How to Trade Cryptocurrencies – From Newbie to Pro-Trader in 1 day

After the recent highs & lows in cryptocurrency prices, many people started researching how they can profit and study how to trade cryptocurrencies.

But without a clear understanding of the basics, many new traders found themselves making bad calls which led to losing money.

This guide will help all beginners better understand how they can make better market predictions and, thus, better trades.

how to trad cryptocurrencies

Okay, let’s dig in – Here’s How to Trade Cryptocurrencies

To make sure we don’t lose all the cash in the first trade – let’s start with the basics.

1. Understanding the Economic factors

In order to better understand what drives the cryptocurrency prices, we first need to learn some basic cryptocurrency economics. If you are familiar with investment markets, you will probably know some of these concepts. Others, however, are unique to the cryptocurrency markets.

The basic factors that affect the price movements of a cryptocurrency are the following:

  • Supply & Demand
  • Utility
  • Market Sentiment
  • Mining Difficulty

1.1. Supply & Demand

Starting with the basics, supply and demand is a huge price driving factor. The most popular cryptocurrency, Bitcoin, has a higher level of demand than most cryptocurrencies due to its reputability. With a circulating supply of 17.2 million coins as of this moment, the number of coins available is very limited.

The low supply levels, when compared with the overwhelming demand Bitcoin witnessed in the last year, makes this cryptocurrency very valuable and most subject to long term predictions.

how to trade crypto

1.2. Utility

In the context of this guide, utility stands for the usefulness of a certain coin or token. Cryptocurrencies with utility are often perceived as more valuable and, therefore, more people are likely to invest or buy them.

A classic example of utility can be seen in Ethereum. A cryptocurrency that provides a platform which allows people to build decentralized applications on top of it, much like an “app store” but run on blockchain technology. This utility of Ethereum has been perceived as a catalyst to mass adoption and growth of cryptocurrency in general, making it very useful and, therefore, valuable.

1.3. Market Sentiment  

When you decide to become a cryptocurrency trader, you will likely buy, sell and trade in a much higher amount compared to the traditional “hodlers”.

Attempting to make short amounts of profit through a high frequency of trades, entails that you perform in-depth research and find coins that have a positive market sentiment currently surrounding them.

This is where it will be important to trust upon high quality sources, including videos, articles and expert opinions on the cryptocurrencies you plan to trade. Investing in coins with no media exposure is a bad idea and may lead to a declined value in your position. This is because most cryptocurrencies increase in value based on hype, storytelling and effective marketing strategies.

1.4. Mining Difficulty

Mining difficulty represents the amount of effort needed to add a block to the blockchain. Low mining difficulty indicates that a certain cryptocurrency is easy to mine, which results in an increased supply and, thus, a lower average price. On the contrary, a higher mining difficulty, as seen in Bitcoin, suggests that it takes much more effort and energy to mine. This results in a slower supply growth over time and, therefore, a higher average price.

2. Order Book & Stop Losses

Now that we understand the importance market sentiment over time has on cryptocurrency prices, we will talk about the essential knowledge one needs to have to make successful trades, the order book and stop losses.

2.1. Order Book

An order book shows traders all the buy and sell orders that have been placed at different price levels for a certain cryptocurrency. The order books can be accessed through your exchange, are always updated in real time and can be utilised to provide an indication of liquidity for a cryptocurrency. Liquidity stands for the capability of a cryptocurrency to be purchased and sold efficiently without affecting the price. The higher the volume of trading, the higher the liquidity.

trading cryptocurrencies

The red wall shows all the orders of people who want to sell and the green all the people who want to buy. The amount on the horizontal axis is the FIAT ($) price a market participant is willing to exchange a particular cryptocurrency for while the vertical presents the amount of orders for each price point.

To give an example, if person X created an order to sell one Bitcoin for $6000, this would be perceived as a market order and take place in the order book. Person X’s trade would remain in the order book until it gets filled, for example if person X’s trade was matched with person Y’s purchase order for one Bitcoin at the price of $6000.

