How to trade cryptocurrency

There are lots of ways to make a profit (or lose money) by trading cryptocurrency.

This guide explains where to begin, including choosing a trading style, how to devise a trading plan, what to look for in a crypto trading platform and risks to consider.

Disclaimer: This page is not financial advice or an endorsement of digital assets, providers or services. Digital assets are volatile and risky, and past performance is no guarantee of future results. Potential regulations or policies can affect their availability and services provided. Talk with a financial professional before making a decision. Finder or the author may own cryptocurrency discussed on this page.

How to trade crypto

There are 5 steps to getting started:

1. Do your research to work out whether cryptocurrency trading is right for you

Cryptocurrency is a notoriously volatile asset and active trading can result in substantial losses. Before getting started, it’s essential you understand how any crypto you’d like to buy works. Reading guides, exploring the blockchain and observing moves made by experienced traders are good ways to see if crypto trading suits your investment goals.

Remember to never trade more than you can afford to lose and consider chatting to a professional financial adviser before you get started.

2. Decide whether you want to do long-term or short-term trading

Traders are typically divided up into 2 groups: long- and short-term. Both are very different.

3. Choose the trading method that’s right for you

The next step is choosing a trading method. This is important because they are all quite different and require different techniques. In some cases, the same cryptocurrency exchange will offer several different types of trading.

There are 3 main ways of making short-term cryptocurrency trades.

A. Trade cryptocurrencies directly against each other

You can trade a pair of cryptos against each other or against fiat currency, with the goal of making a profit through buying low and selling high. This might mean buying a cryptocurrency before an important event (for example, Cardano adding smart contracts) and selling it into a stablecoin once the hype begins to wear off.

If you do it right, your funds grow. If you do it wrong, your funds shrink over time, as bad trades and changing markets can eat away at your holdings. The value of your crypto will rise and fall, but there’s no risk of immediately losing all your money to a bad trade. This method requires timing the market accurately, which can be difficult and requires a lot of research.

• Good for: Avoiding excessive risks, keeping things simple.

• Not so good for: High-risk/high-reward strategies, profiting from markets dropping.

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B. Trade cryptocurrency derivatives

You don’t have to own any cryptocurrency to trade crypto derivatives. You can “bet” on the markets instead.

Derivatives trading offers much more flexibility than simply buying and selling cryptocurrencies, but it’s also more complex and only suited to experienced traders. There are several types of derivatives, such as futures, options and perpetual swaps, all of which have their own nuances and can be used simultaneously.

Crypto derivatives trading often includes using leverage, which can substantially magnify gains and losses. Traders can also open short positions to directly profit from cryptocurrency price drops, mitigate their risks by hedging and make big trades even if the markets are relatively quiet. Derivatives can also be a very fast way of losing money.

• Good for: Leverage, large profits (or losses) even in flat markets, fast gains or losses, high-risk/high-reward strategies, flexibility in any market conditions.

• Not so good for: First-time cryptocurrency traders.

Our guide to Bitcoin futures trading

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C. Trade cryptocurrency CFDs

Cryptocurrency CFDs (contracts for difference) are a specific type of derivative that lets you place bets on the price movement of an asset. Like other derivatives, they let traders go long (bet on price rises) and short (bet on price drops), and utilize leverage without owning the underlying asset.

Unlike other derivatives, CFDs don’t involve buying and selling derivatives in an open market. Instead, you’re just buying from and selling to whichever trading platform you’re using. While most cryptocurrency derivatives treat crypto as a commodity of sorts, CFDs typically approach cryptocurrency similar to forex trading.

• Good for: Leverage, large profits (or losses) even in flat markets, fast gains or losses, people who are experienced with forex trading and want to try their hand at crypto.

• Not so good for: Beginners; due to the elevated risks, the potential for larger losses and all the additional tools and jargon you’ll have to know.

4. Learn how to place trades and read charts

Before you start trading, you need to be sure cryptocurrency trading is right for your circumstances and that you understand the risks associated with it. You’ll also need to know how to read technical graphs and how various order types work.

Here’s an example from the Binance cryptocurrency trading platform, showing the Bitcoin/USDT market with the important parts annotated.

The red and green box at the top is the price chart. At the bottom is where you place your buy and sell orders. Sandwiched between them is where you can click through to derivatives if this is offered in your country. It’s a completely separate market, where people trade futures contracts rather than Bitcoin itself.

Let’s zoom in on the bottom section, where you place buy and sell orders. There are 2 things to pay attention to here: your order type and the amount you want to buy or sell.

In this case, Binance offers 3 basic order types: market, stop-limit and OCO.

• Market. Place a buy or sell order at the current market price to execute your trade immediately.
• Stop-limit. Once you select this, you will be prompted to choose a stop price and limit price. Once the asset (Bitcoin in this case) reaches the stop price, it will sell for at least the limit price if possible.
• OCO “One cancels the other.” This is 2 stop-limit orders combined, where one cancels the other if it’s triggered. You will need to set an active duration for both stop-limit and OCO orders.

