The accelerated rise in the price of Bitcoin has made it the most desired choice of several thousands of people across the globe to take advantage of the extraordinary movement of Bitcoin’s price for financial gains. Trading of Bitcoin is one of the many ways where investors can gainfully invest in the biggest digital assets in the cryptocurrency world.
The purpose of this guide is to expose you to the rudiments of trading Bitcoin and teach you how to accurately forecast Bitcoin price movement via technical and fundamental analysis. Bitcoin trading is a continuous activity that requires one being up to date on its latest information, especially if one desires to make profit.
What is Bitcoin Trading?
There is a very big difference between buying Bitcoin for long term holding and trading it. Purchasing Bitcoin implies that you possess the digital assets, while simple trading is all about using various contracts provided by a broker to capitalise on the varying price.
Using a broker’s firm (unlike a cryptocurrency exchange), you do not retain Bitcoin, but you only buy and sell on secondary basis. While holding Bitcoin in an exchange gives you the benefit of taking loans against it. The reverse is the case with the brokerage platform. The truth is that as a trader, you never truly keep Bitcoin there, you just participate in the different contracts and deals that are driven by the basic price of Bitcoin.
There are basically three different methods of cashing in on Bitcoin price movement when one is trading Bitcoin on brokerage platforms:
CFDs: Referred to as Contract for Difference, (CFD) is a product that only reflects the ever-changing price of Bitcoin as the basic asset without the trader needing to purchase the digital currency.
Futures: Futures are usually time-bound trades that the investor is compelled to close at a predetermined time. Like CFDs, the value difference can potentially bring about profits.
Options: Unlike Futures, a trader is entitled to close the contract at any time he so desires. This assist in profiting when the trader is comfortable with the price increase, or close if the contract begins to accrue losses.
For successful trading, a trader must be vigilant in choosing a broker that is properly registered with the relevant regulatory authorities. Employing authentic and registered brokers limits the probability of fraud and scams.
Several investors who get into trading Bitcoin for the first time mostly rely on copying or mirroring the trade of established traders. This proves to a safety net on the surface, since following the methods of more experienced traders reduces the possibility of losses, however this method also has its own inherent disadvantage.
While experienced traders can trade in large volumes, with protection in place to mitigate losses. Following them blindly often result in great losses. Armed with extensive reserves, they possess an ample margin for various fees and charges that brokers demand, However, these fees and charges are capable of draining up your meager profits.
Having explained what Bitcoin is, the basics of Bitcoin trading and the various methods of trading. The next question is that where to trade Bitcoin?
Where Can I Trade Bitcoin?
The first place to look if you desire to trade Bitcoin is the Online Brokers, they are trading platforms that allow you to invest when the Bitcoin is plunging and sell off when the value has risen.
Although, traders do not purchase Bitcoin via online brokers, rather, they have contracts that give them access to their capital plus any profit or loss incurred at the expiration of the contract. Apart from a few brokers, virtually every trading platform provide derivatives, which are different contracts that follow the basic asset (Bitcoin) and have complex rights and obligations from either side.
Advantages of Using a Broker To Trade Bitcoin
To trade on a cryptocurrency exchange implies actually purchasing the digital asset and then waiting for its price to rise against another and then trade it for a profit.
While this appears a sound strategy, brokers offer a much easier option. There is no need to purchase Bitcoins in the first place. You can simply purchase any of the available contracts and then sell them off when it has accrued enough profit.
Other advantages of employing a broker include the ability to accumulate exposure to the basic asset and increase profitability via leveraged trading, with some brokers offering as much as 100x leverage. Since Bitcoin is a cost-effective digital asset, investors can begin with a very small amount, with some exchanges offering as low as $100 for derivatives.
There are a number of well respected Bitcoin brokers that are compliant with governmental agencies in the US, so they provide sizeable security. With clarity on the various fees they charge on trading, brokers can be very transparent in their dealing with traders.
In addition, Brokers have the capacity to captivate experienced traders and provide them a variety of trading tools that simplifies not only their trades but also assist in their trading resolutions.
Another place to look for the trading of Bitcoin is the Derivative Exchanges. These exchanges have made the trading of Bitcoin easier without necessarily registering with a separate broker.
