Cryptocurrency trading, put simply, is the process of buying or selling a particular coin of interest. In essence, a trader predicts the coin’s future price in one or more of several ways and takes action based on those predictions. Some of these prediction methods include analyzing charts (Technical Analysis), watching the news (Fundamental Analysis), or doing both (Mixed Analysis).
A trader can either go long (buy) if they determine that the value of a particular coin will go up, or go short (sell) if they decide that the value of the coin will reduce.
Cryptocurrency trading can either be done through a CFD trading account or by buying and selling the coins of interest through an exchange.
Cryptocurrency Trading Through Exchanges
After successfully analyzing the market through charts or other means, a trader can choose to buy or sell through an exchange. Read VOC’s explainer, ‘what are crypto exchanges to know more about ‘what are crypto exchanges.’
In this category, the trader opens an account, makes an initial deposit of the same value as the coins they intend to buy, and simply exchanges their deposit for their preferred coins.
When a trader wishes to sell previously owned coins, they do the reverse and cash out their profits or otherwise.
Trading Through CFDs
CFD is an acronym for ‘Contract For Differences. CFD trading platforms accept an initial deposit, known as a ‘margin’ before allowing you to trade. If a trader’s prediction is correct, a CFD trading platform pays out the differences in price between the opening and closing trades.
This contract, however, goes either way. When the market trend goes in the opposite direction to a trader’s prediction, these platforms deduct the differences in price from your initial deposit.
LEVERAGE: The options in CFD platforms are usually leveraged products. This means that the platform allows you to increase your trading position beyond what would have been possible with your current margin by lending you funds.
On the other hand, leverage is a two-edged sword that can both do great good and significant damage. In addition to using leverage as a tool to multiply one’s profit in the event of favorable market conditions, leverage can also multiply losses and lead to liquidation.
Trading a leveraged position is a high-risk strategy and should be done with caution.
LIQUIDATION: Liquidation is a term used to refer to a scenario in which a trader runs out of enough margin to keep a position or trade open. Any running trade gets closed automatically when this happens, leading to a permanent loss of the trader’s initial margin.
Strategies, Styles, And Terms To Be Aware Of When Trading CFDs
There are several terms and strategies every successful trader should be aware of before trading CFDs. It is important, however, to understand the differences between trading strategies and styles.
Strategies are plans that employ prior analysis to identify market conditions, trends, as well as entry and exit points in the market.
A trading style, on the other hand, is a strict plan that determines how long you intend to hold positions, how often you intend to trade, how much profit you intend to make from individual trades and the maximum amount of risk you are willing to accept in the event of a loss. Some styles include:
- Trend trading:
The use of technical indicators to identify market directions, and follow them accordingly.
- Arbitrage trading
In this form of trading, a trader undergoes trades across platforms, without taking any risk. Arbitrage trading involves taking advantage of differences in price between the same asset on different exchanges.
- Reversal trading
Reversal trading involves taking advantage of trend reversals. In reversal trading, a trader tries to identify points where the trend is expected to switch.