The Ultimate Crypto Trading Handbook: Learn the Fundamentals and Get Started Today
Equip yourself with the crypto trading fundamentals from reading charts to technical analysis. Read our comprehensive guide, and start your trading journey today.
This comprehensive guide aims to equip you with the essential knowledge and tools to navigate the crypto trading world with confidence. We'll cover everything from the market fundamentals, various trading strategies, and analysis techniques, to risk management and regulatory compliance. If you are just beginning to explore crypto trading, this article should provide you with all the basic info you need.
- Crypto Trading is an approach that seeks to create profit by buying and selling an asset at different price levels.
- Trading differs from investing and speculation by being a short-term, risk-aware, and computed discipline.
- Crypto is traded both on centralized and decentralized exchanges, where a price chart is displayed and distinct order types can be placed to make a profit
- Technical analysis is a daily bread for traders. It uses chart patterns and various indicators in order to help determine future price development.
- Trading also contains a lot of implicit risks - namely risk of loss, user mistakes, scams and fraud, regulatory action, and so on.
What is Trading?
Trading refers to buying and selling financial assets, such as cryptocurrencies, with the aim of profiting from price changes. It's a fast-paced approach that often requires a keen understanding of market trends, technical analysis, timing, and calculated risk management.
The ultimate goal for traders is to capitalize on market fluctuations and seize profit opportunities in price differences. That means buying an asset and later selling it for a higher price, or selling an asset and later buying it back for a lower price.
Trading vs. Investing vs. Speculation
Trading is a different field from Investing, which takes a long-term approach, aiming for steady growth over time using a buy-and-hold strategy. Speculation is similar to trading in some ways but involves a higher degree of risk and randomness. Speculators rely on sudden market movements, which can lead both to huge profits and losses.
Educate yourself and get valuable information about investing in crypto markets in our Investors 101 guide.
The Specifics of Trading in the Crypto Market
Cryptocurrency trading has its own set of unique characteristics that set it apart from traditional financial markets. These can pose a significant obstacle for newcomers trying to engage in the markets.
Here are some distinct characteristics in which crypto differs from traditional markets:
- 24/7 market operation: Crypto trading is available at any time, day or night, unlike traditional financial markets with set trading hours.
- Decentralization: The crypto market is not subject to the same regulations and oversight as traditional financial markets.
- Higher volatility: Cryptocurrencies often experience significant price fluctuations, offering both opportunities and risks for traders.
- Unique terminology: Cryptocurrencies have their own specific terms and jargon, such as "altcoins" and "HODL."
- Rapidly evolving: Staying informed and up to date with the latest trends and developments is crucial for success in crypto trading.
- Less regulated: Since all the crypto infrastructure is so new, it is far less regulated than other markets. By definition crypto is censorship-resistant and therefore regulation is difficult. This can be both a benefit and a drawback.
In the world of cryptocurrency trading, exchanges play a pivotal role by providing a platform where traders can buy, sell, or swap various digital assets. These digital marketplaces offer a wide range of cryptocurrencies, trading pairs, and advanced features to accommodate the needs of both novice and experienced traders.
It is crucial for anyone entering the trading arena to understand how exchanges function, the different types of exchanges available, and how to choose the right one to ensure a secure and seamless trading experience.
Centralized Exchanges (CEXs)
The biggest and most widely used exchanges, like Binance, Coinbase, or Kraken fall under this category. These exchanges are controlled and operated by a single entity. They act as a custodian of assets, meaning they hold the assets on behalf of users.
To facilitate the trades, CEXs use orderbooks, which contain all the buy and sell orders of a specified trading pair. Centralized exchanges are often beginner-friendly and offer a wide range of services, however, pose a significant security risk.
Decentralized Exchanges (DEXs)
Decentralized exchanges are cryptocurrency trading platforms that operate without a centralized authority, relying instead on blockchain technology and smart contracts to facilitate trades.
AMM DEXs - They use liquidity pools, which are essentially baskets of assets provided by other users. Traders may then exchange assets (swap) in these liquidity pools similarly as they would on centralized exchanges. Well-known examples include Uniswap, Curve, PancakeSwap, and Balancer.