Initially, Bitcoin exchanges were simply about purchasing and selling, providing a very easy onboarding process for people. However, as time went on the trading platforms began to provide a variety of services, including derivatives. This has now made it possible trade on several exchanges without the need to register with an individual broker.
For instance, Bitcoin exchanges like Binance and OKEx are credible examples of derivative exchanges. they provide Futures, Options and leveraged trading (up to 100x).
Advantages of Using an Exchange to Trade Bitcoin
Although the purpose of employing a broker or a crypto exchange is to trade Bitcoins and make profits, there are some advantages of using an exchange:
Bitcoin exchanges permit their users to purchase Bitcoins and hold the digital coins as opposed to a broker firm in which traders only buy or sell contracts that follow BTC price movements. Investors can withdraw their BTC from the exchange at any time.
Secondly, exchanges have an extensive support for cryptocurrencies, allowing users additional options in terms of deposits and withdrawals. This also translates into considerable selection of trading pairs and more flexibility of users to purchase or sell Bitcoin against different currencies.
Thirdly, exchanges provides a more simplified experience, by allowing newbie users to execute trades which is simpler than the complex contracts brokers provide. Several exchanges have also began to provide derivatives, including leverages, meaning an investor or trader can use the two types of services on one platform.
Combination of Fundamental and Technical Analysis
Basically, any form of trading requires two types of information input. While each one has its set of rules and can produce varying results. The important thing here is to combine these inputs and produce an equilibrium.
The first information input is Fundamental analysis which is all about the quality of information, as follows:
News: As a global digital asset, a piece of information coming from one part of the world as regards Bitcoin can will definitely affect it across the globe. It is a good practice to be familiar with all the crypto news platforms and websites, for an up to date information on Bitcoin.
Supply and Demand: Just like every other traded asset, Bitcoin is subject to price movement as a result of differing supply and demand. Though hard-coded to produce 21 million coins in totality, the supply in the trading and exchange market can change as people invest or draw out Bitcoins to private wallets.
Follow The General Rule: As usual, an increase in supply will always exert downward pressure on Bitcoin’s price, while an increase in demand will push up its value. This enables you to know how and when to buy and when to sell.
Mining Hashrate: Bitcoin employs Proof of Work (PoW) to manage complex computations, complete transactions and create new blocks. The more miners compete, the upper the hash rate. A higher hash rate is a sign that miners are finding it profitable to run as Bitcoin’s price rises.
Technical indicators are all about munching numbers. Applying a range of numerical data, you can calculate where the potential price of Bitcoin lies, helping you decide to make a trade. Most common technical indicators employed are:
Moving Averages: The first tool of technical analysis is the Moving Averages MA. Employing prices at set intervals from past data, MA shows how the price is moving averagely and mathematically, what the price would be at a later time. MAs can indicate varying values for different periods and many traders use variations of it, such as EMA and WMA.
Relevant Strength Index: This is a sign of the market momentum, RSI indicates an overview of Bitcoin as either overbought or oversold. A spiking price but with overbought indication means that there’s a retraction on the horizons, while an oversold and falling prices show that Bitcoin will rise soon.
Moving Average Convergence Divergence: The difference between a 26 and 12 period EMA is called a Moving Average Convergence Divergence (MACD) and is a good technical indicator that indicates when traders are ready to purchase Bitcoin. A third, 9 period EMA is plotted against MACD. When MACD crosses the 9 EMA and rises, this results in traders buying and the other way round.
Choosing a Trading Strategy
Like every other trader, your singular goal in Bitcoin trading is to make a profit, the important thing to consider here is how to accomplish that goal. There are many trading strategies that you simply can use:
Day Trading: Bitcoin is notorious for its volatility, swinging several dollars (even hundreds of dollars) over the course of a single day. These fluctuations can be captured in day trading, opening positions and closing them only a few hours later, sometimes in a few minutes even. The aim here is to make as several trades as possible and wind up bitcoins before calling it a day, only to start afresh the next morning.
Swing Trading: Just like day trading, swing trading depends largely on capitalising on the price oscillations, but in this case over a few days or weeks. Leaning heavily on technical indicators, it is only possible if your analysis is correct about Bitcoin being under or overvalued with good chances of price corrections.
