Cryptocurrencies remain one of the fastest-growing digital assets traded in an industry worth over $3 trillion. The crypto market attracts a high volume of traders and investors given its insane market volatilities, which translates to high-profit potentials.
Crypto trading involves buying and selling decentralized currencies (altcoins or tokens) via an exchange, usually for money. It equally means speculating on cryptocurrencies’ price movements and predicting price action either directly on the cryptos or using futures, options, or derivatives via a contract of differences (CFD) trading account.
Cryptocurrencies are highly volatile, which makes trading extremely risky. You can make huge money over a single high-margin market turn or lose a fortune in a flash if the market sways against you.
In the post, we take you through the steps to trading cryptocurrency trades and how to remain profitable doing it.
Steps To Trading Cryptocurrencies
To make money trading cryptocurrencies, you must follow the right steps. Here are 6 steps to successfully making your first trade:
Step 1: Select a cryptocurrency trading method
There are two ways to trade cryptocurrency: (1) speculating and trading cryptocurrency price movements and (2) buying, holding, and selling cryptocurrencies.
Buying and selling cryptocurrencies
The most common way to get into cryptocurrency markets is by buying coins or tokens through a cryptocurrency exchange. Trading rules in this method are simple; you pay the full value for an asset upfront, store the cryptocurrencies in a wallet and hold until you’re ready to sell.
Markets’ learning curves differ from exchange to exchange, so you need to understand how your underlying exchange presents market data to make sense of them. You earn money when you sell your underlying cryptocurrencies at a price higher than the purchase price.
Speculating cryptocurrency price movement
Alternatively, you can speculate and trade cryptocurrency pairs, predicting their price movements against each other or fiat currencies. This can be done directly on the digital assets themselves or using Contracts for Differences (CFDs).
This gives you the flexibility to trade rising or falling markets depending on the direction you think prices move. To open a trading position, you only need to put up a deposit – known as margin – to gain exposure into the underlying market. Profits and losses would be calculated based on the size of your position magnified by leverage.
While it’s possible to trade cryptocurrency using both methods simultaneously, it pays to start with one, learn, and scale.
Step 2: Learn the cryptocurrency market
Cryptocurrency markets operate differently from other financial markets. Given its volatility, jargon, and different factors affecting prices, it’s important to learn and understand how the markets work before you make a trade.
Being a decentralized digital currency network, the cryptocurrency market operates through a system of peer-to-peer transactions, checked and validated through blockchain.
Like currency and stock markets, cryptocurrency prices are influenced by supply (the total number of coins available at a time and the rate at which they are released or destroyed) and demand. However, as they are decentralized, they remain free of the economic and political events that affect traditional trading markets.
Other factors that might have a significant impact on market prices are pumping and dumping, the rate at which a cryptocurrency integrate with payment systems, market capitalization, press or media coverage around the cryptocurrency, ICOs, regulatory updates, blockchain folks, security breaches, marketing schemes, community support, and other key events.
Step 3: Make and fund an account
Create an account with a cryptocurrency brokerage or exchange to trade. Some of the best trading providers are Coinbase and Binance, among others. They provide simple user interfaces and a wide variety of altcoins to select.
For trading providers, it’s important to understand the difference between cryptocurrency brokerage and cryptocurrency exchange:
- Cryptocurrency broker: This is an individual or company that acts as an intermediary between the trader and cryptocurrency markets. A broker facilitates the buying and selling of cryptocurrencies for the trader. It is most suitable for new traders or those looking to simply buy, hold and sell cryptocurrencies.
- Cryptocurrency exchange: This provides an online platform for buyers and sellers to trade cryptocurrencies with each other based on current market prices. Cryptocurrency exchanges act as underlying intermediaries and charge fees for trading. It’s most suitable for experienced cryptocurrency traders or those looking to take advantage of price fluctuations through speculation.
Once you’ve signed up, the next step is to fund it. Common funding methods are wire transfers and debit cards.
Step 4: Choose or create a cryptocurrency trading strategy
Given the volatility of cryptocurrency markets, they are attractive to enter but difficult to trade. It’s therefore highly risky to dabble in without a strategy.
Your trading strategy is the method for entering and exiting trades and techniques for analyzing markets. It usually incorporates risk management setups, such as stop-loss orders, take-profit orders, and restricting trade sizes. Your strategy should align with your trading goals.
Experienced traders usually already have a strategy they used to trade stocks or currencies. If it makes you money, you can adopt them for trading cryptocurrencies, as stock trading strategies are commonly used for cryptocurrencies.
There are many existing trading strategies you can adopt and perhaps adjust to build your effective framework as a new trader. Let’s look at some of these briefly:
Scalping is one of the fastest crypto trading strategies and involves using small price movements again and again against riding on big price moves or trends. Scalpers can open and close positions in a matter of seconds. Given the high risk involved, it is not recommended for beginners.
