How Does Crypto Trading Work?
The cryptocurrency market has been in the news more frequently than ever in the last couple of years. Customers' interest has skyrocketed owing to the gradual escalation of Bitcoin's price over the past decade.
However, many quickly lose hope from crypto trading failing to generate estimated returns. The fault is neither of an exchange platform nor the investors who highly talk about cryptocurrencies. You must know the proper timing for buying and selling your crypto holdings. Read along to learn how crypto trading works.
How does Crypto Trading Work?
You can start investing in cryptocurrencies in one of two methods. In the first procedure, you register a new account by visiting the online portal or opening the application of a crypto exchange platform. Then you are all set to buy and sell the various cryptocurrencies which get stored in your wallet.
Investments via an exchange allow you to speculate the live market value of each cryptocurrency. It helps you can determine the right time to sell your holdings and garner profit out of a deal.
The second most popular way of crypto trading is via CFDs (Contracts of Difference). More experienced investors generally prefer this method as it comes with multiple advantages. Unlike the first system, you do not own the underlying assets in CFDs. Instead, you enter into a contract with another investor. Both of you agree to exchange the margin to be generated between the opening and closing of a mutually fixed time.
What are the Various Types of Crypto Trading?
Crypto trading can be broadly classified into three categories such as:
- Swing Trading
Swing traders focus on capturing gains over a short or mid-term investment. They tend to stay invested in the underlying assets for somewhere between a few days to some weeks. Swing trading calls for a fundamental analysis of the overall market scenario besides grasping the current trends and pricing patterns.
Merits
- Provides more time to anticipate the pricing patterns compared to intraday trading
- Risk is comparatively less as traders stress on grasping the knowledge of technical indicators rather than depending on overnight market shifts
- Demands less active involvement than regular day trading
- Causes less stress for the traders and is somewhat beginner-friendly
Demerits
- Calls for more practical expertise and in-depth research
- May trigger emotional reactions from the traders as they manage their holdings and see growth over time
- Demands long-term discipline to ensure flawless implementation of a strategy
- Day Trading
Day trading specifically involves crypto traders who buy and sell currency units within the same trading window. Their motive revolves around bagging profits from the sharp fluctuations of prices that they predict by assuming market inefficiencies. Popularly, this form of trading is also referred to as ‘intraday trading’.
Merits
- Guarantees profits very quickly
- Develops desirable qualities of a trader like precise risk-controlling ability and emotional stability despite frequent market shifts
Demerits
- Triggers obsessive behaviour especially when you occasionally procure short-term profits
- Involves greater risk owing to the highly volatile nature of crypto assets
- Generates more pressure on the trader as mistiming a transaction can lead to a substantial loss of money
- Not suitable for newcomers who often depend on short-term trends to ensure gains
- Position Trading
Popularly referred to as ‘trend trading’, here you buy definite units and retain them for longer periods before finally selling them off. To become successful following this concept you have to learn to ignore short-term price movements and plan for several upcoming months. Hence, you should have adequate experience, strong analytical skills, and a disciplined research regimen to perform position trading.
Merits
- Allows you to recover the incurred losses over time
- Can be mastered through systematic learning
- Brings in considerably low stress compared to intraday or swing trading
- Enables a trader to begin learning practically with a small investment
- Demands less active involvement
Demerits
- May limit your other investment opportunities if you predominately rely on crypto stake
- Can attract risk if you stay aloof for too long owing to the highly unpredictable character of cryptocurrencies
- Liquidity has to be compromised as you hope to attain profits over several months or years
How Can Beginners Trade in Cryptocurrency?
Here is a step-by-step guide that will help enthusiastic new crypto traders to begin their journey:
Step 1: Check reviews online and select your preferred crypto trading platform.
Step 2: After registering you can start collecting assets in your wallet. To grab an idea regarding the top performing cryptocurrencies you may refer to that platform’s suggested list.
Step 3: As per the trading styles discussed above, select the one which aligns with your motive. Beginners generally either stick to medium or long-term investments as they are more forgiving.
Step 4: Refer to the in-app technical indicators and expert analysis sections to complete a basic research work.
Step 5: Buy units of a cryptocurrency and hold them for a finite period in your wallet before finally selling them to earn profit.
Takeaway
Due to its extreme volatility, trading in cryptocurrencies carries a risk of losing your invested money. Hence, before investing, you should be aware that not all investors would be a good fit for cryptocurrencies. As a result, you should carefully assess your financial situation before deciding if trading or owning digital assets is right for you.
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