In this post we will cover the basics of cryptocurrency trading. It will help you learn and understand the basic terms, how to “read” the market, make a trading plan, and discover how to execute it.

Cryptocurrency trading is the act of buying low and selling high. Unlike investing, trading aims to predict price movements by studying the industry and price graphs. To become a successful trader, you would have to invest a lot of time, money and effort before actually getting good at it.

While all traders want to make profits, they use different methods to achieve it. Let’s examine some examples of popular trading types:

Day trading — This method involves making multiple trades throughout the day and attempting to profit from short-term price fluctuations. Day traders spend a lot of time gazing at computer screens, and they usually close all of their positions by the end of each day.

Scalping — This day-trading strategy is growing popular lately. Scalping attempts to make large profits on small price changes, and it’s often referred to as “picking up pennies in front of a steamroller.” Scalping concentrates on extremely short-term trading, and it is based on the idea that making tiny profits repeatedly limits risks and creates advantages for traders. Scalpers can make hundreds of trades in one day.

Swing trading — This type of trade tries to use the natural “swing” of the price cycles to its advantage. Swing traders attempt to spot the beginning of a specific price movement and enter the trade then. They hold on until the movement slows down and take the profit.

Swing traders attempt to see the big picture without constantly watching their computer screen. For example, swing traders often open a trading position and hold it open for weeks or even months until they reach the desired result.

The short and clear answer is that no one can predict what will happen when it comes to cryptocurrencies. However, some traders have recognized specific patterns, methods, and rules that allow them to make a profit in the long run. No one makes only profitable trades, but at the end of the day, if you see a positive balance, even though you suffered some losses along the way, then it’s all good.

Traders follow two main methodologies when they analyze digital currencies — fundamental analysis and technical analysis.

This methodology tries to predict the price by studying at the big picture. Fundamental analysis evaluates coin’s industry, news about the currency, technical developments, regulations around the world, and any other news or issues that can affect the success of the coin.

This methodology looks at coin’s value as a technology (regardless of the current price) and relevant outside forces, in order to determine where will the price go. For example, if China abruptly decides to ban Bitcoin, this analysis would predict a probable price drop.

This methodology tries to predict the price by analyzing market statistics, such as past price movements and trading volumes. It tries to identify patterns and trends in the price and based on these conclude what will happen to the price in the future.

The core assumption behind technical analysis is this:

Regardless of what’s currently happening in the world, price movements speak for themselves and tell some story that helps us predict what could happen next.

Now it is time for a short intro into reading price graphs.

A very widely used type of price graph, Japanese candlesticks are based on an old Japanese method of technical analysis, practiced in trading rice in the 1600s. Each “candle” represents the opening, lowest, highest, and closing prices of the given time period. Due to these meanings, Japanese Candlesticks are sometimes referred to as OHLC graph (Open, High, Low, Close).

Depending on whether the candle is green or red, traders can tell if the closing price of the timeframe was higher or lower than the opening price. If a candle is green, it means that the opening price was lower than the closing price, so the price went up during this timeframe. On the other hand, if the candle is red, it means that the opening price was higher than the closing price, so the price went down.

When we’re in a bull market, most of the candlesticks will usually be green. If it’s a bear market, most of the candlesticks will be red.

These terms are used to indicate the general trend of the coin, whether it’s going up or down. The trends are named after these animals due to the ways they attack their opponents. A bull thrusts its horns up into the air, while a bear swipes its paws downward. So these animals are metaphors for the movement of a market: If the trend is up, it’s a bull market. But if the trend is down, it’s a bear market.

Often, when looking at market graphs such as OHCL, it may seem as though coin’s price cannot break through particular highs or lows. For example, you can witness Bitcoin’s price go up to $20,000 and then seem to hit a virtual “ceiling” and get stuck at that price for some time without breaking through it.

In this scenario, $20,000 is the resistance level — a high price point Bitcoin was struggling to beat. The resistance level is the outcome of many sell orders being executed at this price point. That is the reason why the price fails to break through at that specific point.

Support levels, in a sense, are the mirror image of resistance levels. They look like a “floor” coin’s price does not seem to go below when the price drops. A support level will be accompanied by a lot of buy orders set at the level’s price. The high demand of the buyers at the support level cushions the downtrend.

Historically, the more often the price has been unable to move beyond the support or resistance levels, the more powerful these levels are considered.

Interesting thing is that both resistance and support levels are ordinarily set around round numbers e.g. 10,000, 15,000, etc. The reason for that is that many inexperienced traders tend to execute buy or sell orders at round price points, thus making them act as strong price barriers.

Psychology also contributes a lot to support and resistance levels. For example, until 2017, it seemed expensive to pay $1,000 per Bitcoin, so there was a strong resistance level at $1,000. Once that level was breached, a new psychological resistance level was created: $10,000.

Trading is a risky business and mistakes can cost a lot of money. Let’s check the most common mistakes that people make when they start trading — in the hopes that you will be able to avoid them.

Mistake #1 — Risking more than you can afford to lose

The biggest mistake you can make is to risk more money than you can afford to lose. Take a look at the amount you feel comfortable with. Here’s the worst-case scenario: You’ll end up losing it all. If you find yourself trading above that amount, stop. You’re doing it wrong.

Mistake #2 — Not having a plan

Another common mistake people make when beginning to trade is not having an action plan that’s clear enough. In other words, they don’t know why they are entering a specific trade, and more importantly, when they should exit that trade. So clear profit goals and stop-losses should be decided before opening a trading position.

Mistake #3 — Giving into fear or greed

Two basic emotions typically control the actions of many traders: fear and greed. Fear can appear in the form of closing your trade too early, because you read a disturbing news article, heard a rumor from a colleague, or got scared by a sudden dip in the price (that could be corrected real quick).

The other major emotion, greed, is actually also based on fear: the fear of missing out. When you hear somebody telling you about the next big thing, or when market prices rise sharply, you do not want to miss out on all the action. So you may get into a trade too soon, or even delay closing an open trade.

Remember that in most cases, our emotions rule us. So never say, “This won’t happen to me.” Be aware of your natural tendency towards fear and greed, and make sure to stick to the plan that was laid before you started the trade.

We covered a lot of ground about cryptocurrency trading, but we have to warn you: The majority of people who start trading coins stop after a short while, mostly because they fail to make any money. So if you notice that trading is not working out for you, maybe investing would be a better thing for you. For example, investing 1000 EUR in Arbismart could bring you approximately 12% of profits in a month. An experienced trader could make higher profits within the same time period, but with way higher risks.

If you want to be successful at trading, you will have to put in a significant amount of time and money to obtain the relevant skills. If you are looking to make a quick buck then maybe investing is a better option for you.

However, if you are dedicated to learning how to become a professional cryptocurrency trader you may achieve it and make really decent profits.

If you have any further questions regarding trading or investing, do not hesitate to reach out. We are here for you.