Cryptocurrency trading is the practice of buying and selling digital currencies or their derivatives with the goal of making profits. Trading is different from investing, which refers to the practice of buying and holding coins like Bitcoin for a long period. In this article, we will explain how to trade cryptocurrencies.
Learn more about cryptocurrencies
The blockchain industry is relatively complicated, especially for new traders. Therefore, the first step to trading and investing in cryptocurrencies is to learn more about them. Learning will give you more details about how cryptos work, the types of digital currencies, and the key catalysts for their price action.
In addition, learning about trading will help you understand important analysis concepts like fundamentals, price action, and technical analysis.
Fortunately, there are many free and premium materials you can use to learn more about cryptocurrencies. You can use free platforms like YouTube and crypto-focused websites. Similarly, you can buy books on Amazon or enroll in premium courses.
Create an account
The next stage in cryptocurrency trading is for you to find a good exchange and create an account. In the past decade, the number of crypto exchanges has been on an upward trend. Data shows that there are more than 600 exchanges globally.
You should select a company that has a good track record and reputation. In the past, many crypto investors and traders have lost billions of dollars by using exchanges like Mt. Gox and Voyager Digital.
There are other things to consider when creating a crypto account. For example, go for an exchange that has deep liquidity, lower transaction costs, and offers most cryptocurrencies. Also, consider an exchange that has an easy-to-use trading platform.
Broadly, there are two main types of exchanges: centralized and decentralized. Centralized are those controlled by their shareholders and management teams.
On the other hand, decentralized exchanges (DEX) like Uniswap and dYdX use a decentralized autonomous organisation (DAO) model. Holders of a DAO token like UNI vote to pass major decisions like fee increases and rewards.
DEXes have become popular among most traders. In 2021, the volume traded on DEXes surpassed that of centralised exchanges.
Create and test your strategy
A common mistake that many people make is to trade without a good strategy. You can avoid the challenge by taking your time to come up with an approach and testing it well. Fortunately, most cryptocurrency exchanges provide a free demo account, which you can use to test your strategy.
Some of the most popular crypto trading strategies are trend-following, copy-trading, reversals, news trading, scalping, and swing trading, among others. Some traders also prefer algorithmic trading, which involves the use of robots.
New traders should spend as much time as possible in a demo account before moving to a real account because of the risks involved. Take this time to consider the type of cryptocurrency you want to trade. Common examples are spot, futures, tokenized assets, and contracts-for-difference (CFD).
After testing a strategy, the final stage is where you deposit your funds and start trading. As you do this, ensure that you are implementing a good risk management strategy to prevent the downside. Some of the top approaches to reducing your risks are having a stop-loss for all your trades, reducing your leverage, and avoiding overnight trades.
The bottom line
Cryptocurrency trading can be a highly profitable approach to making a living. Unfortunately, most people who start trading often lose money within a short period. Therefore, you should take your time to learn about the crypto industry and how trading works. Most importantly, you should create a strategy and test it over a long period.