Orderbook DEXs - A newer generation of DEXs that function with an orderbook, similar to centralized exchanges. The difference is that the whole process is decentralized and all transactions take place on-chain. For example, ZkSync Era or XRP Ledger offer such trading experience.
DEXs require a bit of technical knowledge and skills in the field, such as operating a cryptocurrency wallet and signing transactions, but they grant high security and privacy levels. For secure and efficient swap use the Trade tab on Coinbrain.
Orders and Order Types
Orders are the instructions given by traders to buy or sell assets on an exchange. Orderbook is the interface that displays these orders with their corresponding prices. Let's dive into some common order types that you can encounter on most centralized and some decentralized exchanges:
- Market orders: A market order buys or sells immediately at the best available price. It guarantees execution but not a specific price. Market orders have slightly higher fees on exchanges compared to other order types.
- Limit orders: Limit order allows traders to buy or sell an asset for a specified, or better price. It guarantees the price, but not execution. Limit orders typically have lower fees on exchanges, because they add liquidity to the orderbook.
- Stop orders: Allow traders to buy or sell the asset after a specific price has been reached. These orders are often used to automatically exit a position either by cashing profits (Take-profit), or preventing further losses (Stop-loss)
Different Types of Trading
Spot trading: Spot trading is the most straightforward and common trading style, where traders buy and sell cryptocurrencies using their own capital at the current market price. In this method, assets are immediately exchanged and settled, making it suitable for beginners and those looking for a simple trading experience.
Margin trading: Margin trading involves borrowing funds from an exchange or broker to amplify your buying power. This allows traders to open larger positions than their account balance would typically permit. While margin trading can lead to potentially higher profits, it also carries increased risks, making it more suitable for experienced traders who understand the potential consequences.
Futures trading: Futures trading allows traders to bet on the future price of a cryptocurrency without actually owning it. In this method, traders enter into a contract agreeing to buy or sell the asset at a predetermined price on a specific date. Futures trading can be a powerful tool for managing risk and speculating on price movements, but it requires a deeper understanding of market mechanics and is best suited for more advanced traders.
There is almost an uncountable amount of trading strategies that traders can choose from. Each one applies a different approach and requires varying amounts of time and effort. Traders usually choose strategies that correspond well with their specific lifestyle.
One of the main ways to categorize them is by the frequency of trades. Here you can find some examples of the more popular strategies, however, there exist many more.
Higher Frequency Trading
- Day Trading: Engaging in multiple trades within a single day, capitalizing on short-term price movements.
- Scalping: Making numerous small trades throughout the day to profit from minute price discrepancies, often holding positions for mere minutes.
- High-Frequency Trading (HFT): Using sophisticated algorithms to make thousands of trades within milliseconds, aiming to exploit minuscule market inefficiencies.
- Arbitrage: Taking advantage of price differences of the same asset across different exchanges, buying low on one platform and selling high on another.
Lower Frequency Trading
- Swing Trading: Holding onto assets for several days or weeks, aiming to capture significant price movements based on anticipated market momentum.
- Trend Following: Identifying and following established market trends, potentially holding positions for weeks or months based on these patterns.
- Position Trading: Basing trades on long-term price movements, using a combination of technical and fundamental analysis, and holding onto assets for months or even years.
The cryptocurrency market represents a worldwide arena where digital assets, like Bitcoin and Ethereum, are exchanged. Functioning non-stop and reachable from any location, this market enables individuals to purchase, trade, and swap digital currencies through the use of distributed ledger technology (blockchain.
This novel financial landscape presents investors with fresh possibilities to partake in the digital economy and interact with cutting-edge financial offerings.
Why does the Price Change?
Cryptocurrency values experience shifts due to various factors, including the balance of buying and selling pressure, public perception of the market, breakthroughs in technology, government regulations, and significant global economic incidents.
Additionally, the decentralized nature of cryptocurrencies, market manipulation, and media coverage also contribute to these price fluctuations, making the crypto market highly volatile and presenting both opportunities and risks for investors.