Market and stop-limit are the basic order types you’ll find on almost all exchanges, while OCO is a bit less common. Different exchanges will sometimes have additional order types or slightly different rules about how they can be placed.

5. Choose an exchange and start trading

When choosing a cryptocurrency trading platform, consider factors such as what kind of order types it allows, whether it offers derivatives or leverage and how easily it integrates with cryptocurrency trading bots. High-volume traders will also want to consider fees and how they may impact profit margins.

How to make a crypto trading plan

The difference between gambling and trading is having a plan. The most important part of creating a plan is ensuring it suits your specific trading goals. In general, a trading plan involves a 3-step process:

1. Look for patterns

The basic principle of reading charts and creating trading plans is to look for patterns in previous price movements and then use those to try and predict future movements.

Some patterns emerge frequently enough across multiple markets that they’re given their own names, such as resistance and support. Others can be much more obscure and aren’t given names of their own.

For example, if you think Bitcoin goes up when Ethereum goes down, or that Bitcoin rises when the US dollar falls relative to the Chinese renminbi, or anything else you can think of, that could be a pattern you can trade on.

While patterns can be very helpful for traders, it’s worth remembering that past performance is not always a reliable indication of future performance.

2. Make a plan and stick to it

The following are the 2 basic components of a trading plan:

• A point where you take profits
• A point where you cut your losses

For example, someone’s basic plan might be to sell 33% of their Bitcoin for every $1,000 the price goes up (taking profits) or to immediately sell all their Bitcoin if prices drop below the current support line (cutting losses). To lay out this plan, they could set up a series of stop-limit orders.

This is not necessarily a good plan, but it would ensure that the amount they gain or lose is within sensible boundaries no matter what the market does.

As traders get more experienced, they can create increasingly sophisticated trading plans that tie together more market indicators and allow for much more nuanced trading strategies.

Experienced traders typically use cryptocurrency trading bots to execute their strategies because they tirelessly follow complex trading plans faster and more reliably than a human ever could.

3. Experiment

It’s good to test trading theories before throwing real money at them. Paper trading or backtesting can be useful here. Both features are often found on trading platforms.

Paper trading is a way of using fake money on markets, so you can test a trading strategy in real, current conditions. Backtesting is when you put a trading strategy through historical market movements to see how it would have performed.

What to watch out for

Cryptocurrency trading incurs many of the risks of trading on any other market as well as some unique challenges.

• Volatility. Cryptocurrency is volatile. This is one of the things that makes it attractive to traders, but it also makes it very risky. Double-digit intra-day price swings are common, and drastic shifts can happen in just minutes.
• Unregulated, manipulated markets. The cryptocurrency markets are largely unregulated compared to more traditional markets. It’s an open secret that wash trading and market manipulation are common. They’re also a lot less liquid than many other markets, which can contribute to the volatility and make it easier for well-moneyed “whales” to manipulate prices, force liquidations and similar. Exchanges themselves are sometimes accused of manipulating their own markets against their own customers.
• Inaccurate patterns. Markets will often follow patterns, but often they won’t. This is a risk when trading anything, but the unique characteristics of the cryptocurrency market mean it’s a particular challenge there.
• Being over-exposed. Don’t bet more than you can afford to lose. Limit your exposure and consider setting up “take profit” and “stop loss” orders to limit your exposure in the event of drastic swings.
• Using excessive leverage. Many cryptocurrency exchanges will offer up to 100x leverage, dramatically magnifying the potential risks. The volatility of cryptocurrency, combined with high leverage trading, can see positions be liquidated extremely quickly.
• Not knowing when to fold. Whether you’re up or down, it’s important to know when to close a position and either take profits or cut your losses.

Bottom line

Trading cryptocurrency can be a good way for experienced investors to make a profit. There are lots of different trading styles to choose from, so do your research to decide which one meets your personal investment goals first.

It’s important to remember that trading crypto can be extremely risky. Crypto is a notoriously volatile asset, and even the most advanced traders can end up losing all of their capital on a few bad trades. Don’t begin trading until you are confident in your understanding of the markets, have thoroughly researched the best cryptos to buy and are up to date with the latest crypto news. When in doubt, it’s a good idea to consult a financial adviser.

FAQs

• What is the best way to trade cryptocurrency?

  There is no single best way to trade cryptocurrency. The best way to trade crypto will be whatever suits your long- or short-term investment goals.

  Focus on developing and sticking to a trading strategy, like one of the ones we've outlined in this guide. This might include following market patterns, setting limits on losses/profits or diversifying into multiple assets.

• How do I start trading cryptocurrency?

  Start off by setting a goal and developing a strategy. This will help with working out the next steps, like choosing a trading platform that meets your requirements and figuring out which cryptocurrencies to trade.

• Is crypto trading profitable?

  Yes, crypto trading can be profitable. Some experienced traders make a living just by trading digital currencies. However, trading cryptocurrency is also very risky and not suitable for everyone.

  Crypto markets are especially volatile, meaning it's easier to accrue substantial losses, especially if you're trading with leverage. Like any investment, don't invest more than you can afford to lose.