by: ofir beigel | last updated: 4/7/22
This post covers the basics of bitcoin trading. It will help you get familiar with the basic terms, understand the different ways to “read” the market and its trend, make a trading plan, and learn how to execute that plan on bitcoin exchanges.
Reading: Buying and selling bitcoin for profit
don’t you like to read? watch our video guide instead:
link to resources section
bitcoin trading overview
Bitcoin trading is the act of buying low and selling high. Unlike investing, which means holding bitcoins for the long term, trading is about trying to predict price movements by studying the industry as a whole and price charts in particular.
There are two main methods that people use to analyze the price of bitcoin: fundamental analysis and technical analysis. Successful trading takes a lot of time, money, and effort before you can really get good at it.
To exchange bitcoins, you will need to do the following:
- open an account on a bitcoin exchange (eg cex.io, etoro, bitstamp)
- verify your identity
- deposit money into your account
- open your first position on the exchange (ie buy or short)
That’s bitcoin trading in a nutshell. if you want a really detailed explanation, read on.
- bitcoin trading vs. investing
- types of trading
- analysis methods: fundamental vs. technical
- bitcoin trading terms
- how to read price charts
- what are the most common trading mistakes?
- frequently asked questions
- conclusion
1. bitcoin trading vs investing
The first thing we want to do before we dive into the topic is to understand what bitcoin trading is and how it differs from investing in bitcoin.
When people invest in bitcoins, it usually means they are buying bitcoins for the long term. in other words, they believe that the price will eventually go up, regardless of any ups and downs that may occur along the way. Typically, people invest in bitcoin because they believe in the technology, ideology, or developers behind the currency.
bitcoin investors tend to stick with the coin for the long haul (hodl is a popular term in the bitcoin community that was actually born from a typo of the word “hold” in a previous 2013 forum post bitcointalk).
Bitcoin traders, on the other hand, buy and sell bitcoin on a short-term basis, whenever they think a profit can be made. Unlike investors, traders see bitcoin as an instrument for profit. sometimes they don’t even bother to study the technology or the ideology behind the product they market.
Having said that, people can trade bitcoin and still care about it, and many people invest and trade at the same time. As for the sudden rise in popularity of bitcoin (and various altcoin) trading, there are a few reasons why.
first, bitcoin is very volatile. In other words, you can make a good profit if you manage to anticipate the market correctly. Second, unlike traditional markets, bitcoin trading is open 24/7. Most traditional markets, such as stocks and commodities, have opening and closing hours. With bitcoin, you can buy and sell whenever you want.
Finally, bitcoin’s relatively unregulated landscape makes it relatively easy to get started, without the need for lengthy identity verification processes.
While all traders want the same thing (profits), they practice different methods to generate them. Let’s review some examples of popular types of operations:
daily operations
This method involves placing several trades throughout the day and trying to profit from short-term price movements. day traders spend a lot of time staring at computer screens and typically close all of their trades at the end of each day.
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This day trading strategy is becoming popular lately. scalping attempts to make a substantial profit from small price changes and is often compared to “picking up pennies in front of a steamroller.”
Scalping focuses on very short-term trading and is based on the idea that repeated small profits limit risks and create advantages for traders. scalpers can do dozens, or even hundreds, of trades in a day.
change operations
This type of trading tries to take advantage of the natural “oscillation” of price cycles. swing traders try to spot the start of a specific price move and then enter the trade. they hold on until the movement dies down and take the profit.
Swing traders try to see the big picture without constantly monitoring their computer screen. For example, swing traders can open a trading position and keep it open for weeks or even months until they reach their desired result.
can i predict bitcoin price movement?
The short answer is that no one can really predict what will happen to the price of bitcoin. however, some traders have identified certain patterns, methods, and rules that allow them to make long-term profits. nobody exclusively makes profitable trades, but here’s the idea: at the end of the day, you should see a positive balance, even if you have suffered some losses along the way.
People follow two main methodologies when analyzing bitcoin (or anything else they want to trade, for that matter): fundamental analysis and technical analysis.
fundamental analysis
Fundamental analysis is used to predict price by looking at the big picture. In bitcoin, for example, fundamental analysis assesses the bitcoin industry, currency news, bitcoin technical developments (such as the lightning network), regulations around the world, and any other news or issues that may affect bitcoin’s success.