Scalping is considered an advanced trading strategy. It is usually used by whale traders who are comfortable opening substantial positions and closing on small profits, the equivalent of the trading capitals of most traders.
Cryptocurrency day trading is a popular short-term trading strategy. Day trading involves entering, trading, and exiting asset positions within 24 hours or fewer, with a major goal to profit from the daily price movements of an asset (s).
To day-trade cryptocurrencies, you need a quick eye for analyzing market movement, dedication to monitor positions constantly, and a good grip of emotions when the market goes south. While this strategy promises quick, short-term profits, it can be laborious and difficult to maintain.
Here, traders hold positions for longer than one day but no longer than a month. It’s a longer-term trading strategy that centers on benefiting from volatility waves lasting several days.
Swing trading requires rational thinking, a combination of fundamental and technical analysis to make thorough trading decisions, and the patience to wait on trade positions for several days.
This is a very long-term strategy where traders attempt to profit by analyzing an asset’s momentum in a particular direction. Positions are often held for timeframes exceeding a couple of months.
Trend traders rely on fundamental factors behind an asset, often paying attention to events driving the asset’s demand, supply, and price. Trend traders open a long position when an asset is trending upward (characterized by higher swing lows and higher swing highs). They enter a short position when an asset is trending downward (characterized by lower swing lows and lower swing highs).
No matter what strategy you decide to trade cryptocurrency with, ensure you incorporate stop-loss and take-profit orders to minimize risks.
Step 5: Select your cryptocurrency and trading platform
Select a trading platform that supports your chosen trading strategy, i.e., your risk management tools and market analysis setup or calls. Trading is usually done over your chosen broker’s web portal, mobile application, or integrated third-party platforms like MT4.
There are plenty of cryptocurrencies to choose from for trading. Popular cryptocurrencies with large market caps like Ethereum and Bitcoin move more predictably in the market than smaller altcoins. So they are easier to trade using technical analysis.
While smaller altcoin is riskier than established cryptocurrencies, they offer a higher potential to rise (or fall) exponentially, making them attractive to investors with a high-risk tolerance.
Step 6: Make money on a trade
Ready to start trading? Good!
If you’re buying to hold for the mid or long-term, get a cryptocurrency wallet where you can store cryptocurrencies after purchase. Wallets come in both software (online) wallets and hardware (physical) wallets.
Hardware wallets offer the best security as they let you store your cryptocurrencies in a physical device offline. Some of the best software wallets are Binance, Coinbase, and ZenGo. The Ledger Nano X and Trezor are some of the best hardware wallets.
If you’re actively trading your cryptocurrencies, it’s best to leave them on the exchange for easy access. To trade, you’ll first need to decide on the direction you think prices would go using support from analysis tools. Then decide on the size of your position using leverage. Open a position by selecting either buy price or sell price.
‘Buy’ to open a long position and ‘sell’ to open a short one. Protect your trade from unnecessary risks by using stop losses and take-profit orders to close a trade once it hits a certain level. Remember to monitor profits/losses after trading periods.
That said, it’s important to understand popular terms used in trading cryptocurrencies.
Best trading terms to know
Spread is the difference between the buy and sell prices quoted for a cryptocurrency. The buy price is slightly above the market price. You trade at this price if you want to open a long position. The sell price is slightly below the market price and is the option you select to open a short position.
Margin is the initial deposit you pay to open a leveraged position. This is usually expressed as a percentage of the full value of the position. The amount of margin required on trade depends on your broker and the size of your trade.
For example, a trade on Bitcoin (BTC) might require 10% of the total value of the position to be paid for it to be opened. If the total value is worth $10,000, you only need to deposit $1000 to open the trade.
Leverage exposes you to larger trade sizes without you having to pay the full value of the trade you would otherwise make without leverage. It allows you to put down a small deposit, known as margin, on trade and give you control 5, 10 even up to 100 times the amount you opened.
While leverage amplifies your potential profits if stocks go up or prices swing in your favor, the reverse is the case if predictions are wrong.
Pips are used to measure the price movements of a cryptocurrency. For valuable cryptocurrencies, a pip is a one-digit movement in price at the dollar level. If the price of a say Litecoin (XRP) moves from $214.97 to $215.97, it has moved a single pip.
However, for lower-value cryptocurrencies, pips apply at different scales, be it movement in cents or fractions of a cent.
How to Make Money in Cryptocurrency Trading
We’ve created two simple trade cases for analysis to aid your understanding of how to trade cryptocurrencies profitably.
