Crypto Trading for Beginners
7 mins read
11 mths ago
There’s been an increase in the usage of bitcoin, ethereum, ripple and many other cryptocurrencies lately. These cryptocurrencies, other than than primary function have also become trading and investments instruments. That is why many like yourself are eager to understand and learn crypto trading.
To get you started, we will introduce you to the basics of crypto trading, terms you should be familiar with and strategies often employed by traders.
What is Crypto Trading?
Generally, trading involves the sale and buying of products (assets). These assets may include; stocks, cryptocurrencies, bonds, among many others. Now, crypto trading involves the buying and selling of cryptocurrencies. It entails monitoring the price movement of cryptocurrencies to determine the best time to purchase or sell in order to make profits.
Understanding what crypto trading is about will help you determine the digital currency you should invest in and the best time for the purchase or sale.
Before delving into the basics of trading, let’s briefly look at the difference between trading and investing.
Trading vs. Investment
Trading and investing focus on making a profit; however, they follow different patterns in terms of how profit is made.
What is investing all about?
Investment usually involves generating profit over a long period. It involves the purchase of assets and holding them over an extended period to generate wealth. Investments may take years and even decades, depending on the preference of the investor.
What about trading?
Trading focuses on making profit in the short term. Think about traders of any kind of goods or commodities; they focus on selling their wares as quickly as possible to make profits. It doesn’t really matter to a trader if what they have right now might be worth much more 5 years from now. They mainly focus on the profit they can make in the nearest future, be it hours, days, weeks or few months.
So trading and investments involve the same basic actions but differ in duration, strategies, and how they operate.
Traders operate on the volatility of the market. That is, they take advantage of the rise and fall of assets to determine when to enter and exit the market. This allows them to make frequent but smaller profits.
The crypto market like most financial markets is volatile, and price fluctuations occur quite frequently. Traders depend on this volatility to make profits within a short time even though it may lead to a loss if not properly timed. Investors, on the other hand, are able to evade downtrends that result in short-term losses. This is because they believe that over time an asset's value will increase, and downward trends are only temporal.
Trading Terminologies You Need to Know
Dump: This is when a trader sells off cryptocurrency; it is sometimes motivated by a downward trend in the market.
Exchange: This refers to an exchange platform, such as Yellow Card, where traders can network to either buy or sell an asset (cryptocurrency).
FOMO: This is an acronym for the "fear of missing out." Traders may experience a fear of missing out on a trade opportunity that promises significant profit.
Inflation: This refers to the decrease in the value of a currency and a subsequent increase in a commodity's price.
JOMO: This is an acronym for the 'joy of missing out." A trader may experience joy about a decision not to follow a market trend that had promised profits but fallen short.
Liquidity: This is an indication of how easily you can buy and sell cryptocurrency
Over the Counter (OTC): This is when trades are completed between two parties without making use of an exchange.
Pump and Dump (P&D) Scheme: This is a fraudulent scheme put in place to inflate the price of a cryptocurrency to sell at a higher price.
Shilling: An act of promoting a cryptocurrency to increase its value.
Volatility: This refers to the degree of variation of the trading price of a cryptocurrency over time. It can be measured using the standard deviation of returns.
Hodl: This refers to holding onto a cryptocurrency and not selling even when its price dips.
Moon: This is the rapid increase in the price of a cryptocurrency.
Rekt: This term is used to refer to losing trade over a short or long space of time.
Whale: A whale is an individual who holds a significant amount of cryptocurrency. A large buy/ sale order from such an individual may alter the price of a cryptocurrency.
Knifedrop: This refers to a quick drop in the price of a cryptocurrency
(Going) Long: This is when a trader enters or exits a trade with the expectation that a cryptocurrency price would increase.
(Going) Short: This is when a trader enters or exits a trade with the expectation that a cryptocurrency price would decrease.
Bid-ask spread: The bid-ask spread refers to the calculated difference between the highest price a buyer would be willing to buy and the lowest price the seller is interested in selling at.
Fundamental analysis: This involves the evaluation of a cryptocurrency's financial and economic variable (such as cryptocurrency adoption) to determine its value for trade and investment.
