Let’s start by answering the question of what is trading and how it is different to investing in Bitcoin. When people put money into Bitcoin, this typically means that they are buying Bitcoin for the long-term. To put it differently, they believe that the price of Bitcoin will go up, regardless of the ups and downs of the market.
People usually invest in bitcoin because they believe in the technology, team, or ideology behind it. Bitcoin investors are infamous for HODLing in the long-term, which is a term that was popularized by the Bitcoin community, a typo for “hold” in a old 2013 post in the BitcoinTalk forum.
Bitcoin investors HODL for the long term, while Bitcoin traders buy and sell Bitcoin in the short term, or whenever they think they can make a quick profit. Traders look at Bitcoin as a way for making fast profits, and sometimes they don’t really consider the technology or the ideology behind what they trade.
Yet people can still trade Bitcoin even if they are a firm believer. And many people out there invest and trade at the same time. But why are so many people trading bitcoin and other altcoins all of a sudden? There a two reasons for this.
The first is that Bitcoin is volatile in nature, which means that people can make a large chunk of cash if they can time the market correctly. Secondly, unlike traditional investments, Bitcoin trading is open at all hours of the day and night. Most markets like stocks and commodities have a set opening and closing time. While with Bitcoin, people can buy and sell whenever they please.
Finally, Bitcoin has an unregulated landscape, which lowers the barrier to entry without the need for a drawn out identity verification process.
Trading Method types
There are a number of different types and styles of trading. For example, day trading involves making numerous trades throughout the day, and then attempting to profit over the short-term price movements. Day traders then spend a considerable amount of their time staring at a computer screen, and then when they’re finished, they usually close all of their trades.
One strategy named Scalping is a particularly popular strategy, and one that many people are talking about today. Scalping attempts to make a large amount of money on tiny price charges, and it’s sometimes referred to as picking up pennies in front of a steamroller. Scalping focusing on the here and now, and it’s based on the idea that making a small amount of money limits the amount of risks one exposes themselves to and then creates advantages for traders. Scalpers often make hundreds of trades in a single day.
The others strategy is swing trading. Swing trading attempts to take advantage of natural swing of the price cycles of Bitcoin and other currencies. Swing traders try to determine the beginning of a certain price movement and then enter the trade. They then hold on until that movement dies out and exit with the profit. They attempt to see the big picture without always looking at their computer screens. Swing traders are able to enter a position and then hold it open until they get their desired results.
So now that you know a little more about trading, you may wonder… How does it actually work? How is someone able to predict how Bitcoin prices will change?
The short answer is that it’s not possible for someone to predict what will happen with Bitcoin. But some traders have found particular patterns, methods, and rules, that allow them to make money over a long enough time scale. Nobody only makes profitable trades, but here is an idea: at the end of the day, traders should see a positive balance, although they may have lost some money along the way.
Fundamental vs. Technical nalysis
Generally, people follow two methods when they trade Bitcoins: fundamental analysis and technical analysis.
Fundamental analysis looks at the bigger picture of the currency. In the case of Bitcoin, fundamental analysis looks at Bitcoin’s industry, news, and technical developments of the network, regulations, and anything else that may affect the price of Bitcoin.
This method looks at Bitcoin’s value as a form of technology, which is independent from price, as well as a outside forces to determine what will happen to that price. For instance, if China decided to ban Bitcoin, then the analysis would predict that the price would probably drop in value.
On the other hand, Technical analysis predicts the price by studying market statistics, like past price movements and trading volumes. Technical analysis identifies patterns and trends in the price, leading to suggestions of what will happen to the price in future.
Technical analysis makes the following assumptions: regardless of what’s happening in the world right now, the price movements of Bitcoin will speak for themselves, and could tell some kind of story that will let people predict what will happen next. So which method is better? There is no answer, but a health mix of both will probably lead to the best results.
Understanding Bitcoin Trading Terms
Let’s continue by breaking down some of the most confusing terms and stats that you’ll come across for most of the exchanges.
Bitcoin exchanges are online sites where buyers are sellers and matched automatically. An exchange is different to a Bitcoin company that sells you coins directly, such as Coinmama. This type of company will typically, but not always, charge a higher fee.
An exchange also differs from marketplaces such as Local Bitcoins, where buyers and sellers communicate together in order to complete a trade. The
The Order Book
An order book is a total list of buy and sells orders that are listed on the market’s order book, which can then be viewed on the exchange. Buy orders are called bids, as people are literally bidding on the prices to buy bitcoin.
