Beginner’s Guide to Bitcoin Trading


June 5, 2018

Beginner's Guide to Bitcoin Trading

It may seem that Bitcoin is just another internet fad-prone to high volatility and little practical use, but it is not so. Bitcoin can be used for trading just like stocks. You can speculate on bitcoins just like you speculate on shares and options. Because Bitcoin is the new cryptocurrency, the volatility is high which means more money-making opportunities.

Before You Begin to Trade

The first thing to do a Bitcoin trader is opening a Bitcoin wallet. This will allow you to transfer funds. If you would like to use a Bitcoin ATM to withdraw funds from your account, you will link your wallet Bitcoin address to the chosen ATM machines address.

To facilitate the transfer of your funds in bitcoin to and from a trading platform, you will simply link your wallet’s address to the Bitcoin address of your chosen trading platform. In actuality, it is much easier than it sounds.

There is numerous website where you can set up a Bitcoin wallet. Before doing that, verify that the company is legitimate and the site has a clear terms and conditions policy. Some wallet providers have different sets of terms to accept US clients. The wallet should make it easy and hassle-free to process deposit and withdrawal of any amount of bitcoins that you earn with trading.

Exploring Types of Trades

Day trading is the method when you conduct several trades on the virtual currency during the course of the day while obtaining profit from short-time price fluctuations. For day trading you have to spend a lot of time staring at a computer screen as you are trying to close your trades by the end of the working day. A day trader can transact many times in a day with no limitations. There are limited times when a market trends during the day, the most profitable times to trade. Most of the time it just consolidates so it’s important to conduct as many trades as possible within this timeframe. You may, in some cases, just buy Bitcoins on one day and sell them on the next day, if you think that selling it on the same day would not prove profitable. There is no legal restriction such as that you must finish off all of your trading activity the same day. There are Bitcoin traders who believe in allowing the profits to run so they stay with the position even after the market closes.

Some people consider this method to be risky, much more than short-term trading or investing. What looks like greater risk is that you end up taking more trades.

Scalping refers to a popular day trading method when the trader makes a profit on minuscule changes in price but does it frequently. They finish off their trades in a matter of few minutes or even seconds. Since the term of these trades is extremely short, this method also significantly reduces risks for Bitcoin traders. If you want to try scalping strategy, be prepared to can make dozens—or even hundreds—of trades in one day.

Remember that you have to pay an interest rate for every 24 hours that the position is kept open, with the exception of the first 24 hours that are free. Therefore, unless you have sufficient balance to cover the high-interest rate, do not keep any unprofitable position open for more than 24 hours.

Swing trading is a method when you try to earn a profit on naturally occurring cycles in the price of a currency. Swing traders predict to notice the very beginning of a cryptocurrency price motion, make the trades, keep them on until the motion slows down. That’s when they make or fail to make the profit. This method requires the ability to envision the big picture of cryptocurrency economy. They focus on momentum or trends of the stock movement. They are very patient during their wait for a strong move, which may occur during the day. Obviously such day traders make only a few trades. Sometimes swing traders keep a position open for weeks or months before the desired movement can be observed.

All ways of trading require the ability to predict price in the offer or at least recognize factors that influence it. Bitcoin is such a novel asset type, the volatility is massive. Traders are always on a lookout for ways to improve their methods and define patterns that would let them earn revenue in a long-term perspective. While no method can guarantee a profit, there are ways to ensure a positive outcome of your efforts, and that’s the trading analysis.

Types of Bitcoin Trading Analysis

There are two main methodologies to ensure the healthy profit when you trade your Bitcoins or another type of assets: fundamental analysis and technical analysis.

The fundamental analysis addresses the market situation as a whole. The analysis is provided by analysing media sentiment about the cryptocurrency market, financial news networks regarding the market conditions, technical and legislative advancements, is always synthesised from different sources of data such as the stock exchanges, political situation, social media sentiment, as well as prices for highly valued commodities like oil and gold. Once the analysis has been done, it becomes clear whether to buy or sell depending on the market climate.

