Cryptocurrency trading can be difficult if you do not know what you are doing, and making a profit from the notoriously volatile crypto markets will be tough without prerequisite knowledge. Here we will look at three key things to remember when trading crypto for profit.
Before we begin, you must first establish what type of trading you are going to be doing. The two biggest types of trading are ‘spot trading’ and ‘margin trading’.
Spot trading
Spot trading refers to buying and selling assets with the hope of generating a return in your chosen token. For example, let’s say a person has 9 Bitcoin and wants to turn that into 10 Bitcoin. That person then might decide to trade 4 Bitcoin for ‘Coin A’ and 5 Bitcoin for ‘Coin B.’ Coin A and Coin B may then go up by 20%, which then prompts the person to trade Coin A and Coin B back into Bitcoin. Since the person has made money, they can buy more Bitcoin than they started with.
Margin trading
Margin trading involves borrowing money with a fee attached to speculate whether an asset will go up or down. This is often called ‘leverage,’ and exchanges tend to offer different amounts of leverage depending on the provider. There is also a minimum deposit required in many of these scenarios. A common leverage offered by exchanges is 20:1. This means you can trade with 20x above the deposit you have placed.
So, for example, if Bitcoin’s price is at $3,800 and a person speculates it will rise by 10%, they might borrow $3,800 from an exchange. Next, the person would exchange the $3,800 for a single Bitcoin. Hypothetically speaking, if Bitcoin’s price then rises 10%, they would trade the single Bitcoin back for $4,180. However, do not forget that there is interest to be paid back to the exchange. But once that has been paid, you are left with your profit.
Hopefully, you will now have a better understanding of which type of cryptocurrency trading you want to get started with. Now that is out of the way, we can take a look at the three key things to remember when trading to turn a profit.
1) Risk management
Risk management is an incredibly important part of trading if you don’t want to make a serious loss. Typically, you should never enter a trade where you stand to lose more than 1% to 2% of your total portfolio. Naturally, if you allow for a bigger margin, you stand to lose a lot more money.
Another risk management strategy is ‘hedging.’ This is where you take an offsetting position on your primary asset. This in turn provides insurance and reduces the potential for loss. If we were to apply this to Bitcoin, it is like you are selling Bitcoin to reduce the risk of holding onto the Bitcoin, thereby increasing the reward of your profits. This is because if the value drops, the value of your crypto stash is less likely to drop with it.
2) Don’t let emotion cloud your judgement
This point sounds incredibly cliche, but don’t disregard it. After risk management, this is a tip you should never forget under any circumstance when cryptocurrency trading. If you begin to feel emotional whilst trading, you should take those emotions, compartmentalise them, and then lock them away until you are finished trading.
Many people have fallen victim of letting their emotions get the better of them. This is because trading can bring a lot of emotion to the surface, whether it be anger, frustration, or euphoria. Euphoria can mislead you into thinking you can double down on your profits, or give you a false sense of feeling safe when you are not. Anger and frustration can cause you to rush trades you would otherwise patiently wait on.
This isn’t to say don’t let emotion guide you in life; just don’t let them guide you in trading. If you begin to feel emotionally overwhelmed, take a break for a few days and come back to trading level headed and of sound mind.
3) Technical analysis
Identifying the correct type of formations and patterns is pivotal in ensuring you will turn a profit. This can encompass a lot. For example, if you are new to trading but have been keeping an eye on the current markets, then you may have heard some weird terms. These terms can range from “head and shoulders” to a “rising wedge.”
These are not arbitrary terms. They are in fact trading patterns. Learning trading patterns is key to understanding a market – and we’re not just talking about being able to read which assets are up and which are down. A quick Google search of ‘trading patterns’ will bring up a lot of material that you can study to familiarise yourself, including images of all the different patterns.
Another term that you may have heard of is ‘bullish.’ This is when a market or a token is going up in value – the market can then be said to look bullish. This will often prompt traders to buy. On the other hand, a ‘bear’ market is the complete opposite. A bear market is when prices are falling, which encourages users to sell their crypto.
This is hopefully a good starting point for you to now branch out and begin trading a little more comfortably.
(Note: please be advised cryptocurrency trading is notoriously difficult and carries substantial risk. Never trade with money you can’t afford to lose. Trade at your own risk.)
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Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.