There are lots of different ways of making a profit (or losing money) from cryptocurrency. Trading is one of the most popular.
This guide explains where to begin, including how to choose a trading style, how to devise a trading plan, what to look for in a trading platform and things to consider.
Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific
provider, service or offering. It is not a recommendation to trade.
When choosing a cryptocurrency trading platform, consider factors such as whether it offers derivatives or leverage, what kind of order types it allows, and how easily it can integrate with cryptocurrency trading bots.
There are five steps to getting started:
- Do your research and work out whether cryptocurrency trading is right for you.
- Decide whether you want to do long term or short term trading.
- Choose the trading method that’s right for you.
- Learn how to place trades and read charts.
- Choose an exchange and start trading.
This guide walks you through each of these steps.
Traders are typically divided up into two groups, long versus short-term traders. Both are very different.
Long-term traders buy and hold cryptocurrencies over a long period of weeks, months or even years, with the intention of selling at a profit or using it later.
If you believe the value of a cryptocurrency will grow in the long run, and don’t want the stress of actively trading, then this might be your style, and a good first step may be learning how to safely buy and hold cryptocurrency.
Short-term trading is about taking advantage of short term cryptocurrency price swings by creating and executing a trading strategy.
It’s more active, stressful and risky than long-term trading, but it also offers faster and larger potential returns for those who do it right, and lets you profit from cryptocurrency prices dropping as well as rising.
If this is what you’re looking for, you can either read on for a beginner’s guide or compare cryptocurrency trading platforms to get started.
The next step is choosing a trading method. This is important, because all of them are quite different and require different techniques. In some cases, the same cryptocurrency exchange will offer several different types of trading.
There are three different ways of making short term cryptocurrency trades.
1. Trade cryptocurrencies directly against each other
Trade a range of cryptocurrencies against each other, or against fiat currency (“real money”) to accumulate more crypto or fiat currency through repeatedly buying low and selling high.
If you do it right, your funds grow.
If you do it wrong, your funds shrink over time, as bad trades and changing markets eat away at your holdings.
The value of your cryptocurrency will rise and fall, but there’s no risk of immediately losing all your money to a bad trade.
- Good for: Beginners, accumulating cryptocurrency, avoiding excessive risks, keeping things simple.
- Not so good for: High-risk high-reward strategies, profiting from markets dropping.
Learn how to trade cryptocurrencies against each other.
2. Trade cryptocurrency derivatives
Trade cryptocurrency derivatives, such as Bitcoin futures or Ethereum options. You don’t necessarily have to own any cryptocurrency at all to trade crypto derivatives, and can simply bet on the markets if you want.
Derivatives trading offers much more flexibility than simply buying and selling cryptocurrencies, but it’s also more complex and better suited to advanced traders. There are several different types of derivatives, such as futures, options and perpetual swaps, all of which have their own nuances and may be used simultaneously.
Trading crypto derivatives lets you use leverage (magnifying gains and losses), open short positions to directly profit from cryptocurrency price drops, mitigate risks by hedging and make big trades even if the markets are relatively quiet. They 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
Interested in cryptocurrency derivatives trading? Learn how it works and where to get started.
3. Trade cryptocurrency CFDs
Cryptocurrency CFDs (contracts for difference) are a specific type of derivative that essentially let you place bets on the price movement of an asset or currency. Like other derivatives, they let traders go long and short, and utilise leverage.
Unlike other derivatives, CFDs don’t involve buying and selling derivatives in an open market. Instead, you’re just buying from and selling to the whichever trading platform you’re using. There’s also no actual cryptocurrency involved. You’re strictly betting on changing prices.
CFDs also have their own lingo. 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 cryptocurrency.
- 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.
Curious about cryptocurrency CFDs? Learn more by reading our crypto CFD guide.
Before you can 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 what all the buttons do.
Fortunately, most cryptocurrency exchanges have similar-looking market pages, and you can safely ignore a lot of the information on the page.
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 the two, in this particular case, is a place where you can click through to derivatives. It’s a completely separate market, where people trade futures contracts rather than Bitcoin itself.
Let’s zoom in on the bottom part, where you place buy and sell orders. There are two things to pay attention to here: your order type and the amount you want to buy or sell.
In this case, Binance offers three basic order types: market, stop-limit and OCO.
- Market: Place a buy or sell order at the current market price, to execute immediately.
- Stop-limit: Once you select this, you will be prompted to choose a separate 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 two stop-limit orders combined, where one cancels the other if it’s triggered.
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 different order types, and slightly different rules about how they can be placed.
How to make a trading plan
The difference between gambling and trading is having a plan. Creating a plan is a three 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 using those to try to predict future movements.
Some patterns emerge frequently enough across multiple markets that they’re given their own names, such as resistance and support. But others are much more obscure, and are never 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 renmibi, or anything else you can think of, that could be a pattern you can trade on.
2. Make a plan and stick to it
The two basic components of a trading plan are:
- A place where you take profits
- A place 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.
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 the real 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.
If you’re a beginner trying to get your head around the basics of reading charts and spotting patterns, you may want to read the step-by-step guide to cryptocurrency technical analysis for a sense of how to start spotting patterns.
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 means 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.