Technical analysis attempts to estimate Bitcoin prices by studying market data such as statistics of prices movement and trading volumes that dictate the supply and demand. This helps determine trends and identify specific patterns in cryptocurrency prices based on the past events and certain trends that influenced them. This is a somewhat technocratic concept which ignores the events in the world outside of cryptocurrency ecosystem and focuses on pure statistics and mathematical modeling.

Most of these trade analysis reports of this type are going to focus on technical aspects and as a result look more to the price movement and volume. It does not bring into account anything that might affect the market. The cryptocurrency market is made up of numbers, and no matter what affects the market externally it will be reflected in the numbers that are created from an analysis of the market. By focusing on the numbers that are created from the patterns and trends of the Bitcoin rate allows for a clear view of the market.

The same patterns and trends tend to repeat themselves over and over again within the Bitcoin ecosystem so by pulling out these patterns and trends a trader can use it to determine when the best time to purchase and sell would be based on the technical aspects of the trends. While the numbers can produce the patterns and show the trends it does not show the various aspects that affect Bitcoin price.

There are many ways to use the previous cryptocurrency data in order to predict the various trends and patterns that move Bitcoin. From the data collected, it is possible to trace back to historical events and find out which types of events have the greatest impact on a particular stock or market and use that information in order to make wise investment choices.

There are also a number of theories that are used in Bitcoin trading analysis that provide a way to trace prices and patterns as well as trends that can help a potential investor determine if this particular coin is something to consider seriously for purchase or something to avoid. It may even let an investor know to hold off on purchase for a short period of time before purchasing.

It is very easy for Bitcoin traders to go wrong in the area of analysis, just because they happen to believe that they must indulge in a very complex analysis of the chart before they can catch a winning trade. There is no need for a complicated analysis because all you are trying to look at is a simple human behaviour to demand and supply Bitcoins.

Now let’s continue to break down some of the confusing terms and statistics you’ll encounter on most of the exchanges.

Bitcoin Exchanges

This is where Bitcoin users trade with each other to sell or buy Bitcoins. Some exchanges also have a wallet function where users can store their Bitcoins.

Unlike other ways to acquire coins, the exchange doesn’t involve meeting or directly communicating with the other party. The way to trade Bitcoins through an exchange is similar to other Bitcoin buying processes: you choose the exchange, connect your wallet, and offer Bitcoins for sale. You can input your ask price (the price for which you are ready to sell). Although you can ask any price you want, you are guaranteed a quick sale if your price closely matches the market price.

Another benefit of exchanges is that they eliminate the counterparty risk happening when the other party doesn’t intend to honor its obligations and complete the trade.

There are many security concerns about exchanges. The most famous one is involving Mt.Gox which went broke after losing many bitcoins in transactions.

Unlike buying bonds or stocks, Bitcoin exchanges charge a percentage, while discount brokers used by most investors charge flat rate fees. The percentage model, purchasing and selling over time can prove expensive. Some of the popular exchanges charge higher percentage fees on the basis of a sliding scale, based on volume. Hence, they charge less percentage where more volumes have been traded within a period of thirty days.

The Order Book

This part of the exchange lists all orders. Buy orders are called bids and sell orders are called asks. Order book can also include terms “high” and “low”. These terms refer to the highest and lowest prices in the last 24 hours.

Trading Volume

This is the total number of Bitcoins traded during a certain period of time. Strong upward trends are characterized by large trading volumes and weak trends when the price goes down show low volumes.

If you observe an unexpected change in the direction of the price, trading experts suggest checking the amount of the trading volume is to see if this is a slight correction without significant consequences. Alternatively, this could mean the beginning of the opposite trend.

Types of Orders

A Bitcoin market order is an instruction to buy or sell the cryptocurrency at the best price. This type of order is most usually used in an active market when the trader wants to ensure they will enter or exit the market. The disadvantage of a market order is that you will not always buy Bitcoin at the price you were hoping for. The price may be slightly different. However, it is important to understand that you will always get your order filled.