Scalping: Somewhat similar to day trading, scalping functions on a compact time scale, from a few seconds to minutes, with minor profits being made. Through making very minuscule, but numerous trades, the tiny profits accruing can accumulate into a very sizeable amount on the long run.
There are many other trading strategies, such as copy trading, news trading and others. Each carries its benefits and downsides. However, the final choice strategy rests with you.
Choose The Appropriate Platform That Meets Your Needs
Having the appropriate platform for trading Bitcoin is a fundamental requirement. Strategies and the ability to make accurate predictions will be of no use if you are trading on a platform that does not meet your needs.
You also need to decide whether you need a derivative exchange or a proper broker. Although both provide similar options and services, a broker is a dedicated trading platform and more compliant with the relevant regulations.
Modeled towards more committed trading, brokers permit a larger volume of traders with a lesser fee, but at the same time, derivative exchanges allow for more risky trades to be made and thus, people that want to travel for a greater risk would find themselves more welcomed on these platforms.
The important thing is to opt for a platform that is properly registered. Apart from the strong possibility of being shut down due to non-compliance, unregulated platforms could possibly be a scam designed to rob you of your hard earned money.
Set Up Your Account
Once you ‘ve got selected which platform you would like to trade, simply set up your account. You can commence this process via the registration or sign-up procedure. The trading platform will request you to create a username and password, in addition to a registered email address for verification.
The moment your login credentials are created and verified through the official email sent, you will be required to go through the identity verification process. The KYC process is a must under regulations and the trading platforms will either integrate it into the sign-up procedure or ask for it separately.
Once verified, you will be ready to deposit fiat or crypto (depending on your platform’s funding support). Head over to your account wallet and find the Deposit option. Use any of the supported methods (direct crypto transfer, connect your bank or credit/debit card, etc.) to send the funds to your account.
Prepare your Trading Position
Go over to the trade option after funding. The platform will show you a trading interface. Each website will have a different outlook towards how the trading options are presented, but they will always have a few common elements, such as the buying and selling Bitcoin options, trading graphs, order books, your open positions and executed traders, etc.
Short or Long Positions?
Long position simply means you will trade Bitcoin for a specific price and then sell it for a higher price thereby making profits. Shorting may be a position during which you will make profits even when the market is receding. You make money by depending on the falling value.
Shorting is a highly profitable trading strategy in that money is still made. However, it carries a lot of risks in comparison to long positions, where you can lose your invested amount at most, shorting in a rising market can potentially increase your losses well beyond your expectations .
Limit or Market Order
A Market Order is as the name implies is an order where Bitcoin’s market price is used. In a market order, you will only find the option to enter the amount you wish to purchase and sell.
A Limit Order can take time to execute when placed. The market conditions may not attain the anticipated level, but with cost to benefit analysis correctly done, the waiting is the worth the while.
Trade Position Amount and Leverage
Your trade position amount is what you place in the order. Many platforms give another edge to users by providing leverages. Trading platforms define the margin requirements and display it in ratios, such as 10:1, which means a 10% leverage. Holding $1,000, you can open up a trade for $10,000 for Bitcoin. The increased exposure translates into higher profits, but the pendulum can swing both ways, meaning losses also are amplified.
Risk Management: Deciding The Right Stop-Loss and Take-Profit
Stop-Loss orders are used to reduce losses as the market turns red. Placing two key input Bitcoin values determine when the order is triggered: the Stop Price (defined market rate) and therefore the Limit (price you would like to be sold within the market once triggered).
Employing your analysis, you can place the Stop-Loss orders just below key support levels, where you are sure that the market will rebound. In case Bitcoin value keeps dropping and crosses the support level, the order will be triggered and your positions closed, saving your losses.
Review and Execute Your Bitcoin Order
Once you have done your homework and are sure of the market swing, you can choose the type of order that suits you best, input the required information, such as the amount of the order, the bounds, leverages and other factors.
When confident, you’ll simply tap the order placement button (buy/sell) and your order are going be placed.
Close Your Trade for Profits or Limit your Losses
Take Profit settings are employed by traders, and automatically close the order when sufficient profits are realised. Proper usage of Take-Profit and Stop-Losses combinations can maximise the amount of profit that you can achieve, and at the same time limit your losses in a bear market.
Doing all that is discussed above will afford a newbie in the crypto world the opportunity of becoming a seasoned Bitcoin trader in time to come.