In recent years, crypto trading has become one of the most profitable investment forms. With the emergence of digital currencies such as Bitcoin, Ethereum, and other altcoins, trading in cryptocurrency markets is becoming increasingly accessible to experienced investors and newcomers. However, for those unfamiliar with the world of cryptocurrencies, diving into trading can be a challenging task.
So, what is crypto trading, and how does it work?
Trading is speculating on cryptocurrency price movements using a CFD contract or buying and selling the underlying coins on an exchange.
There are two simple ways to buy cryptocurrency. The first method can be compared to stock trading, as it involves using a digital wallet to buy a cryptocurrency at the current rate. Once you receive the currency, you can make money by selling it for more than you initially paid.
The second is a Contract For Difference. This is an agreement between a buyer and a seller that requires the buyer to pay the seller the difference between the current value of an asset and its value at the time of the contract.
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CFD allow traders and investors to profit from price movements without owning the underlying assets. The value of contracts for difference does not consider the asset’s underlying value, but only the price change between entry and exit.
Trading Strategies
Trend trading is the most common and intuitive strategy. Its essence lies in the fact that if an asset is rising in price, it should be bought, and when the cryptocurrency is falling in price, it should be sold. However, this method seems simple only at first glance. A trader needs to catch the trend, and for this, he uses technical and fundamental analysis.
Trading against the trend is the most complex and risky strategy based on the forecast of an imminent reversal of the price direction. This can be either a global reversal when a cryptocurrency declines after a long period of growth, or a small temporary deviation while maintaining the general direction.
Scalping is a strategy that involves making numerous quick trades aimed at benefiting from small price changes. Traders seek to make a profit even on the smallest price difference when the market is hardly experiencing significant fluctuations, for example, by buying an asset for $100 and selling it for $101.
News trading strategy involves trading based on news and market expectations both before and after the news is released. News trading can require an experienced mindset, as news can spread very quickly in digital media. Traders need to assess the news immediately after it is published and make a quick decision on how to trade it.
Position trading is a popular trading strategy where a trader holds a position for a long period, usually months or years, ignoring minor price fluctuations in favor of profiting from long-term trends. Position traders typically use fundamental analysis to assess potential price trends in markets, but also take into account other factors such as market trends and historical patterns.
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Technical analysis
Technical analysis involves analyzing price charts and market data to predict future price movements in the cryptocurrency market. Crypto trading indicators serve as key tools that facilitate an analytical understanding of the market.
They also help in developing effective trading strategies. There is a wide range of TA indicators of varying complexity that a trader can use to analyze the market, here are some of them:
Relative Strength Index (RSI)
The Relative Strength Index (RSI) is a momentum indicator used in technical analysis to measure the speed and change of price movements. It fluctuates between zero and 100 and is commonly used to determine overbought and oversold conditions. Traditionally, an RSI value of 50 or higher indicates overbought and a value of less than 50 indicates oversold.
Key features:
- Effective for identifying changes in trend direction
- Useful for determining support and resistance levels
- Reliable confirmation tool for trend identification
Source: TradingView
Moving Average Convergence/Divergence (MACD)
The Moving Average Convergence/Divergence (MACD) is a widely used technical analysis tool for assessing the momentum and trend of financial assets such as stocks.
It compares two exponential moving averages (EMAs): a short-term EMA (usually 12 days) and a long-term EMA (usually 26 days). The MACD line is calculated as the difference between these two EMAs, and the nine-day EMA of the MACD line serves as the signal line.
Key features:
- Emphasizes potential trend reversals
- Confirms upward and downward momentum
Source: TradingView
Stochastic Oscillator
The Stochastic Oscillator compares the closing price of a cryptocurrency with its price range over a certain period. It ranges from 0 to 100, with values above 80 indicating an overbought condition and values below 20 indicating an oversold condition.
Key features:
- Similar to RSI but also considers the price range, and acts as an indicator for cryptocurrency technical analysis.
- Prone to false signals during market volatility
- Provides increased accuracy when used in conjunction with MACD
Source: TradingView
Commodity Channel Index
The Commodity Channel Index (CCI) is a technical indicator designed to identify cyclical changes in commodities. It is a momentum-based oscillator that measures the current price level relative to the average price level over some time.
Key features:
- It is used to determine overbought and oversold levels, identify new trends, and assess the strength of a trend
- It helps to determine entry and exit points.
Source: TradingView
Ichimoku Cloud
Ichimoku Cloud is a tool used to identify trend reversal, support/resistance, and momentum in cryptocurrency trading. It consists of five lines including Tenkan-sen and Kijun-sen for trend identification and Senkou Span A/B for support/resistance.
Key features:
- Provides a holistic understanding of the market
- Provides parameters customized for individual trading styles
- Signals trend changes, support/resistance, and momentum
Source: TradingView
Other tools of TA include:
- Horizontal line – a straight line used to mark price levels on a chart.
- Trend line – an inclined line to identify a trend.
- Calculation lines are formed based on the mathematical processing of key values specified by the user (Fibonacci levels, Gann lines).
Fundamental analysis
Technical analysis involves the study of market data to determine a trading strategy, while fundamental analysis is the study of the underlying industry, technology, or assets that make up a particular market. In the case of cryptocurrencies, a trading portfolio will consist of Bitcoin and altcoins.
So how do you determine whether an asset is based on solid fundamentals, rather than hype, hyped technology, or worse, nothing at all?
There are several factors to consider when performing a fundamental analysis:
- Developers: you have to take into account their reputation, honesty, and past so that you don’t invest your money in a scam project.
- A project roadmap that describes medium- and long-term development plans
- Cryptocurrency capitalization, trading volume, and price volatility
- Transaction volume and average commission
- What platforms the coin is represented on, whether it has ever been delisted on popular exchanges, and if so, for what reason?
Summary
Trading is inherently a risky business. It is almost impossible to accurately predict any future market activity. Ultimately, it is important to make your own decisions using the information available and your judgment and to make sure you have the proper knowledge.
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Vladislav Hryniv
I'm an aspiring digital journalist. I have worked with web3 companies for 3 years as a copywriter. Prefer to write articles on AI, Web3, blockchain technology and cryptocurrency on Medium and Substack.