The Crypto market, similarly to traditional financial markets, is cyclically repeating itself in periods of altering growth and decline. We call these periods market cycles. An ideal example would include a longer period of a stagnating market (otherwise called accumulation), followed by a few months of rapid growth (bull market/bull run). Bull market inflates prices of assets, which at some point collapse and cause a rapid decrease. After this decrease, the market cycle begins again from the accumulation phase.
So far during every bull run in crypto existence, the price of assets, or at least some of them, have exceeded the highest points of the previous bull run. They have reached a so-called All Time High (ATH). That means in the long run the total market capitalization should gradually rise with the series of ups and downs (like going up the stairs).
While large assets like BTC and ETH survived multiple market cycles and even reached new ATHs, this is not the case for most projects. The majority of crypto projects tend to have one single peak (ATH), which they don't exceed in the next cycle. The price of such projects then usually slowly approaches zero.
Liquidity denotes how quickly an asset, like cryptocurrency, can be bought or sold without significantly impacting its price. In crypto trading, high liquidity means smoother transactions and tighter price spreads, reducing trading costs and minimizing price manipulation.
Conversely, low liquidity can lead to challenging trades, higher costs, and sudden, unpredictable price swings. Speculating on low market-cap altcoins is often accompanied by low liquidity, which can make them hard to sell. Especially after a rapid price increase.
For traders, recognizing liquidity levels is vital to navigate risks and ensure effective decision-making in the crypto market. Use CoinBrain to conduct a simple liquidity check in the “Liquidity” section of any coin profile.
Technical analysis is a popular methodology used by traders to make educated guesses about the future price movements of cryptocurrencies, or other assets, such as stocks. It involves studying past price data, such as charts and patterns, to identify trends and potential turning points.
The idea is that by understanding how the market has behaved in the past, traders can better predict what might happen next, helping them make more informed decisions about when to buy or sell. Technical analysis is not foolproof, but it can provide valuable insights and help traders navigate the often volatile world of cryptocurrencies.
The other most frequently used type is fundamental analysis, which relies on more macroscopic data and the overall economic situation surrounding markets. Fundamental analysis is incredibly useful in the long term but is not as accurate as technical analysis. For more information on this topic please refer to our crypto investing guide.
Price charts are important for showing how the price of an asset develops over time. Traders spend most of their time observing price charts, as that is where the technical analysis takes place.
In a typical chart, traders may choose a time frame from days, even down to one minute. There are many chart types, with each one serving its unique purpose. Charts can be viewed either directly in the interface of the exchange or in a third-party service like TradingView.
You can view real-time charts directly in the browser on CoinBrain. Just select you coin you wish to examine.
Line Chart: This is the simplest chart type, showing only the closing prices of a cryptocurrency over a specific time period. It connects each closing price with a line, giving a clear visual representation of the overall trend.
Bar Chart: A more detailed option, bar charts display the opening, closing, high, and low prices for a given time period. Each "bar" represents a single period (such as an hour, day, or week), with the vertical line illustrating the price range and horizontal lines showing the opening and closing prices.
Candlestick Chart: Similar to bar charts, candlestick charts also display the opening, closing, high, and low prices for a given time period. However, they use "candles" instead of bars to represent this data. The main body of the candle called the "real body," shows the range between the opening and closing prices, while the "shadows" or "wicks" extend from the real body to represent the high and low prices. The color of the candle indicates whether the price increased (typically green) or decreased (typically red) during that period.
Sometimes distinct formations of the price chart emerge as anticipation for certain price movements. For example, higher lows and lower highs forming a triangle in the chart may predict an upcoming sudden price increase.
Patterns can either be bullish, meaning the price should go up following the pattern, or bearish, meaning the price shall decrease. Every trader should learn how to recognize these patterns and use them accordingly, as it reveal a lot of information about future price development.
Below you will find some of the most popular and widely recognized chart patterns, particularly for crypto. This is by no means a complete list. If you want a truly comprehensive source on chart patterns I recommend the Encyclopedia of Chart Patterns by Thomas N. Bulkowski
Double Bottom - A reversal pattern. Occurs when a cryptocurrency's price reaches a low point twice, then fails to break down further and reverses upwards.
