Bitcoin and other cryptocurrencies have taken the investment world and turned it on its head. What the internet did for retail and commerce, bitcoin has done for investing and trading. And the momentum of crypto keeps building and building. But like traditional investing, understanding how to trade Bitcoin can be complicated. You certainly have a head-up in it if you’re experienced in trading and investing, but there are a lot of new terms and concepts to learn that are unique to crypto.
In this guide, we’ll go over the basics of trading Bitcoin. We’ll help you learn the terminologies and vocabulary as well as learning how to watch and read the market, create trading strategies, and understand how to implement that plan on crypto exchanges. While this guide can be roughly applied to a lot of different cryptocurrencies, we’ll be focusing specifically on Bitcoin and Bitcoin trading.
Table of Contents hide
1 Trading Bitcoin in a Few Words
2 Trading Bitcoin versus Investing Bitcoin
4 Technical and Fundamental Analysis
5.1 Trading Platforms, Brokers, and Marketplaces
6 Analyzing Price Charts 6.1 Japanese Candlesticks
6.1.2 Support and Resistance Levels
7.1 1. Trading More Than You Can Afford
7.3 3. Leaving Money on the Exchange
7.4 4. Succumbing to Fear and Greed
9 Success in Bitcoin Day Trading
Table of Contents
The general idea of Bitcoin is, similar to the stock market, to buy low and sell high. While investing is buying and holding on to Bitcoin for the long haul, trading focuses on attempting to predict markets and trends by analyzing the industry. To be a successful trader requires a lot of time, money, and practice before you get skilled and you start to see returns.
Generally speaking, that’s all there is to it. But if you want to dive into the particulars and specifics and truly understand how you can start trading Bitcoin, read on.
Before we go any further, we need to take a closer look at the specifics of trading Bitcoin and how it differs from Bitcoin investing.
When someone uses the term investing in reference to Bitcoin, it typically refers to the practice of buying Bitcoin with the intent to hold on to it for a lengthy amount of time. This is similar to traditional investing. The idea is that, regardless of how volatile the market is in the short term, in the long term the price will rise. Folks will typically invest long term in Bitcoin because of beliefs regarding the ideology and technology behind Bitcoin.
Fun Fact: Bitcoin investors refer to the practice of investing as “HODL,” which originated as a typo in an old forum post circa 2013.
On the other hand, Bitcoin traders buy and sell and buy again attempting to make profits in the short term with market fluctuations. Unlike Bitcoin investors, traders see Bitcoin as a tool for making money. Often times, they have no particular beliefs about the ideologies and technology surrounding Bitcoin.
With that said, these categorizations aren’t mutually exclusive. You can be someone who cares and is interested in the ideas behind Bitcoin while still trading it and attempting to make profits.
There are a few reasons why trading Bitcoin has gotten quite popular. For one, Bitcoin is extremely volatile. If someone can predict market fluctuations accurately, they can make a tidy profit.
For two, Bitcoin is a market that’s open 24 hours a day, seven days a week. For traders that want more freedom or that live in different time zones, this can be an attractive prospect compared to traditional trading where they’re set to the stock market’s schedule.
Lastly, Bitcoin is largely unregulated, meaning that it can be extremely quick and easy for an individual to jump in and start trading without verifying their identities or going through other lengthy processes and requirements.
Trading is generally the practice of buying high and selling low, but there are different ways a trader can go about doing this.
The day-trading method entails doing several trades on a given day. The objective is to capitalize on short-term fluctuations in Bitcoin price. A day trader can spend a lot of time in front of their computer watching prices and market changes. At the end of the day, a day trader will typically not have any more open trades.
Scalping is a method that’s become more and more popular in recent years. The strategy is to attempt to make large profits on small changes in Bitcoin prices. This practice is very short term, and the idea is that repeatedly making tiny profits will limit risk and can create an advantage for day traders. A typical scalper may make tens or hundreds of trades on a given day.
A swing trader’s objective is to attempt to capitalize on the natural ebb and flow of price cycles. They’ll attempt to spot when a particular price movement begins and will then make the buy. They hold on until the cycle drops and then take the profits.
This method requires a trader to analyze and understand the bigger picture rather than staring at their computer all day. A swing trade might take several days or weeks before the cycle finishes and they complete the trade.
While the aforementioned strategies attempt to predict how the market will move and fluctuate, the bottom line is that no one can predict what Bitcoin will do in terms of price. But traders have identified and analyzed patterns and found rules that give them the edge and allow them to capitalize in the long run. No trader can make every single one of their trades profitable. With that said, a successful trader should be able to see profits at the end of a trading day, regardless of whether they traded losses or not.
In analyzing Bitcoin data, traders follow two strategies or methodologies: Fundamental and technical analysis.
The fundamental analysis attempts to analyze the larger moving pieces that affect the price of Bitcoin. This can include changes in the crypto industry, news about alternate currencies, technical changes in Bitcoin or crypto in general, world regulations, and so on.
This methodology seeks to understand the larger outside influences that can change Bitcoin’s price. For example, if a particular country with a large economy announced they were banning Bitcoin, it’s highly likely this news would negatively affect the price.
