Cryptocurrency Markets in a Nutshell
The cryptocurrency market is expanding at a fast pace, with more than 5,500 different tokens currently in existence. Same as any other traditional asset (stocks, bonds, ETFs, currencies, etc.) cryptocurrencies are traded on an open market, which means both retail and institutional investors can get involved and benefit from the price fluctuations. However, cryptocurrencies are new and digital assets, relying on the blockchain technology. There’s no central government controlling any tokens, given the decentralization and self-governing mechanisms.
Considering cryptocurrencies have some unique particularities, starting to trade crypto involves a series of crucial steps, that if not followed, will lead to a lot of painful mistakes and a slow learning curve. The crypto market is one of the most fascinating and active in the world, attracting a huge number of people, but unfortunately, most of them lack a few skills, as described in the next few paragraphs.
Getting Proper Education
Education is the first step in the cryptocurrency trading journey. Beginners can’t start to trade crypto until they know the market particularities. What is the blockchain technology, how each cryptocurrency works, what consensus mechanisms are used by each token, cryptocurrency mining and block rewards, as well as many other related aspects. Without knowledge in the field, traders won’t be able to understand how cryptocurrencies work from a fundamental point of view.
But the basic fundamentals of the cryptocurrency market are not enough to master the art of trading. Most of the retail traders use short-term strategies, which means they rely heavily on technical analysis. This is the science of analyzing charts and price indicators to understand the market and potentially anticipate how the price will move in the near future. Cryptocurrency prices react to support and resistance levels, moving averages, trend lines, Fibonacci levels, and many other technical indicators. Traders all around the world are using them to find trading opportunities.
The third and probably one of the most ignored aspects by traders has to do with understanding risk management. Trading is a world of probabilities and not even the best traders will manage to consistently find only winning trades. Professional traders understand they’ll lose money sometimes and as a result, they take measures to control the risk. Managing risk means adjusting position sizing so no single trade will wipe out an entire account. At the same time, it means placing stop losses/take profits for each trade and keeping a balanced ratio between them (risk/reward ratio).
Developing a Trading Methodology
After the educational tasks had been completed, traders must move ahead and start developing a trading strategy. Most traders don’t have a strict set of rules in place to determine how to trade the markets. A trading methodology includes a wide range of critical information. What type of trading setups should be traded (price patterns, a combination of technical indicators, price action strategies, breakout strategies, consolidating strategies, etc), with details on the ideal market conditions for each of them.
At the same time, the strategy should include a list of cryptocurrencies that should be monitored constantly. For beginners, it will be important to stick with some of the most popular tokens (Bitcoin, Ether, Litecoin, XRP, and others), because of liquidity and lower volatility. Once experience starts to build up, traders can move to small altcoins, where price action is more volatile and technical setups harder to use.
Lastly, the trading methodology includes the risk management rules, determining the maximum risk per trade, maximum trades opened simultaneously, maximum risk/day, maximum stop loss, minimum take profit, and other relevant risk parameters.
Working with the Right Broker
To get access to the cryptocurrency market, traders have to open an account with a broker. There are plenty of different brokerage companies, but only a few of them are focused on the cryptocurrency market. If trading cryptocurrencies is the priority, traders should choose a broker that offers access to a wide range of crypto instruments. That way, trading opportunities could be found on a higher number of cryptocurrencies.
The broker must offer access to reliable trading software (trading platform and other relevant trading tools). It will be a strength if it also provides access to educational resources in the form of webinars, research, analysis, and others. Although the hardest tasks will fall on the trader’s shoulders, working with a broker that offers a complex trading ecosystem will mean there will be a wide range of trading tools available, which in turn could facilitate the trading process.
As it can be noticed, starting to trade cryptocurrencies involves accomplishing a series of crucial tasks that will very likely determine the trading performance over any given period of time. None of the steps described should be skipped and all should be followed diligently, in order to avoid all the traps most beginners stumble upon.