With renewed interest in cryptocurrencies amid higher regulatory glare and mainstream media coverage, trading in crypto has become one of the most attractive forms of investing.
You might be interested in trading cryptocurrency CFDs if you want to speculate on the price of a cryptocurrency without owning the digital asset and to leverage your position so that you only put up a fraction of the cost upfront.
How to use this Guide?
What is crypto trading?
Cryptocurrency trading is the act of speculating on cryptocurrency price movements via a contract for difference (CFD) trading account or buying and selling the underlying coins via an exchange. CFD trading is a type of derivative that allows you to bet on Bitcoin (BTC) and other crypto price changes without possessing the underlying currencies.
For example, you can go long (buy) if you believe the value of a cryptocurrency will rise, or short (sell) if you believe the value will fall. Both are leveraged instruments, which means that you only need a little deposit, known as margin trading crypto, to have total exposure to the underlying market. However, because your profit or loss is still determined based on the total size of your position, leveraging trading crypto magnifies both earnings and losses.
Before even thinking about venturing into crypto trading, it is important that one has a comprehensive understanding of the assets and technologies involved. Bitcoin is the soil from which thousands of other cryptocurrencies have grown.
As with stock trading, forex trading, and any other type of online trading, cryptocurrency trading can be complex, involving a variety of components and requiring knowledge. Over the years, however, an entire industry of other digital assets has come into existence with the assets being tradable for profit. All other cryptocurrencies that are not BTC are known as altcoins, the largest of which is Ether (ETH).
This guide will explain crypto trading strategies and familiarize you with crypto trading platforms and applications, the anatomy of trade, the styles of trading, and the role of technical and fundamental analysis in creating a comprehensive trading strategy.
Why trade cryptocurrencies?
When you trade cryptocurrencies via a CFD account with CAPEX, you are speculating on whether your chosen market will rise or fall in value, without ever taking ownership of the digital asset. Prices are quoted in traditional currencies such as the US dollar and Euro, and you never take ownership of the cryptocurrency itself.
The benefits of cryptocurrency trading include:
Volatility is a measure of how much the price of any particular asset has moved up or down over time. The more volatile an asset is, the riskier it is as an investment — and the more potential it has to offer either higher returns or higher losses over shorter periods of time than comparatively fewer volatile assets.
The volatility of cryptocurrencies is part of what makes this market so exciting. Rapid intraday price movements can provide a range of opportunities to traders to go long and short but also come with increased risk. So, if you decide to explore the cryptocurrency market, make sure that you have done your research and developed a risk management strategy.
With CAPEX you benefit from a Negative Balance Protection policy, which means that you cannot lose more money than what is on your account.
The cryptocurrency market is available to trade 24 hours a day, seven days a week because there is no centralized governance of the market. However, levels of liquidity can vary and your trades are more likely to be executed when there is the highest level of activity.
Cryptocurrency transactions take place directly between individuals, on cryptocurrency exchanges all over the world. However, there may be periods of downtime when the market is adjusting to infrastructural updates, or ‘forks’.
With CAPEX, you can trade cryptocurrencies against fiat currencies – such as the US dollar and Euro – Sun -Fri: 22:00-21:55.
Liquidity is the measure of how quickly and easily a cryptocurrency can be converted into cash, without impacting the market price. Liquidity is important because it brings about better pricing, faster transaction times, and increased accuracy for technical analysis.
In general, the cryptocurrency market is considered illiquid because the transactions are dispersed across multiple exchanges, which means that comparatively small trades can have huge impact on market prices. This is part of the reason cryptocurrency markets are so volatile.
However, when you trade cryptocurrency CFDs with CAPEX, you can get improved liquidity because we source prices from multiple venues on your behalf. This means that your trades are more likely to be executed quickly and at a lower cost (spread and slippage).
Ability to go long or short
When you buy a cryptocurrency, you are purchasing the asset upfront in the hope that it increases in value. But when you trade on the price of a cryptocurrency, you can take advantage of markets that are falling in price, as well as rising. This is known as going short.
For example, let’s say that you have decided to open a short CFD position on the price of Bitcoin because you believe that the market is going to fall. If you were right, and the value of Bitcoin fell against the US dollar, your trade would profit. However, if the value of Bitcoin rose against the US dollar, your position would be making a loss.
