For the uninitiated, trading bitcoins on the exchange probably seems like an easy task that does not include anything more stressful than a mouse click or viewing a screen. What can be said about this in reality? In fact, the vast majority of new cryptocurrency traders lose money and leave the market within a year.
Why is trading in bitcoins so difficult?
This is primarily due to the following:
- unpredictability of domestic markets;
- great difficulty in predicting.
Trading is an emotional stress that includes long hours of downtime, alternating with periods of intense activity and stress. Since traders risk their own capital in an endless game, trading on the exchange is an activity that is closely related to professional gambling. Even successful market participants often succumb to burnout due to such pressure.
With the exception of selling training courses, products, or services, trading bitcoins on the exchange is not the preferred road to easy wealth. Rather, it is an activity that requires a lot of patience, control and discipline. New traders are likely to lose money, as they only develop their skills, and achieving constant profitability is never guaranteed even for the most experienced player.
Bitcoin trading and investing
Investing in bitcoin is a long-term commitment, often with several goals, such as portfolio diversification, risk hedging, business, etc. Cryptocurrency investors are usually independent of price volatility and are unlikely to get out of their position.
In contrast, most traders support only short-term positions, being in the trade for a maximum of several months, but most often for several hours. Such market participants are also extremely price sensitive, and the desire to find the best value for entry and exit is necessary for them to abandon their positions if they prove to be unprofitable.
Trading advantages
Bitcoin is superior to other instruments in trading - stocks, commodities or currencies - for at least three reasons:
- The exceptional volatility of bitcoins allows you to get a high percentage profit.
Large price movements and an average level of income are much more common when trading bitcoins on the exchange than other tools. In this way, Bitcoin traders can avoid increasing the risks designed to make high profits from small moves.
2. Bitcoin trading occurs non-stop, 24 hours a day, 7 days a week.
In contrast, stocks and commodities are only traded during business hours, and Forex markets close by the hour. Bitcoin trading remains active around the clock, as the volume is distributed mainly at American, European and Asian sessions.
3. Bitcoin is the fastest and most convenient tool for trading.
The fee for exchanging bitcoins is minimal compared to traditional exchanges, and deposits or withdrawals are made within a few hours from anywhere in the world. Less stringent requirements for personal information are the norm for the exchange of cryptocurrencies, especially if transactions are processed exclusively in bitcoins.
Ways to trade bitcoins
When trading on the rise and fall of bitcoin, short-term traders rely on real-time data streams, as well as on liquid markets, to provide quick entry and exit from transactions. High volume exchanges are preferred. For the trade to be successful, the exchange must allow traders to profit from the downward movement, offering a short sale opportunity.
The need to store funds in cryptocurrency and filament form dictates that the exchange of funds is a centralized service, although this may change with the advent of a new generation of decentralized exchanges. Whenever funds are held by a third party, there is a risk of illegally holding a cryptocurrency, so it is important to choose these services correctly.
Prefer Bitcoin trading sites that offer confirmation of reserves for customers, and also have regular external audits for client financial funds and a long history of their quality work. In order to make trading convenient, choose a stock exchange that also offers a decent volume and a responsive online trading interface.
Bitfinex
Despite the recent hack, in which users lost 33% of their funds on the exchange, Bitfinex remains a very popular option. The project’s liquidity is blocked only by Poloniex, which makes it the largest bitcoin exchange in terms of trading volume in US dollars.
Poloniex
It is noteworthy that Poloniex provides the largest Bitcoin sales in the world, but its markets are not even secured by the US dollar or any other major currency.
Gdax
GDAX accounts for about 4% of the total trading volume of bitcoins on the exchange. 80% of transactions made here account for the exchange of BTC / USD.
Kraken
Despite the fact that many people know the name of this exchange, trading EUR / BTC and USD / BTC here is about 7% of the total trading market. At the same time, about 50% of Kraken's market share falls on the EUR / BTC exchange, 20% - on USD / BTC, and the remaining 30% - on other pairs with BTC.
Bitstamp
The exchange of BTC / USD to Bitstamp is about 2.5% of the total volume of bitcoin trading. In addition, transactions in the BTC / EUR pair make up 0.5% of the total, which gives the Bitstamp exchange a 3% share in Bitcoin's global trade. Trading bitcoins in Russia on the exchange is also available.
Emotional factor
For all their technological sophistication, markets are based on primary human emotions - fear and greed.
To become a successful cryptocurrency trader, you need not only to be trained in bitcoin trading, but also to be able to manage these impulses. Great opportunities appear when the market becomes irrational. This often happens after major price changes or high-profile news. At such moments, weaker traders are overwhelmed with emotions and illogical in their transactions.
Money management
Perhaps the most important element of trade is the preservation of capital. Before you study the features of bitcoin trading and start trading, think about how much money you can lose before it becomes tangible to your budget. This will allow you to better determine your “pain point” - the amount that you are willing to risk. Never transfer more funds to your trading account.
