Cryptocurrency trading for beginners
You decided to be a cryptocurrency trader. But where to begin? What tactics are you gonna use? Do you even have tactics? Cryptocurrency trading can be hard. Actually, most people lose money.
It’s not hard to earn money when the markets are booming. But if you want to earn money in the long-term you need specific tactics and a trading strategy. Without any strategy, you will only lose money.
Before you start trading you should prepare yourself mentally. Because you are not trading against other people. You are trading against yourself. If you just invested $10.000 and this investment drops to $5.000 in just a few days how would you react?
Will you hold $5.000 and hope the price will go back up again? Will you take your losses and panic sell with a $5.000 loss? Or maybe you buy even more because the price is much cheaper?
The biggest enemy in trading is you! Not the market or other traders. This is the most important part to understand. If you can switch off your emotions you can make a lot of money. But if emotions get in your way you can lose everything.
Before you continue reading you should read “New to crypto trading? 8 rules you should know before you trade…” first.
Different trading strategies
There are a lot of trading strategies you can use to make money. We will give you details about the most common trading methods and how you can use these strategies to your advantage.
There is no particular best strategy. The best strategy depends entirely on the person who makes the trades. Are you a risk taker? Or you want to trade defensively? Some people should stay miles away from trading cryptocurrencies.
Let’s have a look at the most common trading strategies:
- Day trading
- TA and indicators
- Stop loss
- Buy low, Sell high
- Buy and Hold
- Arbitrage trading
Trading Strategy 1: day trading
Day trading is probably the most used trading strategy. Day trading is used to make profits in one single day. Day trading can take a lot of your time. Especially if you are a beginner.
There are many day trading strategies. Professional day traders use TA (Technical Analysis) to make their trades. TA is used to minimize risk and gain profits from the market. One popular way to analyze candlestick charts is using Elliott waves.
By the way, if you don’t know how to read candlestick charts or order books you should stop reading. Without a basic understanding of candlestick charts or order books trading will be very difficult and you will lose money.
Before you continue reading you should read “Reading candlestick charts for beginners” and “Reading the order books for beginners” first.
Let’s take a look at a TA example using waves:
In this TA a trader named CryptoEd uses wave patterns to determine where the price will go. Below the chart, he uses other technical indicators like MACD and Stochastic oscillators to back up his theory. How to use technical indicator and waves is beyond the scope of this blog post. It can take years of practice to create charts on your own. Although the showed example is quite simple to make.
But there are a lot of traders like CryptoEd out there that share their TA with their public. But keep in mind that these charts can have many different time frames. For example, the above chart has a timeframe of 4 hours. That means every candlestick on the chart represents 4 hours.
If you switch to other time frames (like 30 min) the chart will be completely different. You can use a combination of time frames to spot an up or downtrend in the trend itself.
If you want to know more about wave patterns, technical analysis and indicator you should definitely take a look at tradingview.com
Using stop loss orders
Professional day traders use stop-loss orders in combination with TA to minimize risk. Placing stop-loss orders can prevent you from losing more money. Because you rule out your emotions.
If you spot a trend you can specify buy and sell orders. Let’s take a look at the following example:
Source: Adam Choo
In this example, there is an uptrend reaching resistance. The evening star (bearish) is a way to determine where the price might go. If you want to know about this you should view the video Adam Choo made about this subject.
Because Adam expects the price to go down he puts a buy stop loss order above the resistance line (in case the bullish trend continues and breaks the resistance line.). And a sell order just below the first bearish candle.
Adam is trading points in this example. That means you earn money with each point you make from the start of the trade. So in this case, placing a sell order means that you expect the price to go down. This might be a bit confusing.
The best way to remember this is that Adam minimises his risk by putting a stop-loss order at the top. When the up trend continues, his analysis did not work out (because he expects it will go down) and he will sell his position automatically right away.
Placing stop-loss orders can be quite simple. Let’s say you bought 10 bitcoins for $4.000 each. You can place a stop-loss order at $3.900. That means if the price will reach $3.900 all your bitcoins will be automatically sold for $3.900.