As CFD trading is a leveraged product, it enables you to open a position on ‘margin’ – a deposit worth just a fraction of the full value of the trade. In other words, you could gain a large exposure to a cryptocurrency market while only tying up a small amount of your capital.
The profit or loss you make from your cryptocurrency trades will reflect the full value of the position at the point it is closed, so trading on margin offers you the opportunity to make large profits from a small investment. However, it can also amplify any losses, including losses that could exceed your initial deposit for individual trade. Therefore, it is crucial to consider the total value of the leveraged position before trading CFDs.
It is also important to make sure that you have a suitable risk and money management strategy in place, which should include the appropriate stops and limits.
With CAPEX you can trade with leverage up to 1:30 for cryptocurrency and other assets, including crypto and blockchain-linked stocks and ETFs.
Faster account opening
When you buy cryptocurrencies, you will need to buy and sell via an exchange, which requires you to create an exchange account and store the cryptocurrency in your own digital wallet. This process can be restrictive and time-consuming.
But when cryptocurrency trading with CAPEX, you will not need access to the exchange directly because we’re exposed to the underlying market on your behalf. You will not need to set up and manage an exchange account, so you could be set up and ready to trade much more quickly. In fact, you could be trading in less than five minutes, with our simple application form and instant online verification.
Cryptocurrency trading examples
To help you understand how to trade cryptocurrencies, we have complied with two examples of cryptocurrency CFD trades and their outcomes.
CFD trading example: buying Bitcoin or going long
Let’s assume that Bitcoin is trading at a sell/buy price of 40.200/40.300 USD. You want to buy 1 CFD (units) because you think the price of Bitcoin will go up. Bitcoin has a 1:2 leverage or a margin rate of 50%, which means that you must deposit only 50% of the position’s value as position margin.
In this example, your CFD position margin will be $20.150 (50% x (1 units x $40.300 buy price)).
Outcome A: a profitable trade
If your prediction was correct, and the price of Bitcoin surges over the next hours or days, then you have made a profitable trade. If the sell/buy price is 42.200/42.300 USD when you decide to close your position by selling at 42.300 (the new sell price).
The price has moved $2000 (42.300 – 40.300) in your favor. Multiply this by the size of your position (1 unit) to calculate your gross profit which is $2.000.
If the position was closed during the day, there will not be any swap charges and the net profit is $2.000.
If the position was closed after a few days, there will be swap charges according to the overnight rollover specification.
Outcome B: a losing trade
If your prediction for the price of Bitcoin was wrong, the Bitcoin CFD trade will result in a loss. Let’s assume that the price of Bitcoin drops over the next hour to a sell/buy price of $38900/39.000. Because you want to limit the loss in the eventuality that the price continues to drop, you can sell at $41.000 (the new sell price) to close the position.
The price has moved $1.400 (40.300- 38.900) against you. Multiply this by the size of your position (1 units) to calculate your loss, which is $1.400.
CFD trading example: selling Ether
Let's assume Ethereum EUR is trading at a sell/buy price of €3.542/3.544, and you want to sell 1.5 CFDs (units) because you think the price will go down. Ethereum has a 1:2 leverage or a margin rate of 50%, which means that you only must deposit 50% of the position’s value as position margin.
In this example, your CFD position margin will be €2,656.5 (50% x (1.5 units x €3542 sell price)). Remember that if the price moves against you, it is possible to lose more than your initial position margin of €2.656.5.
Outcome A: a profitable trade
Your prediction was correct, and the price falls later to a sell/buy price of 3340/3342 EUR. You decide to close your trade by buying back at €3.342 (the new buy price).
The price has moved €200 (3542-3342) in your favor. Multiply this by the size of your position (1.5 units) to calculate your profit, which is €300 gross.
If the position was closed after more than 1 day, the overnight swap will be added to the profit according to the overnight rollover specification.
Outcome B: a losing trade
Unfortunately, your prediction was wrong, and the price of Ethereum EUR rises over the next hour to a sell/buy price of 3680/3682 EUR. You feel the price is likely to continue up, so to limit your potential loss you decide to buy at €3682 (the new buy price) to close the position.
