Cryptocurrency Trading Principles

January 21, 2020   Bitcoin

Trading digital currencies is getting increasingly widespread as the digital financial asset class grows rapidly. But still, for many traders, buying altcoins remains not a trivial task. The abundance of complex industry slang and polarized media coverage can place some concerns in novice traders. However, with some preparation, new traders can confidently enter the industry of trading cryptocurrencies.

The basics of cryptocurrency trading


In this article, we'll try to overview the basic principles that every participant in the cryptocurrency market should follow.

Research

Same as with any financial asset or commodity, a thorough check is required before diving into the crypto industry. Perhaps the most vital rule is that you must never buy more cryptocurrencies than you can safely lose. But what level of diligence is enough in this class of virtual financial assets? Let's look at a few specific aspects:

  • You need to evaluate a range of circumstances when buying a particular altcoin or token. The stated goals and objectives of the blockchain project, along with its market cap, trade volumes and the practical usefulness of coins are the most significant considerations. If the token’s trading volume is very low, and its practical usage is doubtful, future price growth of this coin is uncertain.
  • The team behind the token is as important as the altcoin itself. Project teams and their special skills must be on top.
  • When buying digital currencies, a trader needs to consider his own risk tolerance. Even popular cryptocurrencies demonstrate sharp price fluctuations. Virtual assets with lesser market capitalization can fluctuate even more significantly.

Research is definitely essential before purchasing any digital currencies. This principle is called “Always do your own research” ("DYOR”).

Understand who you are: a trader or an investor


Digital currencies can be an attractive financial asset to traders and investors for different reasons.

Intraday traders, or short-term traders, are attracted by cryptocurrencies’ high volatility, while long term investors hope that bitcoin’s and other altcoins’ price substantially rises in the future even despite current volatility and random sharp corrections.

You should be honest with yourself and accept the fact that you can possibly start to panic and sell at a loss, if you buy some altcoins with the aim of long-term investment, and the value of the crypto you’ve just bought drops by 30%.

The worst mistake you can make is not comprehend your own motivation. If a trader can't understand what exactly he wants from his investment initiatives, he will not be able to build an effective investment strategy.

Experiment

In order to evaluate what you are great at, you need to have the courage to experiment in trading and investing (with reasonable amount of funds you can afford to lose).

If it concerns trading cryptocurrency at Forex, you can consider opening a demo account in one of the most popular trading platforms, for example MetaTrader5, that allow trading cryptocurrencies paired with major fiat currencies or other cryptocurrencies.

However, free trading demo accounts do not give a likewise experience as live trading with real funds, as a trader does not have the same emotional stress and anxiety as when trading with own real money that can easily be lost.

Although, a free demo account, or as it’s also called “an account on paper”, is well suited for completely novice traders in their first steps in the industry in order to examine painlessly the exchange’s or the broker’s trading interface and grasp how it works in practice.

What is leverage and margin cryptocurrency trading


Trading assets, including cryptocurrencies, can be traded with the usage of leverage. This means that the potential benefits that you could get are increased by 10, 100, or even 1000 times. And vice versa, you can also easily have losses, and leverage will accelerate this process in the same 10, 100 or 1000 times.

The simplest way to understand the usage of leverage or margin trading to a novice trader who is not familiar with these concepts is to compare them with getting a home mortgage.

Surely, there is a significant difference between a bank and an online forex broker offering marginal trading. For example, if the price of a house goes down below the value of the initial deposit, the bank will never give you a margin call, and it will even ask you to compensate for the shortage, or, even worse, just it’ll sell your real estate property and demand that you return everything at once. In fact, this is the case with forex brokers that allow their customers to trade on margin or with the usage of leverage.

Let’s say for simplification: the deposit margin for bitcoins is 10%. This implies that if one bitcoin is trading for $12000, the forex broker or online trading platform will ask you for a deposit of at least $1200. This may seem very profitable, since you can access trading the whole bitcoin by depositing only one-tenth part of its current market value. But you need to understand that potential profits and losses increase significantly, which also means that you can lose your deposit very easily, because $1200, which is already pledged by the broker, will be taken by the broker at the very moment as the loss on the open positions gets close to the amount of coverage, while the broker liquidates the trading position itself on completely legal grounds, to prevent large losses. This procedure is called “Margin Call”.

Therefore, trading with the use of leverage is highly risky and, of course, is not appropriate for novice traders especially in the cryptocurrency industry. Besides, cryptocurrency is very volatile and unpredictable in its nature. So why should you increase the risks?

When a trader buys or trades virtual currencies through a crypto exchange or a digital wallet, this usually happens without any leverage. But nevertheless, this does not signify that your funds are not at risk. You can still lose all your funds even without the use of leverage, except that, as a rule, you will not get more profit than the amount of your investment.

Nowadays, some cryptocurrency exchanges start to experiment with leverage and some of them with derivatives, although these tools will be aimed more at professional traders.

But nevertheless, traders should be patient and not fear to experiment with reasonable funds that they aren't afraid to part with. In the long run, you will elaborate your comprehension of the cryptocurrency markets and, what is more important, be able to identify your strengths.

Learn about the markets and keep a diary to develop your skills


Do not think that you have to study all about trading cryptocurrencies at once. Some things will come to you naturally, and then you’ll just need to focus on enhancing your strengths and make them even more effective.

Keep a trading diary

Note down your remarks about the virtual currency market and various financial asset classes in a trading diary or notepad. Also note down all your key trading and investment decisions, plainly indicating why you are choosing specific positions. There is nothing wrong with keeping a trader's diary, do it regularly and correctly:

  • Check the decisions and risks that you have documented on your laptop (you should do it on a daily basis if you want to become a successful trader over time).
  • Be attentive in your reviews and write down what has gone wrong. You should be able to learn from your mistakes.
  • Try to apply various trading strategies

In order to become a successful trader, you do not have to trade on a daily basis. Probably you will trade positionally only under certain market conditions.

For instance, you may decide to buy some altcoin before the reward for its block is halved, and then sell after an increase of x%. And this can be the one strategy that you will ever follow and focus on. Do research and experiment, but do it so that all your trading steps are structured and measured.

Author: Kate Solano for –°rypto-Rating.com
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