Cryptocurrency trading is the act of speculating on cryptocurrency price moves via a CFD trading account, or buying and selling the coins via an exchange. It includes different types that each trader choose based on his/her needs, time, skills and experience.
CFD trading on cryptocurrencies
CFDs trading are derivatives, which make you speculate on cryptocurrency price moves without taking ownership of the coins. You can go long (‘buy’) if you think a cryptocurrency will increase in value, or short (‘sell’) if you think it will drop.
Both are leveraged products, so you only need to put up a small deposit – known as margin – to gain full exposure to the underlying market. Your profit or loss are still calculated according to the full size of your position, so leverage will magnify both profits and losses.
Buying and selling cryptocurrencies via a crypto exchange
When you buy cryptos via an exchange, you buy the coins themselves so you’ll need to create an exchange account, put up the full value of the asset to open a position, and store the tokens in your wallet until you’re ready to sell.
Exchanges bring their own steep learning curve as you’ll need to get to grips with the technology involved and learn how to make sense of the data. Many exchanges also have limitations on how much you can deposit, while accounts can be very expensive to maintain.
There are different types of cryptocurrency trading. Here are some detailed descriptions of cryptocurrency trading types:
Scalping is about make very quick trades, and the whole of the goal is to make constant profits (even if the profits are very small). You might make a trade every few minutes. Ideally you’d want to be able to go long and short (and would thus need to margin trade, even at 1x leverage, so you can short). However, you can scalp by spot buying and selling cryptos.
This type might have you buy a coin at $700, then sell at $705, then buy at $702, and sell at $705. So you might place a tight stop at say $698. Or you might have a rule that you scale out of your position by hand if the trade goes against you.
This method requires risk management and considerable skill, but on paper you can make constant small gains, and those gains can add up quickly.
Day trading is like scalping, but instead of making trades over the course of minutes, you make them over the course of the day.
You still use stop losses and scale in and out of positions, but you are looking for a little more profit on each trade than a scalper.
Cryptocurrencies constantly define a range they are trading in. Generally, this range will be a type of consolidation (either accumulation, big players getting more coins for the next leg up, or distribution, selling coins at a high before the big players let the market fall).
A range trader trades the range and sets stops, they don’t really care if they are trading the range at the all-time high, or trading the range at the local bottom, as they are simply buying the bottom of the range with a stop, and then selling the top of it (or scaling out toward the top).
It is a style of day trading, but the goal is to trade the range, not to buy into an uptrend, or buy after a downtrend, etc.
This is a type of day trading that allows for holding positions over more than one day. The reality is traders do this and there is no rule that it can’t be successful. In crypto space the market never closes, so there is no end of a trading day. With software you can automate positions and in this respect there is not specifically a reason to close a near term position just because the clock strikes 4pm or whatever.
Swing trading is like trading a very large range. Here you will open a position (sometimes gradually) at what you think to be the local bottom, then you will aim to HODL your position all the way to what you believe to be the local top (generally gradually scaling out of your position to lock in profits). It is the reverse logic for shorting, you aim to short the top of the forming trend to the bottom.
Swing trading is generally done over the course of days or weeks. That means you’ll be taking a position, sleeping on it, watching its bulls and bears, etc… all without panicking.
If you feel like you can analyze patterns and detect likely support and resistance levels, it can make a ton of sense to focus on swing trading.
Crypto are high volatile assets, so swing trading is all about finding the bottom of the wave and riding it to the top (with long positions; it is the opposite with short positions).
Those who effectively swing trade using long and short positions tend to do very well and do very little work. That said, detecting the pattern, staying calm, and being willing to use loose stops takes some guts.
Position trading is like a zoomed out version of swing trading or the trading version of investing. You’ll build / take a long position low or short position high and then stick with that position for weeks, months, or even years.
This is the simplest form of trading, but it also needs a lot of discipline. Consider someone who has been long on Bitcoin since $5k or short since $12k (the price of BTC is currently trading at $34K). Bitcoin has gone to the high $5ks from $20k, and to the high $11ks from that high $5ks low. A disciplined position trader likely sat through both of those events (although they perhaps scaled out of some of their position or reopened positions).
Position trading is like investing, in that it is long term, but it isn’t purely investing, as the final goal is to make a killer longer term trade based on overarching trends.
In crypto, you must hold through the crazy ups and downs, the bear and bull markets, the good and bad news, and keep your eye on the ball.
Trading is all about taking a position and aiming to take profit. Investing is all about having ownership of an asset as a store of value with a very general goal of increasing that value over time.
Warren Buffet is an investor. He considers buying stock like owning part of a company. If you own a fortune 500, you aren’t looking to take profits when its value increases, you are looking to see more increase.
Investors are more likely to sell their position because they don’t like the direction of the asset.
An investor isn’t necessarily going to set a stop loss. Instead, they will build a position in the asset and stick with their investment for as long as the reason they made the investment in the first place is true.
An investor is a true HODLer, they really don’t need to look at prices and charts unless they are looking to add to their position at a good price.
Investing is not like other cryptocurrency trading types, but ultimately buys and sells are made, and it is important to understand that this style will suit some.
- In any of the above cryptocurrency trading types you can take a full position at once or ease in. Some people will run accumulation bots and buy very small amounts of coin all day long, some people will enter a position incrementally with a few buys, some will go into the full position in one swing. Doesn’t matter which style you choose, just as long as it works for you and you have some way to manage risk.
- All the above cryptocurrency trading types need patience. There is nothing more common than seeing a string of losses in a row when day trading or seeing a downtrend after opening a well-researched long position (or uptrend after a short position). What can go wrong, often will. You should bear through the fails to see if a style is statically working over time, you cannot judge a style or an implementation of a style based on a few results in a short window of time. The goal is to be right more often than you are wrong, not to be right every single time. Once you find a style, it will take work to refine, and your tactics will likely have to be tweaked based on the current market and coin you chose.