Features of Bitcoin CFD Trading

February 24, 2020   Bitcoin

A downtrend, Bitcoin price falling, and movement in the range do not allow physical cryptocurrency owners to get any profit from the Bitcoin price fluctuations, and the same is true for all other altcoins. Besides, downtrend or consolidation purchases are not the smart choice in most cases. Therefore, any trader who wants to actively participate in the virtual currency market and make a profit should turn to other derivative financial instruments, such as CFDs, which stands for contracts for difference.

Trading bitcoins at a falling price can be most profitable, as it gives speculators the possibility to enter the market and make profitable transactions at the moment when the long-term trend in the chosen financial asset decreases. Meanwhile, those people who own bitcoins or other cryptocurrencies physically lose money and they do not have many options what to do.

Surely, it is useful for investors to remember that trends always change and do not last forever. However, since the long-term upward trend in bitcoin prices seems to be a happening of the past times, CFDs are apparently the optimum way to trade cryptocurrencies nowadays.

In addition, contracts for difference allow those traders who have investments in Bitcoin to insure themselves against the falling price of the first digital currency. This can be done by opening a short position in Bitcoin CFD. Trading contracts for difference for bitcoin is probably not much different from trading with any other currency pair on out-of-the-counter markets. The same is true for commodities and other financial assets with high volatility that are in the trend on traditional markets.

What is interesting in cryptocurrency transactions is their diversity, and thanks to studies of price movements, traders should make a profit that makes them financially independent and stable. Bitcoin CFD practitioners should focus on the following things:

  • Following the trend
  • Proper money and risk management
  • Observing major trading sessions: European, American and Asian.

Selling after Bitcoin's price decline against the US dollar in BTC/USD pair could be key. This allows traders and investors to join most of the digital currency market and monitor the dynamics.

Good money management is the holy grail of trading in financial markets, and bitcoin and altcoins are no exception. If proper risk management is applied in a strong trend, theoretically it can bring huge returns on investments in bitcoins.

Traders should definitely focus on the main trading sessions, as large “shopping centers” offer the highest liquidity and volatility at BTC/USD. Fortunately, MetaTrader 5 (MT5) platform offers Bitcoin CFD trading during the most important 24/7 market sessions.

Trading bitcoins through CFD has its advantages over the physical purchase of cryptocurrency. Bitcoin is not backed by any physical assets, and there is no government or company behind it that makes it difficult to evaluate the digital asset, except through technical analysis.

Regulation


CFD trading is more tightly regulated than today's trading bitcoins and other altcoins for which there is no regulation at all. However, before a trader starts trading crypto CFDs, he has to check that the broker with whom he is going to have a relationship is regulated by some major international financial regulators.

If the bank used to store the client’s deposit is declared liquidated, any losses will be divided between the customers in proportion to their share in the total amount held by the bank in case of bankruptcy. As a result, any funds lost will be covered by the FSCS in the amount of up to £80,000 per customer.

Leverage


Most traders search for the volatile digital financial assets to get the most from their trading. In the case of digital currencies, high volatility is surely present natively to the extent that for some conservative traders this may be a little more than enough. Therefore, before you begin trading bitcoin or altcoins CFDs, you need to make sure that they are right for you.

You should always remember and understand that market fluctuations of 10% or even 20% in virtual currency prices during the day are not atypical.

Even better news for speculative traders is fact that they can use leverage when trading cryptocurrencies. The traditional leverage in cryptocurrency trading is 1:2. Thus, you can find positions that are 2 times higher than the available capital on your Bitcoin trading account.

Remember, however, that trading with funds borrowed from the broker increases not only your profits, but also your potential losses. Therefore, it is strongly recommended to use leverage very wisely.

You are probably wondering why you ever should use a tool that is already very volatile for trading. The usage of leverage frees up capital that you can utilize to trade other financial assets - currencies, stocks, indices, commodities, etc. Thus, you can diversify your portfolio of financial assets, thereby reducing the potential risk to your entire capital. Meanwhile, if you decide that you can double your investments to Bitcoin or another cryptocurrency with a view to getting the most out of it if you correctly understood the trend of the price.

Long and short positions


As it was mentioned earlier, when trading bitcoin CFDs, you can profit from assets’ price movements in both directions. If you suppose that the Bitcoin price of will rise, then you can open a long position and earn money while Bitcoin price is growing. Meanwhile, you will get losses if the largest cryptocurrency in the world becomes cheaper.

On the contrary, if you suppose that the current price of Bitcoin is already high and it will go down soon, you can open a short position and get profit when the price decreases. Bun in this situation, you will lose if the asset’s price rises.

Opening short positions can also help those traders who have already purchased or mined bitcoins. By opening a short position in CFDs, these traders can insure their trading positions against falling Bitcoin prices.