Stop-loss orders are used to minimise risk but also to reduce the time you need to trade. If you’re sleeping you don’t want to worry about prices going up and down. A stop-loss order will sell your coins at the price you specify.
Do note that in some situations even stop-loss orders won’t help you from losing money. When somebody is placing a very big sell order, many stop-loss orders can be triggered. But if only one sell order is causing the price to go down, it will quickly go back to the original price.
In the following extreme example, this made someone a millionaire and a lot of people lost money:
In this example, you see the orderbook of Ethereum on the GDAX exchange. Between 21 and 22 June 2017, a flash crash happened. This made one person a millionaire and a lot of people lost money. So what exactly happened?
Someone placed a very big (millions of $) sell order. This big sell order drove the price of ethereum down. In the meantime, because the price went down, a lot of stop-loss orders triggered along the way. All the way down the order book. At the lowest point, you could buy 1 ethereum for just 0.10$. Right after the sell order was filled, the price went back up to 300$. This all happened in a just few seconds/minutes.
There were a lot of people who lost money. But some bought hundreds of ethereum for just a few cents.
Buy low, Sell high
A great strategy is buying low and selling high. But if it were that simple, everyone would do it. Buying low and selling high sounds easy. And most of the time it actually is. This strategy works best if you know the coin you are trading.
Most coins will always trade in waves. The price will go up and down every day. You can ride these waves by buying low and selling high. The most important thing is to control your emotions and avoid panic sells. Take a look at the following chart from Signatum (SIGT):
If you’re not familiar with this coin, you probably have no clue what happened. As you can see in the chart at 15 Aug, there was a massive sell going on. The price dropped from 1615 to 570 satoshis in just a few hours.
This sell happened because there was a lot of noise around the dev team and the marketing team of the coin. You can read the fuss around Signatum in the bitcointalk forum. But if people followed the news, they soon learned that the original signatum developers are still running the show.
The price stabilized and some people lost money because they panic sold. After that, the price went up again. With this information, you know that even after very bad news the price went up and until now it’s quite stable.
With this information, you can ride the smaller buy and sell waves that happen almost every day. A great way to try this is to just write down the price when you would buy and sell. Of course, there is no guarantee that buying low and selling high will always work. It depends on the coins you trade and your knowledge of this coin. It might take a lot of practice before you become good at riding waves.
Another example is to look at the trending gainers and losers list on coinmarketcap:
You can easily spot coins who lost a lot of value the last 24 hours. That means you can buy cheap. Of course, you need to find out why the prices dropped. If you can find no obvious reason then the price will probably go up again the next few days.
But if you picked the wrong coin, everything can collapse and you lose all your money. Keep in mind that there are no guarantees.
Trading Strategy 2: Buy and Hold
Buy and hold is a fairly simple but effective strategy. You don’t need to look at any charts or order books. You just buy the coin you want, store them in your local wallet and hold them for a few months or years.
If you bought 100 bitcoins a few years ago, you would have a lot of money today. Buy and hold is a great strategy because it leaves your emotions out of the trade. If you look at the history of the common stock market you would have made money just by holding. Many, many people sold their stocks in 2008 because of the financial crisis. If those people just held all their stocks, they would have earned a lot of money by now.
This is not just guessing. In the history of the stock market, the price will always go up in the long-term. It does not matter when you bought stocks. Some guy invested money based on advice from Warren Buffet. Warren Buffet’s best advice? Don’t sell.
With cryptocurrency trading, buy and hold is an excellent strategy. Especially for the people who want nothing to do with day trading, looking at charts and numbers all day. Although it’s not important to look at charts and order books, you might want to pick a right moment to buy.
For example, bitcoin reached an all time high just recently. It’s probably not the best entry point. It’s better to wait for a correction. If there is no particular reason the prices go up, then you can buy the same coin much cheaper a few days/weeks later. Don’t let your emotions get to you because of the hype.
As you might have learned from our blog post “New to crypto trading? 8 rules you should know before you trade…” you should never follow the crowd. Never buy when everybody is buying. Doing just the opposite may save you a lot of money. But no one can tell where the price will go.
