In this article, I wanted to touch the topic of trading crypto assets on daily basis. Many people discover crypto, take a look at charts, and think “Hey, this looks straightforward, all I need to buy these bottoms and sell when it reaches one of these tops. Easy!”.
If you tried it, you know it’s not that easy. When you are trading with real money, with your money, emotional stability and plan is everything. If you enter the trade without a stop loss and exit plan, you’ll probably lose money.
My goal in this article is to show you the basics of crypto trading, get you familiar with the terms and tools you need to trade. Plans and emotional stability you’ll have to develop by yourself and over time.
If you want my advice about trading, here it is summed in as few words as possible: Don’t day trade crypto assets, you’ll lose your money!
In more than a few words: Day trading is serious business. If it’s not full time job for you, don’t do it. It’s very easy to lose all your money and very hard to earn. You’ll be on an emotional roller coaster, real-life relationships will suffer because you’ll always be checking your phone / PC, you could also get anxiety attacks, etc.
If you just want to earn some money and don’t mind the long-term investing, I suggest you use DCA (dollar cost averaging) strategy. Another good strategy (in my opinion) would be waiting for big drops in price (20-40%) and then investing larger sums of cash set aside just for that. I’m using both of these strategies for my personal crypto portfolio.
If you still want to try your luck in trading, continue reading.
Trading interface simplified
Let’s get you familiar with trading terms you’ll need to know before you start trading. I’ll be using Kraken trading console as an example, but trading interfaces on all exchanges are similar. If you learn one, you’ll manage others also. If you are searching for the best and safest crypto exchanges to trade on, check my linked article.
Candlestick represents price movement in a set amount of time. If the chart timeframe is 1H (1 hour) then one candle is equal to 1h of time.
The candle has an open and close price which determines the candle body, the highest and lowest price which forms upper and lower shadows (wicks).
If the candle body is green, the close price is higher than the open price, in short, the price has increased in the candle time period. The same logic applies for red candles, the open price is higher than the close price which means the price has decreased.
The order book is composed of orders, bids and asks that can be filled by market participants. In the attached picture, you can see that the last traded price for asset was 42027.7 USD, the first/highest bid is 42021.0 USD for the amount of 0.10508063 BTC, and the first/lowest ask is 42025.1 USD for the amount of 0.00010000 BTC.
The difference between the bid and ask is called spread, and in this instance, it equals 4.1 USD or 0,00975%. This is a very small spread which is good! Best exchanges have small spreads which means they have liquid markets.
Bellow bids and asks you can see last realized trades, the price at which they were conducted, amount, and time of trade closing.
Creating buy and sell orders
Buy and sell widgets are quite straightforward, but let’s go into details.
Action – pick if you want to make a bid or ask order.
Type – pick the type of your order. Following is available:
- Limit order is order with exact price and quantity
- Market order is order with exact quantity. Trade price is best available market price at time of creating order. This order will be immediately closed.
- Settle position returns borrowed margin trading assets to exchange without makeing a trade.
- Stop loss order is market order activated when price reaches defined level. Contrary to it’s name it doesn’t need to be used only to limit loss. It can also be used to take profit or open new positions.
- Take profit order is similar to stop loss order, it closes position with market order when price reaches defined price.
- Stop loss Lmt order is same as regular stop loss order, only difference is that instead of using market order, you need to define all paramaters for limit order. Potentional flaw of this order is that if you don’t define your price correctly, it might not be closed.
- Take profit Lmt order is same as regular take profit order, only difference is that instead of using market order, you need to define all paramaters for limit order. Potentional flaw of this order is that if you don’t define your price correctly, it might not be closed.
Leverage – allow you to pick the size of your leverage. None means that you are only trading with assets you own. Anything else means you are margin trading and borrowing assets from the exchange. Kraken offers from 2x up to 5x margin trading. In short, 2x means that if you have $1000 worth of assets, you can open a $2000 position, and 5x means you can open a $5000 position.
Funds, Quantity, Price, and Total are self-explanatory and don’t need further explanation.
Create Conditional Close option lets you create another, opposite order, as soon as your original order is triggered.
Spot and futures trading
Now that you are familiar with the trading interface, let’s explain a few more concepts.
Spot trading is buying and selling assets for immediate delivery. In a nutshell, spot trading means that when you buy 1 BTC, you own that 1 BTC and can withdraw it to your personal wallet.
Futures trading on the other hand is buying and selling derivatives contracts that represent the value of a specific asset. When you open a long (buy) position in the futures market, you can’t withdraw that asset to your personal wallet since there is no asset to withdraw. In the futures markets, you are opening positions. Buy position is called long, and sell position is called short.
Leverage is available in both spot and futures trading. Essentially, when you are using leverage, you are borrowing funds from the exchange. For example, if you are trading BTC/USD pair and want to leverage your trade on the spot market.
User funds: $1000
BTC/USD price: $40000
Asset quantity: ₿0.125
Funds needed: $5000
Borrowed from the exchange: $4000
User funds: ₿0.100
BTC/USD price: $40000
Asset quantity: $20000
Funds needed: ₿0.500
Borrowed from the exchange: ₿0.400
In the first buy example, you need to borrow $4000 from the exchange so you can buy a total of ₿0.125. You owe exchange $4000 which you need to repay by selling BTC you own. In the meantime, you need to pay interest fees on borrowed assets which usually aren’t cheap and accumulate over time if you keep your position open for a long time.
In the second sell example, you had ₿0.100 and borrowed an additional ₿0.400 from the exchange so you can sell it for $20000. You own ₿0.400 to exchange and need to repay it by buying at least ₿0.400 with those $20000. In the meantime, you need to pay interest fees on borrowed assets.
When you use leverage, you aren’t only paying trading fees, you are also paying an additional interest rate on borrowed funds.
Trading isn’t for everyone, and I generally don’t recommend it to people wanting to get involved with cryptocurrencies. If you decided you want to try it, there are a few things I can recommend.
- Open an account on Trading View and get familiar with it.
- Learn how to practice trading with paper trading on TV.
- Research and get familiar with chart patterns, candlestick types and indicators. I made few diverenges indicators which can help you spot RSI and OBV divergences, so check them out.
- Follow @BigCheds on Twitter, he publishes a lot of knowledge content for rookies and has some candlestick and chart patterns tutorials.
- Calculate and know in advance what kind of fees you’ll pay before you open a trade.
- Check my overview of best and safest crypto exchanges to trade on, and decide which fits you best.
- Before entering trades, know your stop loss price and take profit price!
- Start trading carefully and good luck. 🙂