Of this trading capital, never risk more than 5% in one transaction. Novice traders should not risk more than 1%. If your trade is successful, the size of each transaction in absolute terms will grow steadily as your account grows. In case of failure, your losses will be minimized, which allows you to adjust your trading plan.
Profit Targets and Stop Losses
Initiating a trade without a clear exit strategy is a recipe for disaster. Determine in advance the price at which you will reduce your losses if the market moves contrary to expectations. This level is known as stop loss, and it is important for survival in the market. Limit your losses below 25% of your position size.
The flip side of the stop loss is the profit target: the level at which profit is taken when the price behaves as expected. Profit targets are best positioned to previously significant levels. If the price exceeds your expectations, penetrating significant previous levels while maintaining a strong trend, consider replacing your target for a trailing stop.
Risk and reward ratio
It can be argued that the establishment of a stop-loss of -25% in combination with a target profit of + 50% gives a risk and reward ratio of 1: 2. Adhering to this methodology: one good deal will offset two bad ones. It is fair to assume that the trader’s chances of success are approximately the same in every trade. Therefore, the choice of transactions that will potentially satisfy the 1: 2 ratio should ensure consistent profitability over time. Of course, markets are rarely predictable. Their randomness means that consecutive losses should be foreseen and protected by the correct determination of the position.
Shopping tips
Buy at a low and sell at a high price. Obviously, difficulties arise due to the complete subjectivity of the terms “low” and “high”. It is often difficult to assess fair value only in the context of past levels and expected future results. This assessment may also be the result of an emotional outburst.
There is a seller for each buyer, since there are two sides to each transaction. In fact, bidding occurs because sellers consider the price high and buyers consider it low. Stable price movements lead to the fact that both sides become more active when crossing the spread. In other words, whichever side is collectively more likely to pay the difference between the bid and the ask price in order to start trading, it will move the price in the desired direction. It can also be expressed as a bull or bear market.
Time frame
The various strategies for trading bitcoins on the exchange mainly differ in the terms that they use.
Bitcoin scalpers usually trade on a 5-minute or lower timeframe, sometimes following tick charts that record every trade without a reference to time. Scalpers seek to profit from a fleeting imbalance between buyers and sellers. They can make hundreds of transactions in one day. For obvious reasons, such traders are especially common on Burmese exchanges that offer zero or minimal trading fees.
Market participants who seek to profit from higher bitcoin rates during their session are known as day traders. This term comes from traditional stock market participants who refrain from holding positions overnight. However, it is suitable for Bitcoin traders who usually follow half-hour, hourly, or 2-hour charts. This is entirely justified, since the rate of bitcoin against the dollar fluctuates continuously, and the trend can be fast and persistent.
Trend traders are those who maintain positions for several days, weeks, or even months. Such traders are trying to capitalize on large fluctuations within the range of the market or major trends. They usually follow daily charts, with occasional links to weekly charts for more context. They can also apply to lower timeframes to study price action at important levels or to achieve greater accuracy of outputs and records.
Choose your period depending on the desired level of activity in the market. Scalpers follow each trade and usually carry out several trades per day, while traders with fluctuations or trends check the price only occasionally and rarely perform market actions.
As a rule, competent traders consider several time frames when planning their transactions. When a convincing argument in favor of the future direction of the market can be made in all relevant timeframes, then you should act.
Market trends
Markets spend most of their time in motion. Price ranges between strong support (the “low” level at which active buyers absorb the entire volume offered by sellers) and strong resistance (reverse support) form its basis. This range state is best illustrated by a daily chart over a long period.
The exchange rate of bitcoin against the dollar constantly fluctuates on the charts between the lines of support and resistance.
The more often the price reacts to these levels (S / R), the more important they are. As a rule, they are rooted in significant “large round numbers,” such as $ 200 and $ 300.
When the S / R lines are sloping, they are known as trend lines. As mentioned earlier, stop losses should be placed on the other side of the trend line. If they significantly penetrated beyond it, this is a strong signal that the impulse has shifted.
Indicators and patterns
On graphical sites and trading interfaces, indicators are usually present - mathematically derived visualizations of market aspects. The main ones include moving averages, MACD, Bollinger bands, RSI, etc. Before experimenting with a wide range of indicators for trading bitcoins, it is recommended that you master the basics mentioned above - money management and the correct setting of stop loss. In addition, chart patterns and candles are additional tools to help your trading.
Bitcoin brokers
In addition to buying and selling Bitcoin on exchanges, you can also trade CFDs using this cryptocurrency (CFD). This means that you can sell contracts for changing the price of bitcoin without actually having BTC. This process can be compared with acquisitions of shares on credit.
In order to carry out such activities, it is necessary to resort to the services of a broker. The companies that carry out these activities are the widely known worldwide Alpari, Instaforex and AMarkets.