How to trade cryptocurrency

Understanding cryptocurrency trading

Definition of cryptocurrency trading

Cryptocurrency trading involves buying and selling crypto like Bitcoin or Ethereum with the goal of profiting from price movements. Traders buy cryptocurrencies with the hope of selling them for a higher price when their value rises, which could be within hours or months depending on the strategy.

This is different from cryptocurrency investing, where the goal is to hold for the long-term despite any short-term price fluctuations. Crypto investors believe in a coin’s long-term potential and might hold it for years (or decades), while traders focus on short-term market trends and aim to profit from volatility.

Types of cryptocurrency trading

There are two types of crypto trading: long-term and short-term trading:

Long-term trading

Long-term trading, also known as position trading or trend trading, involves holding cryptocurrencies for months or even years. This is similar to investing, except long-term traders hold for shorter time periods – for example, one or two years as opposed to 10 or 20 years.

Position trading is a good option if you’re just starting out in crypto trading, as it’s easier to learn, less stressful, and tends to be more forgiving than other trading styles. That said, there’s still risk involved with this type of trading, especially because the long-term outlook for cryptocurrencies is still uncertain.

Short-term trading

Short-term trading focuses on capitalising on price movements over days, hours, or even minutes. This style of trading can generate profits more quickly, but also requires a lot more research, knowledge, and preparation.

Short-term trading includes:

• Day trading: This involves buying and selling cryptocurrencies within the same day. While this can help avoid the risk of unexpected market shifts overnight, it can be time intensive and requires a lot of quick decision-making.
• Swing trading: Swing trading involves holding positions for several days or weeks with the aim of capturing short to medium-term price movements. It's less demanding compared to crypto day trading, but still requires careful analysis and a strict strategy.

Choose a cryptocurrency exchange

The first step when trading crypto is to open an account with a cryptocurrency exchange platform. This is where you’ll buy, sell, and store your coins.

Factors to consider when choosing an exchange

Here are some things to look for in a crypto exchange:

• Security features: Look for a crypto platform that offers two-factor authentication (2FA), cold wallet storage that keeps most funds offline, and a clear Know Your Customer (KYC) policy.
• Fees and charges: Some exchanges advertise ‘zero fees’, but they often make up for this by using wide spreads or listing assets at higher prices. Look for an exchange that’s transparent about its trading fees and offers instant order execution so your trades go through at the price you expect.
• Supported cryptocurrencies: If you’re looking to trade a variety of cryptocurrencies, you’ll want to choose an exchange that offers a range of altcoins so you have more options. This usually means a few hundred coins at least.
• User experience: Look for a clean, simple interface that makes it easy to track your assets and place trades. It’s not worth having a bunch of advanced charting tools if all it does is make things confusing.
• Customer support and transparency: Choose an exchange with responsive support that’s ideally based in your country. You should also be able to find clear information about where the company is located and who’s behind it.

Examples of popular cryptocurrency exchanges

Some of the most popular cryptocurrency exchanges include:

• Binance
• Coinbase
• Kraken
• Bitfinex.

Setting up crypto trading account

Now that you’ve chosen an exchange, you’ll need to create an account before you start trading.

Create an account and verify your identity

First, you’ll need to sign up using your email address. Make sure to choose a strong password and enable 2FA for extra security.

Most regulated exchanges require identity verification to help protect against fraud and money laundering. You might be asked to upload a government-issued ID, like a passport or driver’s license, along with a selfie or proof of address. If you’re in the U.S., you might also need to submit your Social Security Number.

Deposit funds into your account

Once your account has been verified, you can fund it with traditional currencies. Most exchanges let you deposit funds via bank transfer, debit card, or digital wallets like Apple Pay. Some might charge a small fee depending on the method you use.

If you already own crypto, you can also fund your account by transferring it from an external wallet to your exchange wallet.

Learn how to analyse crypto markets

There are two main ways to analyse cryptocurrency: fundamental analysis and technical analysis.

Fundamental analysis

Fundamental analysis looks at what gives a cryptocurrency its value, like the technology and team behind it or how it fits into the broader economy. Some of the key factors that can impact a cryptocurrency’s price are:

• News and events: Major news or events, like changing regulations, security breaches, or product launches can cause prices to swing sharply.
• Project fundamentals: Coins with a strong development team and real-world use cases are usually considered more valuable. Research the team behind a coin, how the technology works, and whether it solves a real problem.
• Supply and demand: Limited supply can drive up prices if demand is high. We see this with Bitcoin, which has a cap of just 21 million coins.
• Exchange listings: If a coin gets listed on a major exchange like Coinbase or Binance, it often increases demand and drives up prices.

Technical analysis

Technical analysis uses charts and price patterns to see how a cryptocurrency has behaved in the past and how it might move in the future.

Some key technical analysis tools include:

• Support and resistance: Support is a price level where a cryptocurrency tends to stop falling, while resistance is where it stops rising. Looking at support and resistance levels can help you identify entry and exit points.
• Trendlines: These lines follow the general direction of a coin’s price and help you identify whether it’s heading up, down, or sideways.
• Moving averages (MA): Moving averages smooth out price data so you can filter out the noise from short-term price fluctuations and see trends more clearly. The two most commonly used MAs are simple moving average and exponential moving average.
• Relative Strength Index (RSI): RSI is a momentum indicator that measures whether a cryptocurrency is overbought or oversold. It also shows divergence, which can hint at a potential reversal.
• Moving Average Convergence Divergence (MACD): MACD helps show changes in momentum and trend reversals.