Tariffs and fees


Before traders start trading any financial asset, it is recommended that they clear up the associated transaction costs. This can be a serious “trap”, especially when trading cryptocurrencies, which can eat most of your future profitability. The advantage of trading cryptocurrencies with some brokers is that they don’t charge commissions when trading outside the spread. Traders don’t have to pay commissions and fees for the transfer of their funds, as well as fees for the transfer of funds to and from their account (if they trade actively).

There is also the fact that if you trade any cryptocurrency other than Bitcoin, it will be converted to Bitcoin when purchasing or selling the corresponding currency. This is because of additional commissions and fees and an additional liquidity risk if you trade at any crypto exchange.

These flexible trading conditions come from the reason that the trader simply speculates on the underlying asset’s, bitcoin or other cryptocurrency, price fluctuations instead of owning the asset.

Nevertheless, it should be remembered that when trading Bitcoin through CFD, the usage of leverage can not only increase profits, but it also can significantly increase losses, that is why an adequate risk management strategy should be implemented.

Bitcoin Trading Technical Analysis


First, let’s remember what is technical analysis? Technical analysis is the use of analytical methods to ascertain the most possible direction of the asset’s price movement, based mainly on its historical data. The techniques of technical analysis are numerous and diverse, so traders can select the best from this variety, depending on their risk aversion, trading style and trading goals.

In practice, technical analysis is actually the only kind of analysis that can be applied effectively to CFD Bitcoin trading. And this is to a certain extent for the reason that fundamental analysis is practically not applicable in trading cryptocurrency or investing in bitcoin or altcoins.

  • The first and the main problem that keeps large institutional investors from investing in bitcoin is the fact that the virtual currency doesn’t have an “intrinsic value”. And the price of one or another cryptocurrency is completely determined by the circumstance that market participants suppose that this price is fair, this attitude is quite similar to that of gold.
  • Secondly, Bitcoin Blockchain is a decentralized payment platform, which makes Bitcoin a decentralized digital currency. And such objects do not have sufficient regulation and its supply and demand cannot be influenced, that is why fundamental analysis similar to fiat currencies can’t be carried out. For comparison, dollar, euro and other fiat currencies can be affected by monetary policy and by decisions of their regulatory institutions such as the Fed and the ECB. That is why forecasting these decisions and policies is an integral part of fundamental analysis.

Finding Bitcoin’s price trends


The main principle in the technical analysis is “the trend is your friend". Therefore, before starting trading bitcoins, it is necessary to find the cryptocurrency trend. An additional principle of technical analysis is that when you graphically analyze the tradeable asset, you inevitably need to switch from a longer trend to a shorter one. There is a quite simple method to find a trend using moving averages. When the short-term moving average is higher than the long-term one, it is accepted that the trend is upward.

Different indicators use different average values of timeframes. However, the most common indicators use 200-day and 50-day timeframes. Simple moving average gives the same weight to all timeframes and exponential moving average gives more weight to the last periods. Everyone can decide for themselves what type and timeframe of averaging to use. However, we give an example with 200-day and 50-day simple moving average values for bitcoin on an hourly chart.

As the chart above clearly shows, the trend is downwards, as both moving averages point down. However, these moving averages can alternatively be applied as support and resistance levels around which you can set stop orders in order to limit losses and make a profit.

Support and resistance


Support and resistance levels are highly essential and useful method of technical analysis. This method is used to find entry or exit points and can be very serviceable for CFD bitcoin trading. Simply put, support and resistance levels are previous grounds and peaks from which price tends to repulse. Support is the level at which the asset’s price commonly limits its decrease. And vice versa - resistance is the level at which it is highly probable that the asset’s price stops its growth.

These method works because traders tend to estimate if a financial asset is “expensive” or “inexpensive” compared to previous highs and lows. What happens when the asset’s price nears its previous bottom? Buyers become active and start buying actively. This is in a situation where sellers do not particularly want to sell, waiting for evidence that the asset’s price will continue to decline further, waiting for the support level’s breakthrough. And vice versa, when the asset’s price approaches its peak, sellers become active, and buyers take a waiting position and see what happens further. This causes the resistance to drop out of the indicated level.

Moving averages, especially in long-term charts, are an effective method for finding the trend, but they are not notably useful for determining the most appropriate time to enter a trading position, in this case support and resistance levels come to the rescue.

The common approach in the support and resistance levels is that when they were overcome, they become the opposite of what they were before, which means that resistance level becomes support level and support level becomes resistance level. In the below chart, you can observe what the support and resistance levels look like.

Japanese candles


It is not possible to talk about technical analysis and not to mention charts. There are various kinds of them - linear, arithmetic, geometric, Japanese candles, etc. Japanese candles are attractive for their visualization of the chart, which provides insight into the asset’s price behavior and its key turning points. The latter is another characteristic of the indicator, which makes it the preferred tool for technical analysts. Japanese candles can be used in any trading sessions and with any timeframes, you just need to have the opening price, closing price, minimum and maximum values.

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