As the name implies, the methodology of technical analysis is focused on price movements, statistics, and volume of trading. It’s the practice of analyzing data and searching for patterns and then applying these patterns to similar circumstances in an attempt to predict the market price.
The idea behind this methodology is that the movement of market prices speaks for itself and that, regardless of events happening in the world, the movements have patterns that can be analyzed and used to predict the behavior of prices.
Having said that, which is the better of the two methods?
It’s worth mentioning again: No one can predict without error what the market will do. Technical analysis may yield a promising pattern and then the market just doesn’t behave how you expected. Fundamental analysis might see a promising announcement in technology that ends up causing the price to plummet. The bottom line is that there are no surefire methods in trading. But a healthy mix of both methods of analysis where you take all factors into consideration is likely the best strategy.
There are quite a few terms that get tossed around in the Bitcoin world that can be a little confusing if you aren’t familiar with them. You’ll come across many of these terms in the crypto world and when working with crypto exchanges.
A Bitcoin trading platform is a website where a buyer is automatically matched with a seller. This differs from a broker that deals with crypto, like Coinmama.
A Bitcoin broker will sell you crypto directly, usually with a more substantial fee. This is not the same as a marketplace where buyers and sellers can communicate with each other directly.
The order book is a list of buy and sell orders of the market and can be viewed on the trading platform. Buy orders are known as bids as people are bidding on Bitcoin prices to buy at. The sell orders, on the other hand, are referred to as asks as they indicate the asking price that a seller wants.
A unique distinction between Bitcoin and other markets is that Bitcoin’s price is determined by the last trade that happened on a particular trading platform. Unlike other traditional currencies, there isn’t an individual price that Bitcoin follows globally.
Because of this, Bitcoin’s price can fluctuate from country to country, since every country may be operating from different exchanges and so include different trades.
Keep in mind that, when looking at Bitcoin prices, you may see the indicators high and low. These prices refer to the prices of Bitcoin over the last 24 hours.
Volume indicates the number of Bitcoins that have traded over a particular span of time. It’s a statistic that’s utilized by traders to determine how substantial a trend is. Substantial trends will usually come with large volumes be traded while weaker trends will indicate low trade volumes.
As an example, a good upswing trend will have large volumes being traded along with it. But as the trend begins to dissipate, the trading volumes will taper off and get lower. If you see a sudden change in Bitcoin price, it’s a good idea to look at trading volume. This can help determine whether the trend is simply correcting or if it’s reversing completely.
A market order, sometimes referred to as an instant order, can be placed on a trading platform and it’ll be completed instantly at any price. The only thing you do is set the amount of Bitcoin you’re wanting to sell or buy and the exchange performs the transaction immediately. The platform itself then matches buyers or sellers to fulfill your order.
When your order is completed, it’s quite probable that the order will have been matched by multiple buyers or sellers at different prices.
As an example, imagine that you placed a market order for five Bitcoins. The trading platform will search for the sellers with the lowest price available. Once it gathers enough sellers to equal five bitcoins, the order will be completed. Depending on the availability of the sellers, it’s possible you’ll end up buying two of the Bitcoins at once price and the remaining three at another price.
To put it another way, the buying and selling process doesn’t stop until it reaches the amount you bought or sold. Be careful with market orders, since it’s quite possible to pay more or sell for less than you originally intended.
A limit order gives you the ability to buy or sell Bitcoin at a price that you specify. With this, however, the order may not be completed or filled since there may not be adequate sellers or buyers to meet your given price.
For example, imagine that you create a limit order for five Bitcoins at the price of $10,000 per coin. You get four of the Bitcoins, but there were no remaining sellers to facilitate the final coin. The order remains open until there’s a Bitcoin available at the specified price, at which point, the order gets fulfilled.
A stop-loss order allows you to specify a price to sell in the future in the event that there’s a sharp drop in price. This kind of order can help you minimize your losses.
Essentially, it’s an order that specifies that, if the price of Bitcoin drops to or below a certain level, the platform will sell your Bitcoin at the predetermined price, minimizing the loss of as little money as possible. This also acts as a market order.
When the stop price is reached, the market will begin selling your Bitcoin at any price until the order is completed.
The concept of maker and trader fees tends to be a little confusing, but let’s try to take it apart and explain it.
Bitcoin exchanges want to have people trading. Their whole agenda is to “make market.” When you open a new order that can’t be fulfilled by an existing seller or buyer, you’re essentially a market maker and this will give you lower fees.
A market taker, on the other hand, will place orders that are instantly filled. These orders are filled by the market maker orders that were already placed. A taker is essentially taking business away from the exchange, so their fees will be higher than a maker’s, who add business to the exchange.
Say, for example, you place a limit order for one Bitcoin at a price of $10,000, but the cheapest price on the exchange is $11,000. You’re now a maker as you’ve created a new market for people wanting to sell at your price. In simpler terms, when you place a buy order below market cost or a sell order that’s above the market price, you’re a market maker.
Following from the same example, maybe you decide to put in a limit order for one Bitcoin for $12,000 and the lowest seller is sitting at $11,000. In this scenario, your order will be filled instantly. Since you’ve removed an order from the market’s book, you’re now a market taker.