This methodology looks at the value of bitcoin as a technology (regardless of the current price) while considering relevant external forces to determine what will happen to the price. For example, if China suddenly decides to ban bitcoin, this analysis will predict a likely price drop.
technical analysis
attempts to predict the price by studying charts and market statistics such as past price movements and trading volumes. try to identify patterns and trends in the price, and based on this deduce what will happen to the price in the future.
The core assumption behind technical analysis is this: Regardless of what is currently happening in the world, price movements speak for themselves and tell some sort of story that helps you predict what will happen next.
So, which methodology is better?
Well, as I said in the previous chapter, no one can accurately predict the future. from a fundamental perspective, a promising technological achievement could end as a failure. from a technical perspective, the chart just doesn’t behave like it did in the past.
The simple truth is that there are no guarantees for any type of trading. however, a healthy mix of both methodologies will likely yield the best results.
Let’s continue breaking down some of the confusing terms and statistics you’ll find on most bitcoin and crypto exchanges:
trading platforms vs. brokers vs. marketplaces
Bitcoin trading platforms are websites where buyers and sellers are automatically matched. Please note that a trading platform is different from a bitcoin broker, such as coinmama.
Unlike trading platforms, brokers sell you bitcoin directly, and usually for a higher fee. A trading platform is also different from a marketplace like localbitcoins, where buyers and sellers communicate directly with each other to complete a transaction.
the order book
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A complete list of buy and sell orders is included in the order book of a trading platform. Buy orders are called offers, as people offer prices to buy bitcoins. sell orders are called asks, as they show the price sellers are asking.
bitcoin price
When people refer to the “price” of bitcoin, they are really referring to the price of the most recent trade made on a particular trading platform. this important distinction is because, unlike US dollars, for example, there is no single, global bitcoin price that everyone follows.
for example, the price of bitcoin in certain countries may be different from its price in the united states, as the major exchanges in these countries come with different market conditions.
note: Next to the price, you will sometimes also see the terms “high” and “low”. these terms refer to the highest and lowest prices at which bitcoin traded in the last 24 hours.
volume
volume is the total amount of bitcoins that have been traded in a given period of time. traders use volume to identify the importance of a trend: significant trends are often accompanied by high trading volumes, while weak trends are accompanied by low volumes.
For example, a healthy uptrend will be accompanied by high volume when the price is up and low volume when the price is down.
If you are witnessing a sudden change in price direction, experts recommend checking how significant the trading volume is to determine if it is just a minor correction or the start of an opposite trend.
market (or instant) order
This type of order can be set on a trading platform and will be executed instantly at the best price currently available. you just set the number of bitcoins you want to buy or sell and command the exchange to execute immediately. then the trading platform matches sellers or buyers to respectfully fulfill your request.
once the order is placed, it is very likely not to be matched by a single buyer or seller, but by multiple people, at different prices.
For example, suppose you place a market order to buy five bitcoins. the trading platform is now searching for the cheapest sellers available.
the order will be filled once you accumulate enough vendors to deliver five bitcoins. depending on the seller’s availability, you could end up buying three bitcoins at one price and the other two at a higher price.
i.e. in a market order, you don’t stop buying or selling bitcoins until you reach the requested amount. With market orders, you can end up paying more or selling for less than you intended, so be careful.
limit order
A limit order allows you to attempt to buy or sell bitcoin at a specific price that you decide. In other words, the order may never be filled, or may only be partially filled, until there are enough buyers or sellers willing to fulfill your requirements.
Suppose you place a limit order to buy five bitcoins at $10,000 per coin. you could end up owning only 4 bitcoins because there were no other sellers willing to sell you the final bitcoin at $10,000. the remaining 1 bitcoin order will stay there until the price reaches $10,000 again, and then the order will be filled.
stop loss order
This order type sets an auto-execution price at which you want to sell at in the future, in the event that the price drops sharply. this order type is useful for minimizing losses, without actively monitoring price action.