Sell orders are called asks, since they are a literal asking price that the sellers request. This means that whenever people refer to the price of bitcoin, they are actually referring to the price of the latest trade made on a specific exchange. This is important to keep in mind because there is not a single, global Bitcoin price that each person follows. Sometimes, the price of Bitcoin in other countries will differ from the price in the US, since the primary exchange in these countries include different trades.
Price alone, you will also see the terms high and low. These terms refer to the highest and lowest prices over the last 24 hours.
Another term is volume. Volume represents that number of total bitcoins that have been traded in a set timeframe. Large trends are usually followed by large trading volumes, while weak trends follow low volumes.
A healthy trend upwards often comes with high volumes (when the price goes up) and low volumes (when the price decreases). If you are seeing a sudden change in direction for the price, experts recommend that you check how significant the trading volume is, so you can determine if it’s only a minor correction or a beginning for an opposite trend.
Now you know most of the terms that you’ll come across on the average exchange. It’s now time to move on to the types orders that you can place on an exchange.
Exchange Types of Orders
A market or instant type of order refers to an order that gets instantly fulfilled at any price point. So, if you put a market order in to buy five Bitcoins, which will get you the cheapest sellers possible, until it earns enough sellers to hand over 5 Bitcoins. Another way of looking at it is that you might end up buying 3 Bitcoins at 1 price, and then another 2 at a higher price. For a market order, you don’t stop buying Bitcoin until the set price is reached.
With market orders, you could end up paying more than you had planned, so it pays to be careful. With a limit order, you will only buy or sell Bitcoin a set price that you decide on. The order may not be fulfilled, as there won’t be enough buyers or sellers to meet those requirements.
For example, let’s say that you place a limit order to buy five Bitcoins at $10,000 per coin. You then could end up owning 4 Bitcoins in total as there were no other sells at the price point you set. The remaining order for 1 coin will stay there until the price goes up to $10,000 again. A stop loss order lets you set a certain price that you’d like to sell in future. This type of order is handy for minimizing losses.
A stop order is an order that tells exchanges the following: if the price drops by a certain amount, I will sell my Bitcoins at a determined price. I will lose as little as money as possible. A stop-loss order works as a market order. Once the stop price has reached, the market will begin selling your coins at any price until it is fulfilled.
Maker & Taker Fees
These are other terms that you might come across when trading on exchanges: maker and taker fees.
For many, this is one of the most confusing models to wrap your head around, but let’s try to break it down.
Exchanges want to encourage people to buy and sell. They want to make a market. Therefore, whenever you create a new order that is unmatched by any existing buyer or seller, then you become a market marker, which means you will have lower fees. At the same time, a market taker places orders that are instantly fulfilled, as there was already a market maker in place to match those requests.
Takes remove business from the exchange, so they generally have higher fees than makers, who add orders to the exchange’s order book. For instance, say you put a limit order in to buy 1 Bitcoin valued at $10,000, but the lowest sellers are only ready to sell at $11,000. You’ve then created a new market for sellers who will sell at $10,000. Whenever you place a buy order below the market price or a sell order above the market price, you become a market marker.
Taking the above example further, imagine you place a limit order to buy one Bitcoin valued at $12,000 and the lowest seller is selling one bitcoin for $11,000. Your order will be instant fulfilled. You will be taking orders from the exchange’s order book, so you’re considered the market taker.
Reading Price Graphs
Now that you are up to speed with the primary Bitcoin exchange terms, let’s go into a short introduction into reading price graphs.
Japanese candlesticks are based on an old Japanese method of technical analysis, which was originally used in the trade of rice in the 1600s. Each candle shows the opening, lowest, and highest closing prices at any given time period. That’s why you’ll often see people refer to these candles as OHLC. If the candle is red or green, you’ll be able to tell if the closing price of the timeframe was higher or lower than the opening price.
If you see a green candle, it means that the opening price was lower than the closing price, so the price went up in value during this timeframe. While on the other hand, if the candle is red, then this means that the opening price was higher than the closing price, so the price went down in value.
In Japanese candlesticks, you can see the opening price in the wide bottom part of the candle, and the closing price being the wide part of the candle, an the highest and lowest trades on both ends of the candle.