Technical analysis: This is an analysis done on a cryptocurrency market trend to determine when and how to trade it. It also helps traders predict the rise and fall of a cryptocurrency market value based on previous market data.
Common Trading Strategies
A trading strategy is a plan executed to make the most profit out of a trade. There isn't just one suitable trading strategy that is built to make the most profit. The trading strategy you choose to implement depends on your experience, preference, and risk tolerance.
A trading strategy enables you to plan and make the best profit from your trade. It affects the time you choose to enter and exit a trade as well as help you minimise loss and maximise profit.
The most common strategies include:
- Swing Trading
A swing trader typically holds cryptocurrency for a few days or a couple of months. The goal is to make a profit off of market fluctuations. That is, a trader buys a cryptocurrency when its price is lower and sells it when it is higher. The strategy is to identify cryptocurrency assets that seem undervalued but have the potential to increase in value, buy this crypto and hodl till the price increases. A swing trader may also sell an overvalued crypto asset with the aim of repurchasing them when they are cheaper in value.
Swing trading is more suitable for beginners who are just joining the financial market because it allows them to make a profit at their pace while using market trends as a guide.
- Position Trading
Position trading is quite similar to swing trading, but a longer timeframe is involved. The trader holds cryptocurrency assets for months till they are able to generate the most profit before selling.
Position traders observe trends over an extended period to determine the best strategy to profit from the market. Swing traders are more focused on "swings" in the market trend to determine when to make the best buys and sells.
Position trading is also suitable for beginners, giving them a better time frame to evaluate their decisions. Position traders often use fundamental analysis in observing market trends for an extended period.
- Day Trading
Day trading is a trading strategy that involves buying and selling assets within the same day. The cryptocurrency market doesn't have a closing period; however, these traders are considered day traders because they enter and exit positions within 24 hours.
Day traders use technical analysis to determine which cryptocurrencies to trade. The profits made within these time frames may be minimal, which is why day traders trade across different crypto assets. This type of trading is for advanced crypto traders. It can be highly profitable and possess a significant risk that beginners may not be able to handle without the necessary experience.
- Scalp Trading
Scalping takes the shortest time frame among all other trading strategies, and it is the most advanced. It takes place in a few minutes, with the trader entering and exiting positions based on small price fluctuations. Scalp traders primarily use technical analysis to evaluate the price movement of a cryptocurrency.
They make use of bid-ask spread to make the most profit from their trade. Due to the short time frame involved in this trading process, scalp traders make profits at a margin of 1%. However, they can make repeated trades to generate wealth. An in-depth understanding of the market, trends, and technical analysis is needed to profit from scalp trading.
What are trading pairs?
Trading pairs, also referred to as cryptocurrency pairs, are cryptocurrencies that can be traded for each other. For instance, You can trade Ether for Bitcoin (ETH/BTC), Polkadot for Litecoin (DOT/LTC) or Bitcoin for Tether (BTC/USDT). It is important to understand trading pairs as not all trades include a fiat currency.
There are two important parts of a trading pair: the base currency and the quote currency.
A base currency is a common currency that can be used to exchange other cryptocurrencies. Because it is not always possible to exchange fiat currencies for the over 1000 cryptocurrencies that exist, a base currency such as Bitcoin and Ether provides a quote for the other cryptocurrencies so that you can easily exchange them. The crypto you’re exchanging the base currency for is known as the quote currency.
For instance, you may have Litecoin and want to purchase Polkadot. Instead of first exchanging your Litecoin for a stablecoin like Tether, the exchange may have a trading pair of DOT/LTC. This way, you can see how much it will cost to directly exchange Litecoin for Polkadot.
In addition, specific cryptocurrencies can only be purchased with other cryptocurrencies. As such, it is important to note these cryptocurrencies and crypto exchanges that allow trading pairs. Understanding trading pairs will enable you to broaden the range of cryptocurrencies you can trade or invest in. Multiple trading with different cryptocurrencies may improve your profit margin. Trading pairs make it easier to purchase other cryptocurrencies using specific cryptocurrencies.