A stop-loss is basically an order that tells the trading platform the following: “if the price goes down to $x, I will sell my bitcoins at $y, to avoid further losses”. A stop loss order normally acts like a market order, which is executed instantly.
In other words, once the stop price is reached, the market will start selling your coins at any price until the order is filled.
maker and taker fees
Other terms you may come across when trading are “maker fees” and “taker fees”. Personally, I still think this model is one of the most confusing, but let’s try to break it down.
Exchanges want to incentivize people to provide liquidity. in other words, they want to “make a market”. therefore, whenever you create a new order that cannot be matched by any existing buyer or seller (i.e. a limit order), you are considered a “market maker” and will generally have lower fees .
meanwhile, a “market maker” places orders that are instantly fulfilled (ie market orders) since there was already a market maker to satisfy their requests. buyers remove liquidity from the exchange, so they typically have higher fees than creators, who add orders to the exchange’s order book.
For example, consider you place a limit order to buy a bitcoin at $10,000 (at most), but the lowest seller is only willing to sell at $11,000. in this case, you just created more liquidity for sellers who want to sell at $10,000.
then every time you place a buy order below the market price, or a sell order above the market price, you become a market maker.
Using the same example, maybe you place a limit order to buy a bitcoin at $12,000 (at most) and the lowest seller sells a bitcoin at $11,000. In this case, your order will be instantly fulfilled at $11,000. will remove orders from the exchange’s order book, so you are considered a market taker.
Now that you’re familiar with the main trading terms, it’s time for a brief introduction to reading price charts.
Japanese candlesticks
A widely used type of price chart, Japanese candlesticks are based on an ancient Japanese method of technical analysis, used in rice trading in the 17th century.
Each “candlestick” represents the open, low, high and close prices of an asset over a given period of time. This is why Japanese candlesticks are sometimes called ohlc (open, high, low, close) charts.
Depending on whether the candlestick is green or red, you can tell if the closing price of the timeframe was higher or lower than the opening price.
If a candlestick is green, it means that the closing price was higher than the opening price, so the price rose overall during this time period. On the other hand, if the candlestick is red, it means that the closing price was lower than the opening price, so the price went down.
In the image above, the opening price of the green candle is the wide bottom of the candle, the closing price is the wide top of the candle, and the highest and lowest trades within this time period are at the tips of the candlestick.
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When we are in a bull market, most of the candles are usually green. if it is a bear market, most of the candles will be red.
bull and bear markets
These terms are used to indicate the general trend of the chart, either up or down. They are named after these animals because of the way they attack their opponents.
A bull raises its horns in the air, while a bear moves its paws down. So these animals are metaphors for the movement of a market: if the trend is up, it’s a bull market. but if the trend is down, it’s a bear market.
resistance and support levels
Often when looking at market charts like ohcl, it can seem like the price of bitcoin cannot break above certain highs or lows. for example, you can see the price of bitcoin rise to $10,000 and then appear to hit a virtual “ceiling” and get stuck at that price for some time without breaking it.
In this scenario, $10,000 is the resistance level: a high price point that bitcoin is struggling to overcome. the resistance level is the result of many sell orders being executed at this price point. that is why the price fails to break through at that specific point.
Support levels, in a sense, are the mirror image of resistance levels. they look like a “floor” whereby the price of bitcoin doesn’t seem to go down when the price goes down. a support level will be accompanied by many buy orders placed at that price level. high demand from buyers at that support level dampens the downtrend.
Generally, the more often price has failed to move beyond support or resistance levels, the stronger these levels are considered to be.
Interestingly, both resistance and support levels are usually set around round numbers, e.g. 10,000, 15,000, etc The reason for this is that many traders tend to execute buy or sell orders at round numbered price points, causing them to act as strong price barriers.
psychology also contributes a lot to support and resistance levels. for example, until 2017 it seemed expensive to pay $1,000 per bitcoin, so there was a strong resistance level at $1,000. today, with bitcoin topping $68,000 by the end of 2021, the next psychological resistance level would be $70,000.
Great, you made it this far! By now, you should have enough knowledge to go out and get some field experience. however, it is important to remember that trading is a risky business and mistakes cost real money.