Ascending Triangle - A continuation pattern, formed by a horizontal resistance line and an upward-sloping support line. It indicates that the price is likely to break through the resistance and continue rising.
Cup and Handle - A continuation pattern that resembles a teacup with a handle. The "cup" represents a rounded bottom, while the "handle" is a smaller consolidation pattern. A breakout above the handle signals a potential upward price movement.
Head and Shoulders - Reversal pattern consisting of three peaks: the left shoulder, the head, and the right shoulder. The head is the highest peak, while the shoulders are lower and roughly equal in height.
Double Top - A reversal pattern, formed when a cryptocurrency's price reaches a high point twice, then fails to break through and reverses downwards.
Descending Triangle - A continuation pattern, characterized by a horizontal support line and a downward-sloping resistance line. It suggests that the price is likely to break below the support and continue falling.
Support and Resistance
Support levels are like a floor that prevents the price from dropping further. They are formed when many buyers enter the market, pushing the price up. By connecting multiple price lows on a chart, you can spot a support level.
Resistance levels, in contrast, act like a ceiling that stops the price from climbing higher. They are formed when many sellers enter the market, pushing the price down. By connecting multiple price highs on a chart, you can spot a resistance level.
Trading, or Analytical indicators are mathematical calculations applied to historical price data to help traders identify trends, potential reversals, and entry/exit points. Here are some of the most widely used indicators:
- Moving Averages (MA): A widely-used indicator that calculates the average price of an asset over a specific time period. It helps to smooth out price fluctuations and identify the overall trend direction.
- Relative Strength Index (RSI): A momentum oscillator that measures the speed and change of price movements. It ranges from 0 to 100 and is used to identify overbought or oversold conditions in the market.
- Moving Average Convergence Divergence (MACD): A trend-following momentum indicator that shows the relationship between two moving averages. It's calculated by subtracting the longer-term moving average from the shorter-term moving average.
- Bollinger Bands: A volatility indicator that consists of a simple moving average (SMA) with two standard deviation bands above and below it. The bands expand and contract based on market volatility, helping traders identify potential breakouts and reversals.
- Fibonacci Retracement: A technical analysis tool that uses Fibonacci ratios to identify potential support and resistance levels. It's particularly useful in determining potential price reversal points following a significant price movement.
Risks and Security of Trading
The crypto market is well-known for its extreme fluctuations, which are considerably more pronounced than those in the stock market. This volatility can be both a blessing and a curse - seasoned traders can capitalize on market swings to generate profits, while beginners often succumb to their emotions, leading them to buy or sell at inopportune moments.
Furthermore, the value of certain projects can plummet to nothing, making it crucial for investors to conduct thorough research and only invest in projects they comprehend and have confidence in.
This includes risks associated with using leverage, which can amplify both gains and losses, and the potential for liquidation if a trader's position moves against them. Additionally, inexperienced traders may make poor decisions based on emotions or lack of knowledge.
Crypto trading platforms and wallets can be vulnerable to hacks and security breaches. Traders must be vigilant in safeguarding their assets and ensuring they use trusted platforms with strong security measures in place.
Crypto's unregulated and experimental nature contributes to a high concentration of scams and fraudulent projects. Scammers constantly devise new tricks, making it challenging to recognize such projects. However, understanding basic crypto-economics and market patterns can help identify potential scams.
The evolving regulatory landscape surrounding cryptocurrencies can impact the trading environment. Changes in regulation can lead to sudden shifts in market sentiment and affect the accessibility and liquidity of certain assets.
It is essential to keep up to date regarding the newest regulatory information to prevent costly mistakes.
The Bottom Line
We have gone through the basics of cryptocurrency trading. At this point, you should be equipped with enough information to start your journey and make conscious decisions. Be aware, however, that within each topic is a vast amount of skills and knowledge that we have not covered, so definitely stay tuned for more!
To become a successful trader, expect years of mistakes and unprofitable experiences, but we hope that CoinBrain can make this journey a little bit easier for you. Stay vigilant of the changes happening in the field and always DYOR (Do Your Own Research).