Cryptocurrency traders tend to prefer exchanges with more liquid coins because they would not affect the price negatively by exiting a position (sell an amount of that specific cryptocurrency). Apart of that, cryptocurrencies with high liquidity are much harder to manipulate, making them bad targets for pump and dump schemes which are often observed in smaller cap coins.

In order to understand the liquidity of a cryptocurrency, it is best to look at the order book to get a feeling of the market depth. Every essential price level upwards or downwards will have an amount of buy and sell orders which you can compare to create an estimation for yourself.

2.2. Stop Loss

A stop loss sell order is placed on a cryptocurrency trade in the rather unfortunate case it reaches a certain price below the buy-in. This tool is used to employ calculated risk management and can help traders limit their losses in case these are about to happen due to the volatility of the market.

A stop loss buy order allows a trader to sell and collect profits when his cryptocurrency hits a certain price above the initial buy-in price. This method of selling is very useful to avoid emotional trading and still acquire profits in volatile periods.

To give an example, if Bob bought Bitcoin at a price of $7000 per coin, but he had a feeling that the price would drop below 10% of his initial buy-in price, he could add a stop loss sell order. Bob employes a sell stop loss at the price of $6300 and, if the price of Bitcoin hits this price, her holdings will automatically be sold. This process is similar to the stop loss buy order, except the stop loss price has to be at a point above the initial buy-in price.

3. Technical analysis

After understanding the market sentiment and how to setup our trades, we will talk about Technical analysis (TA) , which is comprised of several basic tools in the form of graphs and lines. By analysing the historical trends in price movement, technical analysis helps us better predict the price’s future movement.

3.1. Relative Strength Index (RSI)

RSI calculates the speed and strength of a price movement in the market by comparing past and current performance of a cryptocurrency.

RSI also compares the degree of past gains to past losses in attempt to foresee if a particular cryptocurrency is oversold or overbought.

The RSI ranges from 0 to 100. A cryptocurrency is said to be overbought once the RSI starts to approach 70. This suggests that the cryptocurrency is getting overvalued and so may soon experience a pull back.

The RSI ranges from 0 to 100 depending on how oversold or overbought a cryptocurrency is. Once the range starts to approach 30 or below, there is an indication that a cryptocurrency is oversold and undervalued which may lead to a breakout at some point in the short term future. On the contrary, a cryptocurrency is considered overbought once the RSI starts to approach 70 or goes above it. This hints the suggestion that there is an overvaluation and there is an expectation for a pullback in the short term future.

RSI in and of its own is a great tool to understand when a market will reverse. However, it has been observed that fake buy and sell signals can be created when we experience large upward or downward price movements. On the image bellow you can observe how the RSI goes in line with the actual price action of a certain cryptocurrency over time. Pay attention to the ranges mentioned in the paragraphs above:

cryptocurrency trading indicators

3.2. The Moving Average Convergence/Divergence (MACD) Indicator

The MACD indicator consists of two exponentially moving averages that assist on measuring momentum in a certain cryptocurrency by using the difference between long term and short term trends in price.

These two moving averages as well as the distance between them, becomes the moving average convergence/divergence (MACD).

When the two averages are moving towards each other we have convergence while, when they are moving away from each other we have divergence.

When this tool is used for cryptocurrency trading, one thing to look for is crossovers. When the MACD crosses above the signal line, we have a buy signal (bullish). On the contrary, when the MACD crosses below the signal line we have a sell signal (bearish) for the cryptocurrency we are trading. Below is an example of how a bullish divergence would look by using the information above:

macd bullish divergence

The image presented below will give you a general idea of all the observed indicators on the MACD indicator:macd indicator

3.3. Bollinger Bands

The Bollinger band is a moving average plotted with two standard deviations on either side. Bollinger bands help with predicting volatility in a cryptocurrency because it measures market volatility with its standard deviations.