Now that you’re good and acclimated with Bitcoin terminology, it’s time to talk about analyzing price graphs.
The Japanese Candlesticks method originates from the 1600s, where it was a technical method for analyzing rice trades. In this methodology, the opening, lowest, highest, and closing prices of a time period are known as a candle. This can also be referred to as an OHLC graph.
You can tell whether or not the closing price was higher or lower than the opening by the color of the candle: Green represents a lower opening price, indicating the price has gone up. Red represents a higher opening price, meaning the price has gone down.
Trading Candlesticks
In a bull market, candlesticks will be mostly green. In a bear market, they’ll be red. Which brings us to the distinction between bull and bear markets.
The terms bull and bear markets indicate the trend of the graph and if it’s moving up or down. The animals are analogous to market movements: A bull attacks by thrusting upwards while a bear attacks by swiping down. If the market is trending up, it’s a bull. If it’s trending down, it’s a bear.
Support and Resistance Levels
When analyzing graphs, it can seem like it’s not possible for Bitcoin’s price to meet a certain high or low. For example, the price might shoot up to $15,000 and then suddenly it seems to hit a ceiling and stay at that price.
In this example, the $15,000 price would be the resistance level. It’s a price point that Bitcoin is having trouble beating. Many sell orders being fulfilled at the price point of $15,000 will cause this and is why the price can’t seem to exceed the ceiling.
Support levels would be the opposite of resistance levels. They’re a virtual floor that prevents the Bitcoin price from falling and further. If the price of Bitcoin drops to $9,000 and seems to level out, this is an indication that many buy orders set at this price have been placed. The high demand at this price stops the downward trend.
Typically, the more times these floors or ceilings have been hit, the stronger they’re considered.
Incidentally, both of these levels are typically set at round numbers, like $15,000 or $10,000. This is caused by inexperienced traders placing buy or sell orders at rounded prices, which makes them strong ceilings or floors.
A lot of this can also be attributed to psychology and human behavior. For example, up until 2017, $1,000 per Bitcoin seemed intuitively expensive. However, once Bitcoin pushed past this price, the new resistance level shot up to $10,000.
At this point, you should have a pretty good idea about what goes into trading Bitcoin, and you can probably start getting your hands dirty with some light trading. But keep in mind that this is an inherently risky venture and mistakes can cost you a lot of capital. Let’s take a look at some of the more common mistakes that new traders make.
This is the single biggest mistake you can make in any form of trading. Evaluate the amount of money you feel comfortable with. The worst possible scenario is that you’ll lose every bit of this amount. So if you start trading more than that amount, you are, in a sense, gambling. Don’t gamble.
Any kind of trading is risky. If you attempt to invest more than you’re comfortable losing, it may affect your trading and cripple your decision-making abilities.
When trading, you need a concise plan to follow. You need to know why you’re beginning a particular trade and when you should end it. You need to have profit goals that are clear and stop-losses in place.
This is an essential rule for any type of crypto trading. Do not ever, under any circumstances, leave money on an exchange that you aren’t using to trade. If your money is sitting there, you have no control over it. And if the exchange gets hacked or goes down, you could end up losing it.
When you have funds that aren’t needed for trading, be sure you move them to your bank account or your own Bitcoin wallet.
Fear and greed have held sway over many traders. The fear that takes over after seeing a sudden drop in price, hearing a rumor, or reading a news article that portends doom can cause you to back out of a trade too early.
Greed, on the other hand, can have the opposite effect. When you hear the buzz about new tech or when the Bitcoin price suddenly raises sharply, you want to get in on the action. This can cause you to enter into trades prematurely or delay closing trades that need to end.
From a psychological perspective, you need to realize that, no matter how rational you are, emotions control our behavior. This is where your plan comes in. When you feel urges wrought on by fear or greed, refer back to the plan you made while you had a cool head.
Not everyone trade is going to be successful; this is simply the nature of trading. But every trade will contain a lesson. It’s imperative that you analyze each and every one of your actions and learn from what you did wrong and what you did right. This way, your skills as a trader will improve, and your trades will trend toward profit and success.
If you’ve made it this far, and you want to know how to get started, I commend you. To get started with trading, you’ll need to:
There are many methods you can utilize when trading and day trading is only one. You can also opt to do swing trading or scalping. Day trading itself can be a good way to make money, but keep in mind that over 90 percent of people who take up day trading end up quitting within three months. But if you’re willing to put in the time and money, and you’re disciplined and determined, day trading can be a very lucrative way to make money.
Well, you’ve come a long way. If you paid attention, you learned quite a bit about trading Bitcoin. But you still need to be cautious. Most people that start out trading Bitcoin end up losing money in the short term, no matter how prepared they are.
If you strive for success in trading, you need to be prepared to invest a large amount of both time and money. Trading is just like any other skill you develop: It will take time and lots of mistakes before you get to a point where you’re profitable. If you’re looking at trading because you think it will be quick and easy to make money, you’ll want to look elsewhere.
But if you have the will, determination, time, and money to invest in Bitcoin and in yourself, you will eventually see profits and success. Good luck and happy trading.
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