How to become a successful cryptocurrency trader: basic rules of digital asset trading
The cryptocurrency market is dynamic and rapidly growing: its capitalization reached $300 billion this summer. Fast changing cryptocurrency rates allow making big money on digital asset trading. How to start successful crypto trading and how can a beginner avoid common mistakes?
What sum to start from?
It’s important to start trading at a cryptocurrency exchange with the sum you do not fear to lose. Failures can happen not only by the fault of the trader. Reasons can include problems of the exchange market, hacking attacks, and the banal loss of the key to the profile.
As with any new case, you should start from small things: run small transactions and do not stake all your funds at once. It’s a good idea to store the basic share of your digital assets not on exchanges but cryptocurrency wallets (best of all cold wallets). Any amount of money involved into circulation should be distributed between several platforms.
You should not expect to enter the market with $50 and start earning tens of thousands of dollars at once. It is better to accumulate assets and only afterwards get down to business. A larger deposit gives more freedom to act and a trader can not only efficiently allot funds but also receive tangible revenues. Several thousands of dollars on the account will allow placing around a dozen of orders on different exchanges even without using all of the savings at once.
Choosing the cryptocurrency
In order to trade digital assets, you should understand their peculiarities and thoroughly study their characteristics. In the first decade of 2018, the total number of cryptocurrencies was 1300, and new coins are still emerging.
A beginner should obtain skills by training on the most well-known cryptocurrencies, as there is more information available about them. By the example of a widespread digital currency, one can understand the main principles of development and the dynamics of the whole market.
News, exchange rate fluctuations, forecasts – you should carefully learn, compare, and analyze these things. Moreover, there are more user feedbacks and discussions of popular cryptocurrencies on the themed forums. That is information and forecasts that traders build their strategies on.
Cryptocurrencies differ from fiat money by high volatility. This factor makes them attractive for trading and quick moneymaking. Digital currencies have different exchange rate fluctuations. For example, Bitcoin has been showing low volatility in the last 30 days – 2.53%. Meaning that you will not make gains on BTC fluctuations. However, the currency is attractive thanks to liquidity (it is beneficial to store funds in BTC and convert them in fiat).
Beginning traders that are just looking into the market should start from the currency with average volatility. Low volatility will not bring quick and sizable profit, and high volatility bears high risks connected with price fluctuations that are difficult to forecast if you don’t have relevant experience.
How to choose a crypto exchange
The choice of a cryptocurrency exchange is one of the most important stages of trading. Crypto exchanges differ by the number of supported currencies, interface, possibility of converting assets in fiat, and availability of different tools for technical analysis.
Crypto traders usually set up accounts on different exchanges, using each of them for different purposes. For example, they trade rare cryptocurrencies on one exchange, liquid assets – on the second exchange, and look for newly emerged coins on the third exchange.
Any trading platform has the following main criteria:
- reliability and reputation (for how long the exchange exists, its position in rankings, user feedbacks);
- the amount of fees (and availability of referral programs that allow reducing the fee);
- security (does the system conduct verification procedures);
- daily volume of trading (liquidity);
- jurisdiction of the exchange (whether it is located in the country with strict consumer rights regulations).
It isn’t a good idea to store all money on one exchange, even the most reliable one. Any system can face attacks and depends on a variety of external factors. You should regularly transfer money to your wallet leaving only the amount that you want to exchange. Some of the most popular and trusted exchanges are Poloniex, Bitfinex, EXMO.
One should choose the cryptocurrency trading strategy after deciding on the trading pairs. Fiat trading can be short-, medium-, and long-term, but cryptocurrencies are usually traded short- and long-term (due to high price fluctuations).
Short-term trading brings quick but small profits and allows trading within short timeframes. Long-term investments can significantly increase you capital, but you will need to keep the currency for half a year or more (and be sure that it will grow in price).
Before making the first steps on the platform, one should factor in all parameters of the future strategy.
- The amount of capital. Risky steps coupled with small initial capital can turn into a failure, as highly profitable deals might require investing a large sum.
- Free time. If a trader can spend several hours per day on trading, it will be easier to conclude frequent deals that bring a quick although small profit. Scalping strategy of high frequency trading will do here, requiring just a superficial forecast. Trading within long timeframes requires experience and accurate calculations.
- Cryptocurrency price fluctuations. If the chosen cryptocurrency has a low volatility, using a long-term strategy is more beneficial (you won’t be able to make money fast on assets with small price fluctuations). High fluctuating currencies allow making small but frequent deals.
You should also take into consideration the overall state of the market, trends and current forecasts for the chosen trading pair. Everything depends on the trader’s goal: whether you want to study the market and try different strategies without any reference to the final amount of profit or you want to increase your capital slowly but steadily.
Common mistakes of traders
Any person can make an error in forecasts or become a victim of circumstances, but it’s easy to avoid basic mistakes made by most of beginning traders. Let’s review several reasons why traders lose money and which actions are undesired or even dangerous for your capital.
- Ignoring the diversification rule (the basic principle of risk management). Using just one (let it be the most hyped) exchange, focusing just on one cryptocurrency is risky and shortsighted. Diversification of the cryptocurrency portfolio (investments made in different token types) stabilizes profitability and helps to protect yourself against the loss of all your capital at once.
- Distracting from the strategy. Due to the lack of experience, beginning traders can ignore the rules of the chosen strategy, relying on intuition: in such a way, they can waste a chance when one could make a profit or even suffer losses in case of incorrect and untimely actions.
- Taking loans. Don’t invest more than you can afford. It increases risks and psychological tension, which hinders exact calculation and analysis.
- Ignoring fundamental analysis. If you focus solely on the technical analysis, you can miss the turning point of the trend. The cryptocurrency price is also influenced by news including financial and politics news. For instance, the price of Ethereum dropped to $200 after the statement made by Vitalik Buterin saying that the crypto market “has reached the top”.
- Not using stop loss orders. This tool allows automatically closing the order at a specific price level to manage risks. The stop loss value can be floating or fixed.
Learning on your own mistakes in cryptocurrency trading is expensive and risky, especially when you can use the experience of other people. Adhering to the basic rules for a beginning crypto trader will not help avoiding all of minor misfortunes, but will significantly save your time and nerves. Crypto trading is an area where you have to be cool-headed and rely on facts and analytics rather than luck and intuition.