you’ll start learning which trades are more successful, and which factors lead to more profits.
#4 – Paper trade
Paper trading refers to trading on paper only. This means you don’t trade actual money. Instead, you write down your entries and exits and practice trading without money. This might seem silly, but is an excellent way to start trading, especially if you don’t have much money to invest into the market.
The most important thing to do is to start trading. It doesn’t matter if you’re not trading actual money. As long as you treat your paper trades with the same conviction that you would for actual trades, you’ll soon find that paper trading is an extremely valuable process.
The other benefit to paper trading is that you’ll get used to keeping a journal. Many traders balk at the idea of logging their trades, but the truth is that this is an extremely worthwhile habit. Paper trading forces you to keep a journal, and will start your trading journey with this useful habit built in.
That’s all for CryptoGlobe’s beginner guide to trading. To learn more, make sure you check out some other useful guides:
The views and opinions expressed here do not reflect those of CryptoGlobe.com and do not constitute financial advice. Always do your own research.