Let’s go over the most common mistakes people make when they start trading, in hopes you can avoid them.
mistake #1: risking more than you can afford to lose
The biggest mistake you can make is risking more money than you can afford to lose. take a look at the amount you feel comfortable with. here’s the worst case scenario: you’ll end up losing everything. if you find yourself trading above that amount, stop. you’re doing it wrong.
Trading is a very risky business. if you invest more money than you are comfortable with, it will affect the way you trade and will likely cause you to make poor decisions.
mistake #2: not having a plan
Another mistake people make when they start trading is not having a clear plan of action. In other words, they don’t know why they are entering a specific trade and, more importantly, when they should exit that trade.
Clear profit targets and loss limits should be decided before entering any trade.
Mistake #3: Leaving money on an exchange
This is the most basic rule of thumb for any cryptocurrency trader: never leave your money on an exchange you are not currently trading with. if your money is on the exchange, it means you have no control over it. If the exchange gets hacked, goes offline, or shuts down, you might end up losing that money.
Whenever you have money you don’t need in the short term to trade on an exchange, be sure to move it to your own bitcoin wallet or bank account for safekeeping.
There are useful tools that allow you to keep track of your portfolio and make sure this doesn’t happen to you. read our full review here to find out which are the best crypto portfolio tracking apps out there.
mistake #4: giving in to fear or greed
Two basic emotions tend to control the actions of many traders: fear and greed. The fear may appear in the form of closing his trade prematurely, because he read a disturbing news article, heard a rumor from a friend, or got scared by a sudden drop in price (which may be corrected soon).
The other big emotion, greed, can actually be fear-based as well: the fear of missing out (often referred to as “fomo”). when you hear people telling you about the next big thing, or when market prices rise sharply, you don’t want to miss out on all the action. so you can enter a trade too early, or even delay closing an open trade.
Greed can also influence traders to oversize their position or not exit a successful trade that has already hit its target, in the hope of making even more profit.
remember that in most cases, our emotions rule us. so never say “this will not happen to me”. be aware of your natural tendency toward fear and greed, and make sure you stick to the plan you laid out before you entered the trade.
mistake #5: not learning the lesson
Regardless of whether or not you made a successful trade, there is always a lesson to learn. nobody manages to make only profitable trades, and nobody gets to the point of making money without losing some money along the way.
The important thing is not necessarily whether you made money or not. rather, it is whether you managed to gain a new perspective on how to trade better next time.
7. frequently asked questions
how do i exchange bitcoins?
To exchange bitcoins, you will need to do the following:
- open an account at a bitcoin exchange (listed below)
- verify your identity
- deposit money into your account
- open your first position on the trade (i.e. buy or short)
Is day trading a good way to make money?
day trading is just one of many methods you can choose to trade. other examples include swing trading or scalping.
Although many people will argue that day trading is a good way to make money, over 90% of people quit day trading within the first 3 months.
Any type of trading strategy can work, as long as you are consistent and willing to put in the time and effort to learn how to be better than other traders.
We cover a lot about bitcoin trading, but I must warn you: most people who start trading bitcoin stop after a while, mainly because they don’t successfully make any money.
this is my opinion, if you want to be successful in trading, you will have to invest a significant amount of time and money to acquire the relevant skills, just like any other business. if you want to start trading just to make a quick buck, then maybe it’s better to avoid trading altogether.
There is no such thing as quick and easy money, no risk and no downside on the other end. however, if you are committed to learning how to become a professional bitcoin trader, take a look at our resource section below. these resources will help you get the best tools possible and continue your education.
You may still have some questions. if so, just leave them in the comments section below.
- cointelligence academy: an a-z trading course from cointelligence and mati greenspan
- tradingview: the most popular trading software
- coinigy: other trading software bitcoin trading
The following sites are suitable for bitcoin trading:
See also: Bitcoin Formula: opiniones sobre el bróker en 2022
- etoro – read my etoro review
- cex.io – read my cex.io review
- bitfinex – read my bitfinex review
- bitmex – read my bitmex review
- coinbase pro – read my coinbase review
- binance – read my binance review
- bitstamp – read my review by bistamp
- kraken – read my kraken review
- gemini – read my gemini review
- bitpanda – read my bitpanda review