Limit orders instruct to buy or sell Bitcoins at a specific price or better. In the case of a buy limit, it will be filled at the specified price or lower. A sell limit will be executed at the stated price or higher. However, there is a drawback to this. If a trader’s sell limit cannot be executed at the specified price or better, it means that the trade will not be executed at all. This can be a real issue during the upward market trend. The trader may not get into a trade at all and therefore miss an opportunity.

Stop orders are similar to market orders, in as much as they are an instruction to buy or sell at the best available price. However, they are only executed if the market reaches a level specified. For example: if the current market price for Bitcoin is $7600 a day trader can place an order to buy at $7600. When the market reaches $7600 the stop essentially becomes a market order and will be filled at the best available price, which could be higher than the specified price. The same holds true for a sell limit.

With a stop limit, the trade will only be executed when the price reaches a specific level. However, that is when the limit part of the order steps in. The limit part specifies that the order can only be filled at the stop price or better. The rules of the stop limit hold true when going short or long.

A stop-loss order lets you set a specific price that you want to sell it in the future, in case the price dramatically drops. This type of order is useful for minimising losses. It’s basically an order that tells the exchange the following: If the price drops by a certain percentage or to a certain level, you will sell Bitcoins at the preset price, so you will lose as little money as possible.

A stop-loss order acts as a market order. In other words, once the stop price is reached, the market will start selling your coins at any price until the order is fulfilled.

Charting Tools

Like cash investments, there are now several charting tools to record the Bitcoin market trends and make predictions to help you make trading decisions. Even as a beginner in Bitcoin trading, learning how to use charting tools and how to read charts can go a long way. A chart will usually include the opening price, the closing price, the highest price, the lowest price and the trading range, which are the essentials you need before making any Bitcoin sale or purchase.

Japanese Candlesticks

Japanese Candlesticks, or the candlestick charting method were developed by Homma Munehisa, a successful rice trader from the 18th century in Japan. Candlesticks are a common way to demonstrate stock price information, including the open, close, range and direction of trade for currencies.This type of a chart can express different price patterns which can be used to help predict the trend. This information is used as a timing tool to get into or get out of a Bitcoin trade. If the currency closed higher than it opened, the candlestick should be a white, blue or green colour to depict an upward change over the specified cycle. If the currency closed lower than it opened, the candlestick should have a black or red coloured body.

A bullish signal is generally given by a candlestick if the lower wick is longer than the upper wick, creating “long lower shadow”. A bearish signal is generally given by a candlestick if the upper wick is longer than the lower wick, creating “long upper shadow”. A bearish market, a downtrend would be represented by lower highs and lower lows with candlesticks with black bodies without wicks occurring after a “long upper shadow”. Now it’s time to explain what that animalistic terminology means so you could start reading price graphs.

Bull or Bear Markets

When the market is going down it is referred to as a “bear market”. It’s easy to memorise if you imagine a bear with its claws pointing down. When the market is going up it is referred to as a “bull market”. To visualise, imagine a bull with his horns pointing to the sky.

Words “bull” and “bear” describe the general conditions of the currency market. They do not describe daily or short-term fluctuations. Instead, they would describe the condition of the market over a longer period of time, such as two months. The overall general performance of the market is termed as Bull or Bear over a given period of time.

Most of the money is made during a bull market. While opportunities lie in both markets you have to understand the state of play so that you can execute trades that will make you money.

Resistance and Support Levels

Support and resistance level are key turning points in the market where buyers and sellers meet. When there are more buyers in the market, Bitcoin price moves higher because sellers can charge more since there is more competition. Whenever there are more sellers in the market, Bitcoin price falls.

Support levels are places in the market when more cryptocurrency buyers enter the market and overtake the sellers. This causes the market to stop falling and to begin rising. The lowest price in this fall is called support.

Let’s use an example. Let’s say that Bitcoin is for sale at $15,000/BTC. Nobody wants to spend $15,000 for Bitcoin, at least right now, so there are no buyers in the market.

The sellers, seeing that there are no buyers, drop their price to $12,000. Some people buy Bitcoins at $12,000/BTC but not really that many. So the sellers keep dropping the price until they get to $5000.