There are different buy and hold strategies:
- Buy ICO’s
- Buy bitcoins
- Buy the current top 10 coins
ICO stands for Initial Coin Offering. An ICO is a startup company for cryptocurrencies. ICO’s are very popular. With an ICO, the public has the first opportunity to buy coins before they hit the market. But you should be aware that there are a lot of risks involved if you want to buy ICO coins.
Not every ICO has a great start and most of them just want to earn millions in the process. Some ICO’s have huge potential on paper. But it’s all marketing so do your own research before you give them your hard-earned bitcoins. Also, not every ICO accepts Bitcoin as payment. Many ICO’s only accept ethereum tokens. That means you have to buy ethereum first before you can invest.
Probably the most simple strategy of them all is just to buy some bitcoins and store them in your local wallet. Bitcoin is still by far the most popular coin. And every other coin just follows the price of the bitcoin.
Since there are a maximum of 21 million bitcoins and If the demand is high enough, the price might rise to $50.000 – $1.000.000 in a few years. Buying bitcoins is a great strategy. Just beware you buy them when everybody is selling and not when everybody is buying.
Buy the current top 10 coins
The best way to invest in common stocks is buying ETF’s. ETF stands for Exchange Traded Fund and is also known as an index tracker. An ETF simply tracks an index. For example, the Vanguard S&P 500 ETF follows the S&P 500 stock index.
If you are not familiar with index trackers or ETF’s, this means that you buy a little piece of every company from the index (in this case S&P 500). You just need to buy one ETF but your assets are divided between a lot of different companies. In the long term, ETF’s are really great performers and you don’t need to look at charts all day or wondering if prices go up or down.
The best thing to do when buying stocks is to diversify. Unfortunately, there are no real index trackers for cryptocurrencies as we speak. But you could setup your own index portfolio. Simply buy and hold the top 10 rated coins (by market cap) of today. In the long-term, this should be a good strategy.
But on the other hand, cryptocurrency prices can fly through the roof in just a single day. For example, the last two days the price of Bitcoin cash went up from $300 to almost $1.000. That’s an increase of more than 300% in just two days.
This will never happen in the common stock market. But in crypto world, everything is possible. Before you buy and hold the top 10 coins by market cap, you should exactly know each selling proposition of every coin you buy.
Trading Strategy 3: Arbitrage trading
Where all other strategies are based on statistical chances or pure luck, arbitrage trading is based on actual facts. With arbitrage trading, you buy coin X on exchange A and sell the same coin on exchange B.
You can do this in two different ways:
- Buy the same coins in advance and transfer them to exchange A and B and trade the difference
- Buy the coin on exchange A and transfer this coin to exchange B
Let’s assume you bought two bitcoins for $1.000 each. You transfer one Bitcoin to exchange A and one Bitcoin to exchange B. On both exchanges, the current price you need to pay for one bitcoin is $1.000.
After a few days, the price on exchange A is still $1.000 but $1.100 on exchange B. In this case, you can sell your bitcoin on exchange B for $1.100 and buy 1 Bitcoin back at exchange A for $ 1.000. You still have two bitcoins. Only the total value of those two bitcoins is now $ 2.100 instead of $2.000 you started with. You made a solid $100 profit.
Using this kind of arbitrage on Bitcoin can be very hard. Because prices will go up and down within seconds. Most order books are controlled by trading scripts. And it can be quite challenging to make money this way. Because if it was easy, everybody would do it.
You can use the same arbitrage tactics but in this case, you will transfer coins from exchange A to exchange B. That means you buy coin X on exchange A and transfer this coin to exchange B and sell it with profit. Now, this won’t work with Bitcoin but it does work with hundreds of altcoins.
DinoTrader has developed a tool where you can find the most profitable trades within a few seconds. This way you can spend all your time on making the trade instead of finding one in the first place. We have some real trade examples which show how you can use this tool to make profitable trades between exchanges.
No matter what type of trader you want to be, there is always risk involved. There are no guarantees that you will earn any money. Most people only lose money when trading.