To learn more about the Bollinger Bands click here.

When a certain cryptocurrency experiences more volatility, the Bollinger Bands become wider, while on periods of more stability, the bands contract and come closer to the average. Bands that look thinner may indicate that the cryptocurrency market may soon undergo large amounts of volatility.

When the price of a cryptocurrency comes closer to the edge of the band, it is very likely that it will return back down within the range of the Bollinger bands. Traders use this as a signal to buy or sell their cryptocurrency with more accuracy.

When the price comes closer to the upper edge of the Bollinger band, we get an overbought signal, which usually leads to a price correction. In the same way, when the price is reaching the lower edge of the Bollinger band, traders will usually buy cryptocurrency, expecting an increase in price.

Bollinger bands

4. Practical advice

Now that we have a basic understanding of the tools and concepts used to predict a cryptocurrency price and trade more effectively, it is time to put our newly acquired skills in practice. In this chapter we will offer advice on which cryptocurrency exchanges you can use and which forms of social media you can use to increase to improve your trading choices.

4.1. Exchanges

An exchange is a digital platform where cryptocurrencies are bought and sold between members. For traders, several exchanges are better than others due to the services that they offer.

Several exchanges allow you to directly deposit and withdraw fiat money (USD, GBP, EUR and others) from your bank account in order to use for your cryptocurrency purchases. This is known as a fiat gateway. This service is very important for new traders, especially if you are looking to inject some starting capital for trading. Some of the more popular fiat gateways include:

Fiat gateways often limit their number of cryptocurrencies that you can start trading with. For example, Coinbase currently only supports Bitcoin, Ethereum, Ethereum Classic, Litecoin and Bitcoin cash. As a trader, you want to have a large selection of coins to trade with, which may lead you to use one of the following exchanges:

  • Bitfinex
  • Bittrex
  • Binance
  • Poloniex

Try not to move your cryptocurrency within exchanges too much because the fees charged upon withdrawing are way larger than moving it through wallets. This may result in a financial loss if you do it too often.

4.2. Social Media

With the cryptocurrency market still being in its infancy, we often see that a certain tweet or post can surge or demolish the price of a certain coin. Being involved with the latest news through the proper channels can be a great opportunity and a powerful tool for investing.

The most important social media platforms when it comes to cryptocurrency investing are the following:

  • Telegram
  • Reddit
  • Twitter

Telegram

Much like messenger or Whatsapp, Telegram is a private messaging service with which one can join groups and channels with many other like-minded individuals. Not only can you remain informed about the latest news, but also learn more from experienced traders and investors.

Reddit

The most important and often, less known news, are often first presented in Reddit. By following the subreddits of your favorite coins, you will always stay informed. For example if you want to follow Bitcoin only, you can follow the Bitcoin subreddits: /r/Bitcoin and /r/btc. Keep in mind, however, that forums are always open to anyone, which means there will often be information that is misleading or inaccurate.

Twitter

As mentioned above, a tweet from an influential personality in the crypto space can drive the price upwards or downwards on a very rapid pace.

A perfect example of this is XVG, which got a shoutout from John Mcaffee, resulting in a x10 appreciation in price in just over two weeks time.

It would, therefore, be a wise idea to find and follow some of the most influential Twitter accounts related to cryptocurrency and turn on the post notifications option.

Now it’s your turn!

Learning how to trade cryptocurrencies and actually mastering this can be very profitable if you are equipped with the proper knowledge and information to take advantage of volatile price movements in the market. Be careful to not let impatience and emotions affect your trading and never risk more money than you can afford to lose, especially in the beginning.

This guide will help you get a better overview as to the knowledge you need to understand if you are to take on this journey. It is, however, by no means the only guide you need to read to succeed. You should always strive to keep learning and improve your trading skills by learning from different reputable sources.

I hope you enjoyed this guide and feel free to comment with any questions you may have.