During a bull market, we’ll mostly see candlesticks that are green. And if it’s a bear market, the majority of those candlesticks will be red in color.
Bull & Bear Markets
The markets are named after these animals for the ways that they attack their prey. A bull thrusts its horns in the air, whilst bears swipes it paws down. These animals are metaphors for the price movements in particular markets.
An easy way to think about it is if it’s a bull market, the trend will be up, while a bear market will pull the trend down.
Resistance & Support levels
Sometimes, the price of Bitcoin will seem to hit a virtually ceiling, which means that the market can’t break through it for a considerable amount of time. This is known as the resistance level. So, if Bitcoin fails to break $10,000 that could be said to be the resistance level. At a resistance level, it’s common that you’ll sell a lot of sell orders, which is why the price fails to break through that certain value. There is also a support level.
A support level is a price that Bitcoin is not likely to fall below. Support levels act as price floors through preventing the price of an asset from being pushed too far downwards. A support level can be accompanied with a lot of buyer orders at the level’s price. A high demand for a buyer at the support level cushions that trend.
Generally, the more frequently the price has been able to surpass the support or resistance levels, the stronger these levels are assumed to be.
Here’s a common feature of both support and resistance levels:
- They are usually set at a round number, as most inexperienced traders will tend o buy or sell when the price is at a whole number. Typically, you’ll see loads of buy and sell orders at around the $10,000 level, rather than a price like $10,256.
- Because so many orders get placed at the same level, these round numbers typically act as strong price barriers. The psychology of it also creates support and resistance levels. For instance, until 2017, it seemed expensive to pay $1,000 per Bitcoin. So there was a strong resistance at $1,000. Yet once that level was breached, a new resistance level was created at $10,000.
Common Trading Mistakes To Avoid
So you know now the basics of Bitcoin trading. But there is a still a lot more to trading than what it seems. Since it’s not possible to cover everything in one lesson, it’s advisable to do as much research as possible and maybe look through the most common trading mistakes.
Mistake #1 – Trading more than you can afford to lose
The biggest mistake in trading is putting more money in than you can afford to lose. Consider the amount that you feel comfortable trading with. The worst case scenario is that you end up losing it all. If you find yourself trading above that amount, then you should stop.
Trading can be a very dangerous business. And if you put more money in than you’re comfortable with, it is likely to affect how you trade, which will lead to bad decisions. Usually, you’ll find that you’ll end up most of the money that you can’t live without.
Mistake #2 – Not having a plan
A different mistake that people make when they start out trading is not having a clear plan or strategy. To put it another way, they don’t know why they are entering a specific trade, or when they should exit that trade. Clear profit and loss goals are needed before starting the trade.
Mistake #3- Leaving money on an exchange
It can’t be overstated to never leave money on an exchange that you are not trading with. That money can easily be lost or stolen as you do not have any control over it. If that exchange goes offline or gets hacked, then you may end up losing all of it. Whenever you have money that isn’t required in the short term for trading, ensure that you move it into your separate Bitcoin wallet or bank account for safekeeping.
Mistake #4 – Fear and Greed
Two dominant emotions tend to decide how traders behave in the market: fear and greed. Fear can come in the form of closing a trade at the wrong time, as you might read a bad news story, or hear a rumour from a friend, or scared of an unexpected dip in the price. The other emotion: greed is also known as the fear of missing out.
When you hear people talk about the next bitcoin, or when the market price rises to an unnatural level, it’s natural that you wouldn’t want to miss out on the action and potential gains. So people may enter a trade too quickly, or even neglect to close an open trade. In most cases, our emotions run us, so always be aware of your natural tendency towards fear and greed, and always stick to your gameplay that you laid out.
Mistake #5 – Not learning the lesson
Regardless if you made a successful trade or not, there will always be a lesson to be learned, no matter what happens. No one only makes profitable trades, and no one makes money without losing some money along the way. The important thing to remember is that it’s not about whether you make money, but if you gained some new insights to help you next time.
To summarize everything: if you want to get into trade just to make some easy money, then perhaps it would be better to avoid trading altogether. As there’s no such thing as easy money, without risk or potential downsides.
However, if you are ready to put the hard work in to becoming a professional trader, then it could pay dividends later down the line.
The most important thing is to understand your own personal tendencies and to not make emotions irrationally. Instead, focus on what you can control: you plan and your strategy, and always be open to learning new things while you are on your journey to success with Bitcoin trading.