How to start crypto trading
First, in order to start crypto trading, there are certain things you need to put in place, which includes:
- Select a fiat to crypto exchange: The first step to take when you intend to start trading is to find a cryptocurrency exchange that allows you to change your local currency to your desired cryptocurrency. For instance, Yellow Card provides this option for citizens of several African countries including Nigeria, Ghana, South Africa, Cameroon, Botswana and many others.
- Choose a crypto trading platform: While some cryptocurrency exchanges allow you to fully trade between fiat and crypto as well as crypto to crypto, some only focus on one form of exchange. A trading platform like Binance and Coinbase will allow you to trade multiple cryptocurrencies and offer various trading pairs.
Besides, it is best to have a Bitcoin wallet off a a trading platform where you can keep funds that you’re not trading with. This will help you plan your trading carefully.
How to select the right exchange
Numerous cryptocurrency exchanges offer a trading platform for crypto enthusiasts. However, there are certain details you need to put in mind when selecting a crypto exchange. These factors include:
- Validity: It is essential that you confirm that the exchange platform is available in your locality. Yellow Card is available in several African countries, with active plans to expand to all countries in Africa so as to make it easy for everyone to access cryptocurrencies.
- Reputation: It is essential to check reviews on the crypto exchange before setting up an account with them. Current customers are a good source to know how a cryptocurrency exchange operates how good their services are. Also, it is important to know that an exchange has legitimate users before creating an account with them.
- Exchange Rates and fees: It is important that you confirm the exchange rates of the exchange platform. The exchange rate of the crypto exchange would determine how much profit you can make. Likewise, using some crypto exchanges attract fees; you should check to determine that you’re comfortable with the extra charges before signing up with an exchange.
Since the fees and method of charging are usually determined internally, they usually differ from one platform to another. In most cases, however, exchanges charge a percentage of every trade. There are also withdrawal fees and limits that using a platform for trading attracts, so you should also take these into account before committing to sign up with the crypto exchanges.
- Security systems: It is crucial to confirm the security system of a crypto exchange platform. Some crypto exchanges may be prone to hacking, and it is vital that you safeguard your data.
Most crypto exchanges make it a priority to ensure that they have put in place various measures to secure the assets of their users. Some include remediation, data collection, cold storage, asset reserves, as well as custodial storage services. As their reputation rests largely on the safety of their platform, some exchanges also work with highly experienced cyber-intrusion detection analysts and investigators and perform in-depth intelligence as well as forensics activities with the aim of ensuring effective resolution of any kind of security incident. These are some of the things to check for before choosing an exchange.
It is vital that you research before selecting a crypto exchange to trade on. You can, however, rest assured that Yellow Card remains one of the best exchange platforms offering users top-notch service at their convenience.
Additional Tips to Keep in Mind While Trading
Certain tips would be very practical while trading. These tips would help you minimise loss and maximise profits. These tips include;
- Keep note of market trends while trading.
Beginners often get excited about trading cryptocurrencies and forget to take note of trends. It is advisable to not rush into trades because others are doing the same. You need to observe the market trends and make a reasonable decision from this.
- Only invest what you’re willing to lose
This is an important tip to always keep in mind when trading or investing in any market. As markets can be very volatile, a good way to manage your risks is to only invest funds that you wouldn’t mind losing. This is just to ensure that you keep your money safe and not get too excited and lose your investment. Investing only what you’re willing to lose is a reminder to invest wisely.
- Manage your risks
There are various tools that can help you manage your risks while trading including stop loss/take profit, risk/reward ratio, setting profit target and many more. Using these tools can aid you while trading to know when to enter a market, exit and keep your profit.
This means "Do Your Own Research". When it comes to trading and investment, it is always best to find out important and relevant information about assets you want to trade and not just take random opinions as facts.
The crypto market is highly volatile and liquid, presenting an opportunity for individuals from across the globe to trade and invest in cryptocurrencies. As a beginner, it is essential to dedicate time to learn more about how the market works and the best strategies that work for you.
Disclaimer: This article is meant to provide general guidance and understanding of cryptocurrency and the Blockchain network. It’s not an exhaustive list and should not be taken as financial advice. Yellow Card Academy is not responsible for your investment decisions.