Trading Toolkits: Cryptocurrency Trading Explained 

Trading in terms of finance is the buying and selling of financial instruments. In these markets, traders buy low and sell high to achieve profit using a plethora of different tools and tactics.

By
Wilfred Victor
on
February 8, 2021
Category:
Trading Toolkits

Introduction

The core purpose of trading is to profit, no matter the trading style, trading instruments, method of analysis, or even the different market types. Trading is an age-long concept, where investors and speculators alike seek to profit over a specific duration of time at for a given return on investment (ROI). Trading acts as the fuel of all transactions and allocations of the world’s resources; as goods and services are exchanged, the individual and global economies receive their sought-after resources.


Financial Markets

The financial market deals exclusively with financial instruments; it refers broadly to any marketplace where securities trading occurs, including the stock market, bond market, forex market, options, cryptocurrencies, and derivatives market. The financial market activities are typically short-term, where traders enter and exit trade over a short period with specific targets in mind. The short term here could range from several days to a few years.


What is Trading?

Trading in terms of finance is the buying and selling of financial instruments. Here, traders buy low and sell high to achieve profit. It is executed in two ways: traders either purchase an asset on a supporting exchange or conduct an over the counter transaction. An exchange is a highly organized place where specific types of instruments are listed; for example, Binance trades only crypto assets, the New York Stock Exchange (NYSE) deals exclusively on equities. However, several exchanges deal with traditional finance (stock and shares) and cryptocurrencies, e.g., FTX and DSDAQ exchange. On the other hand, when you trade over the counter, the trade is between the two parties in an exclusive arrangement, e.g., large buy orders between a firm and an exchange.


Who Trades?

Anyone can be a trader in the finance market, from everyday users to big financial institutions and governments. Cryptocurrency trading brings down the barrier of entry for new users compared to other trading types. At the end of the day, no matter the asset class, the idea is to make a profit. A majority of traders stick to a specific asset class or financial instrument that falls in line with their preferences. Others may have diverse portfolios across various markets. While some would carry out extensive research before taking on trades, another group of traders would only have to look at the chart and watch for trends. The key takeaway here is that no two traders need to execute the same style of trading to capture an edge.


The Risks Associated With Trading

All trading activities carry risks, risk of impermanent loss for DEX traders, risk of their underlying asset falling in price due to fundamental factors, risk of an investment getting delisted from particular exchanges, and so on... No matter the risk incurred, all risk types carry with it the potential for loss. Dedicated traders, who have built their careers off trading activities, would most likely associate a successful trader to one who can correctly determine his/her Risk and Rewards Ratio (R:R) before taking on trades.  A risk-reward ratio will show traders where he stands in terms of profit and risk when trading. There are certain conditions of risk and reward ratio a trader must adhere to stay profitable and in liquid at all times. Correctly applying the risk and reward ratio ensures traders remain in business and it the first step to developing an edge. However, no matter the R:R of a trade setup, two types of analysis determine the entry or exit of a market; fundamental and technical analysis.


Fundamental Analysis vs. Technical Analysis

While one trader speculates off fundamentals: news or rumors, revenue, government regulation, user acquisition, and many more, the other type of trader does not care too much about these factors. This trader utilizes technical analysis, using charts to speculate trend activities, trading indicators, market structure, and other classical chart patterns. While the former uses Fundamental analysis, the latter uses Technical analysis.

Source

Fundamental Analysis (FA) determines a financial asset valuation for its potential prospective value. This type of analysis studies both economic and financial factors to determine if the value of an asset is fair or not. This can include the macroeconomics associated with the business, the state of the economy, broader economies of the company, associated businesses, and government policies that affect the industry. Decisions are based on factual findings and established truths. Some of these can be determined by following social media trends, e.g., Twitter, also referred to as leading and lagging indicators. As it is widely known, with FA, traders and investors alike can determine if the asset class is either undervalued or overvalued.

Source

Technical Analysis (TA) works with a different market approach; its core aspect is to check for historical price data and make decisions based on such data. Traders will speculate on this established data, giving a view of how the price may behave in the future. Technical analysts don’t care a lot about the intrinsic value of an asset. The analysis may include volume, chart patterns, and technical indicators, amongst other trading tools. The goal of his researches is to check for market strength or weakness.

Technical analysis is the most used type of research between the two analysis type. However, many traders may adopt both types into one single trading strategy referred to as confluence. Confluence aims to bring together fundamental and technical analysis into one trading style to improve a greater chance of profitability. There is a bit of confusion when individuals make a comparison between investing and trading. Many people confuse both concepts when referring to either of the two kinds of buying and selling activities.


Trading and Investing

Fundamentally both investing and trading activities are for profit-making, through buying and selling. Both may, however, differ in duration and means of making a profit. While investing may take a more extended period, trading usually has a smaller timeframe. 

According to their trading style, traders find entry and exit positions, including one or all types of trading activities; scalping, day trading, swing trading, and position trading.

Position Trading: Positions runs for months into years

Scalping: Positions are active in seconds or minutes with no overnight holdings.

Swing Trading: Position stay active for days into weeks

Day Trading: Here, trade positions can run throughout the day with no overnight holdings.

For an investor, his reasons and purpose for buying differ distinctly from a trader. An investor gets into an investment to exit over a longer timeframe with a target or specific conditions before selling. For instance, an investor might enter a project position because the company will achieve particular objectives set in its roadmap in X number of years or months.


Market Trends

The trends of a market show the direction a market is going. In technical analysis, the market trend is identified using price action, trend lines, and critical moving averages like the Exponential Moving Average (EMA) and the Simple Moving Average (SMA). Generally, there are two types of market trends; there are the bull and bear market.

Price moves up in a sustained uptrend in bull market trends, where price growth is typically positive. The reverse is the case for a bear market, which brings about a decline in assets’ price over a sustained period. The crypto market is currently witnessing a bull market as the market is overwhelmingly up since Bitcoin hit a new All-Time High (ATH). The last bear period lasted between 2018-2019, resulting in a massive sell-off of the market.


Closing Thoughts

Trading is profitable, no doubt, but with high inflows of new users, it’s important to release that markets are a zero-sum game. This means that typically a few well-informed participants extract profits from the naïve majority of market participants. Newbies are joining the market in droves, and this phenomenon is not recent. The last bull run of 2017 witnessed exchanges like Bittrex and Bitstamp deactivating new registrations as the inflows were high. At this point, caution should be applied by traders as no trend lasts forever. Take profit along the way, don’t be overly greedy. Greed and fear drive the market. Stay on the part of responsible trading as there exists a thin line between trading and gambling. For when you take on excessive trading with no plan insight, you are gambling.


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Wilfred Victor

Ace finds himself as a blockchain enthusiast who is focused on growing with the entire crypto sector. He is an energetic and passionate writer who believes that all things are achievable.

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