Now at $5000, there are plenty of buyers in the market. Everybody wants to buy Bitcoin at $5000. Since there are now a bunch of buyers, the sellers begin to raise their price back up. The price of Bitcoin got so low that there were now more buyers than sellers, so the sellers raised the price back up.

$5000 would be the support level. That is the level that everyone would look at as the lowest prices for Bitcoin ever. People would always talk about the good, old days when you could buy a Bitcoin for $5000.

So imagine that Bitcoin seller came in, but no one wanted to buy the coin at the current price of $12,000 again. Guess how low the price would go before the buyers would come back? That’s right! About $5000. When it got to $5000, everyone would buy because that is the lowest it had ever been.

Support and resistance work in the Bitcoin exchange in the way as described in this example.

Common Trading Mistakes

Now that you know more about best ways to ensure that you trade Bitcoin successfully, it’s also good to know what can hinder your way to profit.

Mistake #1. Trying to predict Bitcoin prices

No one can do that, and there is no market where we would all know the price ahead of time. Markets exist because of uncertainty, not a certainty. Predicting or guessing won’t make you money, so simply trade the reality of market trends and price change and you will have the odds on your side.

Mistake #2. Not trading with discipline

This is something the vast majority of traders regardless of the market do and it leads to a wipeout. If you cannot trade your system with discipline you simply don’t have one. You are going to lose for long periods, all traders do and you must keep your losses small in these periods and take them cheerfully. If you get frustrated and angry like most traders, you will start to bring losses and that ends in disaster.

Mistake #3. Not keeping up with the latest Bitcoin news

The news could significantly influence its price. By regularly checking Bitcoin-related news you could end up catching a valuable signal on time, so you could make decisions that will bring you good fortune. It’s essential to distinguish news from reliable sources with fake news that are often published on less reliable websites to influence the Bitcoin price.

Mistake #4. Not doing technical analysis

This is very important before joining the trade. Considering that there is no governing body or bank to influence the valuation of Bitcoin, you need to be your own judge in more ways than one. If you do not understand market fundamentals and you do not even know how to analyze price charts or read price actions and applying indicators you are doomed to make the wrong moves. Remember the price models are primarily speculative which is why it is essential to understand all technicalities.

Mistake #5. Not benefitting from stop losses

Whether you are just starting with your trading or you have been at it for a while, you need to be prepared for times when losses are inevitable. Nobody trades expecting to make a loss, but the chances are always there hence the need to implement a reliable stop-loss plan. The valuations fluctuate regularly, and you need to be prepared for bad days. The market offers tools that you can automatically set to stop losses before they have severe impacts on your profits.

Good Trading Practices

The process of selling and trading Bitcoins is similar to the process of trading stock or derivatives, although there are certain nuances and tricks to be aware of. Here are some tips to help you trade better:

  • Look out for group effects such as herd mentality and bandwagon effect while trading. Do your own research about cognitive biases so that your trading decisions are not affected by them.
  • Always maintain a realistic outlook. Being optimistic is a good idea for life in general but ignoring negative trends equals shortsightedness on the verge of stupidity. Be on top of information, analyze it with an open mind and then make data-based decisions.
  • Do not gamble. Any cryptocurrency trading is gambling if you trade without a plan or allow emotion to control your decisions. The critical difference is whether you are putting the odds in your favour or not. If you are doing so then the trading, whether you are talking about short-term, investing, or day-trading becomes a business. If you can’t put the odds in your favour, then all of them can be considered gambling.
  • Consider other opinions. Even if you are confident about your own forecasts, reading and scrutinizing other conflicting information sources will help you cover all bases and make an informed decision.
  • Explore various trading strategies before sticking to one. This will let you know which approach works for you and which one you are comfortable with.

Experts suggest that if you want to be successful at trading, you’ll have to put in a significant amount of time and money to acquire the relevant skills, just like any other venture. If you want to get into trading just to make a quick buck, then perhaps it’s better to avoid trading altogether. There’s no such thing as quick, easy money—without risk or downside at the other end.