Case 1: Buy, hold and sell
Let’s assume you prefer the ‘buy, hold and sell’ method of trading cryptocurrencies. Your interests are in the price increase of several cryptocurrencies over a period. There are two ways to can trade:
Here, your interest purely lies in the long-term price increase of large coins like Bitcoin, Ethereum, and Litecoin. You decide to invest equally in all 3 cryptocurrencies, buying $1000 worth of each coin via a broker. You move them into a cryptocurrency wallet to hold until prices rise several percentages above the purchase price after a period.
You create an exit plan to:
- sell cryptocurrencies when prices rise in value by 500% at any period
- sell cryptocurrencies at any price after, say, two years of holding.
In this scenario, you must have researched the price predictions of the cryptocurrency before buying. This information helps you set realistic timelines or price jumps expectations that would trigger sales of the assets for profits.
The long-term approach is great as you do not have to constantly move funds from crypto to crypto in search of profits. All that’s required is watching your portfolio and keeping abreast of news around your vested assets.
Alternatively, you can buy low-valued cryptocurrencies (usually altcoins) with strong growth potentials, hold for a short period (a couple of days or months) and sell when prices rise by certain percentages. You can reinvest profits into new low-valued, high-growth potential altcoins, repeating the cycle and growing your funds.
The holy grill in this approach is finding great low-valued altcoins with promising use cases, good cap, and on a healthy price trajectory at given periods. This can be difficult to do and requires a solid understanding of altcoins as the market is flooded with them. Avoid buying shitcoins or memecoins if you don’t know how to navigate these.
Case 2: Speculating price movements – Day trade cryptocurrency
In this picture, you prefer to speculate on cryptocurrencies price movements and have adopted a day trading strategy. You noticed strong volatility in the daily prices of Bitcoin and Ethereum against each other and want to make money predicting them.
To start, you deposit $1000 with an exchange. After careful analysis of price movement, you stake 1% of your account value per trade. You can either buy an asset on the spot or open positions via futures, options, or other derivatives contracts. You set up a stop loss if prices fall 50% below entry price and a take profit call if prices rise 300% above the amount risked on the trade.
The best tactics you can employ in this scenario are knowing when to open long positions, when to go short, and making good use of margins.
When to open a long position:
If your chart analysis shows that the price of a cryptocurrency might increase over the following days or weeks against the pair you’re trading (usually against the US Dollar), you can go long. One method is checking the chart to see whether the price has broken above an important resistance line, indicating an uptrend.
When to open a short position:
Go short when your chart indicates the price of an asset might decline for a while. One method is opening a short-sell position when prices reach an overbought level, i.e., the price of the cryptocurrency has maintained an uptrend for a long period up to a point where it cannot reasonably rise any higher.
Margin magnifies the potential results of your short or long position thanks to leverage. While profits can be amplified several times, losses also occur in the same proportion. It’s therefore wise to use margin cautiously, only applying it to trade when you’re confident prices will go in the predicted direction. This would boost your profits.
Ensure your trading decisions are backed by fundamental or technical analysis at all times. Risk management practices like risking not more than 2% of your account value per trade, sticking to stop-loss, and take-profit setups backed by support and resistance, play a role in keeping you profitable.
Attitudes of Profitable Cryptocurrency Traders
Staying profitable in crypto trading goes beyond just strategy or wild luck. Profitable traders incorporate certain key attitudes into their trading activity that help them get through the ups and downs of the marketplace. Here’re some tips:
1. Stay updated
Since cryptocurrency price movements are influenced by multiple factors aside from demand and supply, it’s wise to stay up-to-date with happenings in your chosen markets. Keep abreast of news, marketing activities, and other key events that affect the price of coins you trade.
2. Stay positive
Staying positive even in troublesome situations plays a vital role in shaping successful traders. Optimism helps you make better trading decisions, especially if you’re buying to hold for the long term. Panic selling or buying cryptocurrencies usually results in missing out on potential profits or suffering catastrophic losses.
3. Trust your best strategy
Emotional trading is when you let your personal feelings impact your trading decisions. It’s one of the fastest routes to failure as a trader. If you’ve found a tested and proven trading strategy that works for you, stick to it. Do not attempt revenge trading when trades don’t go your way. Trust your strategy and trading process. As a rule, you will win some trades and lose others – profit lies in accumulating more wins (in terms of value) than losses.
4. Time discipline
Treat cryptocurrency trading like a business or a job by setting aside particular hours or a certain amount of hours to make trades per period. Know when to get into trades and when to take a break. This not only helps you build trading discipline in the long run, but it also improves your mental health.
Crypto trading may not be a passive income earning strategy, but it works, and many people have earned a fortune from it. For a more in-depth analysis of your finances to grow your portfolio, book a call with our cryptocurrency consultant. Don’t forget to subscribe to our blog updates below.