Developing a crypto trading strategy

Now that you’ve created an account and understood how to analyse crypto markets, let’s look at developing a cryptocurrency trading strategy.

Define trading goals

The first step is to define what you want from crypto trading. Do you want to make quick gains from daily price swings or are you more focused on long-term growth? Taking the time to define your trading goals can help shape your strategy and control risk.

Some common trading goals include:

• Short-term profits from day or swing trading
• Long-term portfolio growth through strategic coin holding
• Diversifying assets beyond traditional stocks or bonds
• Generating passive income through staking
• Hedging against inflation or market uncertainty

Understand your risk tolerance

Every trader has a different comfort level with risk. When defining your risk tolerance, ask yourself:

• How much money can I afford to lose?
• Do I have emergency savings set aside?
• How experienced am I with volatile markets?
• How do I react to sudden losses or gains?
• Can I commit time to monitoring the market?

Choose trading strategy

We’ve covered different trading styles, now let’s look at some different crypto trading strategies:

• Trend following: Trend following involves buying assets that are trending upwards and selling them once the trend reverses. Indicators like moving averages are often used to spot entry and exit points.
• Scalping: Scalping involves making dozens or even hundreds of small trades throughout the day to profit from small price changes. It’s fast-paced and requires high liquidity and low transaction fees. Scalping is more suited for experienced traders who can dedicate time and focus to the strategy.
• Arbitrage: Arbitrage involves taking advantage of price differences between exchanges. For example, you might buy Bitcoin on one exchange where it’s slightly cheaper and immediately sell it on another where it’s priced higher.
• Range trading: Range trading is based on the idea that prices often bounce between known support and resistance levels. Traders buy at the bottom of the range and sell at the top. This strategy works best in sideways markets where prices aren’t trending in any particular direction.
• HODLing: HODL is a misspelling of HOLD, or Hold on for Dear Life, which is crypto slang for buying and holding coins for the long term despite market volatility. It’s similar to investing in crypto and used by traders who believe in the long-term potential of their coins.

Executing crypto trades

Now let’s get to the main action: how to buy crypto and monitor your trades.

Placing buy and sell orders

With your account funded and a solid strategy in place, you’re ready to start trading. First, choose the cryptocurrency you want to buy. Coins are typically listed by their ticker symbol (e.g. BTC for Bitcoin or ETH for Ethereum), so it helps to get familiar with the codes for the coins you’re interested in.

Note that you don’t need to buy a full coin to trade crypto. Many of them are divisible, so you can start with just a small fraction – which is a great way to ease in if you’re a beginner or working with a limited budget.

When placing a trade, you’ll usually see a few different types of orders:

• Market order: This buys or sells the asset at the current market price. It’s the fastest option but might be affected by sudden price changes.
• Limit order: This lets you set the price you’re willing to buy or sell at, and the order will only execute if the market reaches that price.

You can also add risk management tools to your orders:

• Stop-loss order: This automatically sells your crypto if the price falls to a certain level, helping limit your losses
• Take-profit order: This automatically sells your crypto once it hits a target price, helping lock in profits before the market turns.

Monitoring trades

Now that you’ve made your trade, the next step is to keep track of your portfolio. This is essential in a market that’s as fast-moving as crypto. Most exchanges offer a dashboard that lets you view your current holdings, profit/loss stats, and trading history. Keeping an eye on how your assets perform over time can help you spot patterns and refine your strategy.

Crypto markets tend to move in cycles: accumulation, markup, distribution, and decline. If you can learn to recognise these, you can adjust your strategy depending on where the market is in the cycle. Either way, as your trading experience grows you’ll develop a better sense of when to hold, sell, or cut your losses.

Managing risk and securing assets

If you plan to trade crypto, it’s essential to have a proper risk management plan and protect your assets.

Risk management techniques

Some risk management strategies include:

• Sticking to the 1-2% rule, where you don’t risk more than 1-2% of your total capital on a signlet trading day
• Adjusting your position sizing based on your capital and risk tolerance
• Set stop-loss and take-profit levels to limit losses and lock in gains
• Diversify your portfolio to reduce the impact if one coin performs poorly
• Stick to your trading strategy and avoid making emotional decisions, even during market swings.

Securing cryptocurrencies

Cryptocurrencies are stored in digital wallets and it’s your responsibility to protect them. There are a few different types of wallets you can choose from:

• Hardware wallets: These are physical devices that store your crypto offline. They’re one of the most secure ways to store crypto and best suited for wallets holding large amounts.
• Software wallets: These are apps or browser extensions that store your assets online. They’re more affordable and convenient than hardware wallets but also more vulnerable to hacks.
• Paper wallets: This is essentially just printing or writing down your private keys on a piece of paper and storing it somewhere safe. Not many people use paper wallets today but they can still be a form of cold storage.

Disclaimer: FOREX.com Australia is a Contracts for Difference (CFD) issuer and our products are traded off exchange. We do not offer direct ownership of the product and exposure to cryptocurrencies is available solely via Contracts for Difference (CFDs). This material relates to the underlying asset and does not constitute a recommendation or offer to trade.