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September 13, 2021

How to trade cryptocurrency

Questions that worry all traders: What if cryptocurrencies drop to zero? What are the most profitable strategies? What tools help in trading? Find out in this article

How to trade cryptocurrency

Cryptocurrencies have reached their moment of glory - their course is discussed everywhere, from news to public transport. In anticipation of a quick profit, video cards are being bought up from store shelves, the manufacturers of which are beginning to limit the possibility of profitable mining at the hardware level. Traders, as always, are on the sidelines of this fever, knowing full well that the main money will be received by those who trade, not mine.

The reader will need initial trading experience (even on a demo account) and knowledge of the basic principles and indicators of technical analysis. This is a necessary condition for starting trading cryptocurrencies. We will immediately answer the main question that worries everyone watching the sharp fluctuations in the rates of digital money

What if cryptocurrencies drop to zero?

Let's start with the sharp rise in value that began in December 2017. The reason is beyond doubt - the beginning of Bitcoin futures trading on the Chicago Currency Exchange (CME). This was a signal that the financial market recognized a currency that has no real content, which caused a chain reaction among investors. Everyone who had doubts about investments before happily started buying in huge volumes, pushing the price up. When the first cryptocurrency trading on the exchange filled with excitement, investors got a lot of stress after seeing this:

History chart

But professional traders remained calm, counting the profit from prudently opened short positions because they know the principle formulated in the last century by John Doe: all markets have cycles; growth is always followed by a fall. In other words:

A trader makes money on a change in the rate and, unlike an investor; he absolutely does not care how much the asset is worth now - $ 1000 or 10. The main thing is that it is volatile, and the more movement, the better.

Now that we have found out that we are not afraid of the «collapse of the cryptocurrency bubble», we can move on.

Choosing a trading platform

The most important factor for successful trading of any financial assets is before you top up your deposit and open your first transaction. Two main options:

1. Crypto exchanges

The first sites were where it was possible to sell/buy/exchange Bitcoin and other cryptocurrencies at the market rate. At the same time, the courses could differ very significantly; sometimes this was done on purpose, which created an excellent basis for classical arbitration

Since the creation and bankruptcy of the first Mt.Gox exchange, a series of bankruptcies, hacking with theft of deposits, and charges of money laundering have not stopped. Recent events include BTC-e and Chinese exchanges Bitcan and BTCC. Financial inconveniences include:

  • High requirements for the initial deposit, which usually should be only in cryptocurrency. This means that with a change in the exchange rate, the amount of profit will change and trading may become unprofitable;
  • Lack of transparency in the formation of quotes provided by the cryptocurrency exchange. Forex traders are well aware of how to trade in such conditions. The result is a complete loss of the deposit
  • The process of depositing/withdrawing funds can last up to 3 days, which can turn a profit into a loss in conditions of  the high volatility of digital coins.

If you nevertheless decide to trade on the crypto exchange, choose platforms whose reputation does not yet have "black spots", for example, Kraken, which is licensed from financial regulators in Canada and the United States.

Crypto exchanges

2. Forex Brokers

Now there is already an alternative for cryptocurrency trading. This can be done without changing the broker, and without leaving your favorite MetaTrader. Bitcoin, LiteCoin, Ethereum, and other digital currencies are present in all the leading companies in the Forex access market. In addition, you get

  • A single deposit without the need to reserve the amount for conversion into cryptocurrency;
  • Official quotes of the CME exchange, which can be easily checked and made sure of their correctness;
  • A reputable broker has a full set of licenses and is regularly monitored by regulators.

What are the most profitable strategies?

Let's start with fundamental analysis, forecasts for which are increasingly appearing on the Internet. We can immediately say that such "expert opinions" are devoid of any sense because cryptocurrencies have no real economic content, whether it is Bitcoin worth 25 thousand dollars or Monero for $220. 

The speeches of the heads of the FED and ECB, after which everyone is waiting for sharp changes in the exchange rate of the euro and the dollar, determine the monetary policy of the world's largest economies, and the data of Non-farm Payrolls on unemployment in the USA counts real people. In the cryptocurrency market, there are only rumors and gossip.

Political and legislative decisions, of course, cause sharp movements, especially if they come from China, but it is still impossible to say when and what they will be. An example would be a complete ban on mining by the Chinese authorities, followed by a brief and sharp drop in the Bitcoin exchange rate.

"So what works?". Answer: Classical technical analysis and its most simple and time-tested tools. A few examples:

  • Fibonacci levels. As it turned out, «the golden ratio» works perfectly as it does well on the LiteCoin chart. Even beginners will immediately see the breakdown and rollbacks from the levels working out "according to the textbook", this is normal because people with all their habits and stereotypes trade;
Fibonacci levels
  • Moving Average (MA). For more than a hundred years, moving averages have been bringing stable profits, and if you are not sure which instrument to choose, put MA on the chart. Then we confirm the breakout or crossing with additional oscillators;
Moving Average
  • Price levels. In addition to Fibonacci, you can trade from daily/weekly highs and lows. Cryptocurrency traders should monitor the "round" levels; the last two characters of the quote will be 00 or 50. These are important psychological levels, although with frequent false breakouts. It is recommended to open a position only after 2-3 retests before breaking through.
Price levels
  • Price Action patterns. Such as «Bearish/Bullish Engulfing» and especially «Pin-bar». Signal reliability increases if there is a strong price level below it, such as Fibonacci.
Price Action patterns

Expert Advisors and Signal services

You always want others to trade for you or give you good advice, especially if you don't have much experience. As in Forex, there are many offers of automatic advisors (bots) and signaling services on the Internet. Both paid and free signals

How to trade is decided by everyone individually, but if you decide to use automation, remember. The bot trades only according to the algorithm and almost does not know how to adapt to market changes. No matter how much advertising and "trade reports" convince. Settings can improve the result (if there are any), but on volatile digital currencies, this should be done often and quickly. Otherwise, the robot will open a lot of unprofitable transactions; you can lose the entire deposit.

Signaling services leave the trader the right to decide to open a deal or stay out of the market. They work well as additional validation of your own ideas and strategies. Signaling services such as vfxAlert have been operating for more than 5 years, constantly expanding the list of assets and the quality of signals. There is a free package available immediately after registration. In the FREE package, some of the information is not available, but this is enough for the first test.

The information is not an advertisement or trading advice, but we believe that a trader should also know about this option of trading digital money. Let's repeat the main thing once again: any external signals can only be used as an additional confirmation of the strategy and these indicators!

Recommendations about use …

  • Cryptocurrencies are very volatile on all timeframes. A sharp rise/fall of 15-20% in value will be common. So be careful with scalping. Whatever the cryptocurrency trading rates say, beginners should start trading with intraday transactions on the M30 timeframe and above;
  • Despite periodic ups and downs, cryptocurrencies do not have long cycles, so conventional medium and long-term strategies do not work. In financial markets, cycles are based on periodic downturns followed by economic growth. On cryptocurrencies, everything is determined by large players - the movement can be trending or sideways for a very long time;
  • Price gaps on Bitcoin futures usually remain open, this is normal for the stock market. Cryptocurrency exchange trading requires traders who have come from Forex to get rid of the habit of automatically placing pending orders in the direction of its closure as soon as possible;
  • High volatility requires a revision of the money management system: the volume of the average lot should be reduced at least twice; the leverage should not exceed 1:5-10.

Most importantly: Crypto trading is still a prerogative of people and high-frequency trading (HFT) algorithms have not taken over the entire market, as it happened with stocks, there are prospects to earn a solid amount.

There is an article in russian, you can read.