The price has moved €140 (3682-3542) against you. Multiply this by the size of your position (1.5 units) to calculate your loss, which is €210.
Cryptocurrency Trading Styles
There is a range of styles used to accomplish a cryptocurrency trading strategy, each with appropriate market environments and risks inherent in the strategy.
High-Frequency Trading (HFT)
HFT is an algorithmic trading strategy used by quant traders. This involves developing algorithms and trading robots that help quickly enter and exit a crypto asset. Developing such bots needs an understanding of complex market concepts and a strong knowledge of mathematics and computer science. Therefore, it is more suited for advanced traders than beginners.
Scalping is a method of trading where the trader typically makes multiple trades each day, trying to profit off small price movements. Although there is risk involved, a crypto trader takes care of the margin requirement and other important rules to avoid bad trading experiences. Scalpers analyze the crypto asset, past trends, volumes and choose an entry and exit point within minutes.
Day trading involves taking positions and exiting on the same day. The aim of a trader while adopting such a trade is to book profits amid intraday price movements in a cryptocurrency of his choice. For an intraday trade, investors often rely on technical indicators to figure out entry and exit points for crypto.
Swing trading involves entering just after a trend reverses briefly, then resumes. You enter just as price is pushing or “swinging” past its former resistance, which indicates that the crypto trend has found new strength. Successful swing trading relies on the interpretation of the length and duration of each swing, as these define important support and resistance levels.
Position trading means taking a longer-term position to ride a trend by entering on a pullback to key support, waiting to see if that support holds, and then going long soon after the longer-term trend bounces back up from support and resumes. This style is associated with longer-term trends (so pay attention to the relevant long-term fundamentals).
Cryptocurrency Trading Strategies
There are many techniques traders use to speculate on the price fluctuations in the crypto markets. A crypto trader should devise a powerful strategy backed by research, with well-laid plans for when to enter and exit their positions.
A cryptocurrency trend following strategy is based on the expectation that the direction of price will continue in its current form and the trend will not reverse. This means that if you are trading an uptrend, you could continue to hold your long position and watch crypto price increase in value, while you could choose to sell your asset if the trend is going downward. Trend traders do not have a fixed view of where the market should go or in which direction.
A trading range occurs when a cryptocurrency trades between consistent high and low prices for a period. Crypto traders use various technical analysis approaches to identify major support and resistance levels before entering the market: sell near resistance and buy near support.
The hypothesis behind breakout trading is quite simple. If support and resistance levels keep price contained in a range, the break of that range might indicate a larger move. A breakout trader may enter a long or short position once the price has moved outside of the defined support or resistance area. These levels and the chart patterns that provide the basis for the breakouts might be interpreted differently by different traders. If price breaks outside of a defined range but quickly reverses, it may be considered a fakeout, or false breakout.
Arbitrage in crypto is when traders buy a cryptocurrency on one exchange and make a profit by selling it immediately on another exchange at a higher price.
Cryptocurrency pairs can facilitate arbitrage opportunities. When the price of a crypto pair consisting of a lesser-known altcoin and Bitcoin varies from one exchange to another, arbitrageurs can make a profit by taking advantage of the value difference. While arbitrage is a complicated financial mechanism usually automated by price-monitoring software, it keeps the digital asset prices stable between different exchanges.
Relying on social media for news on cryptocurrencies is among the mistakes that new investors tend to make. Investment decisions should never be based on the hype created on social media. Since digital currency is a hot topic, false information on this topic tends to travel very quickly.
Cryptocurrency Trading Tools
Being able to detect patterns and cycles is crucial for having clarity from the market behavior perspective. Knowing where you are positioned in relation to the whole is paramount. You want to be the experienced surfer who knows when the perfect wave is about to arrive instead of paddling listlessly in the waters hoping for something great to happen.
The micro perspective is also crucial in determining your actual strategy. There are a vast number of technical indicators used by traders to gain insight into the supply and demand of securities and market psychology.
The core idea behind technical analysis is that historical price action may indicate how the market is likely to behave in the future.
But how do we determine the potential of a particular crypto asset beyond or preceding its behavior in the trading market?
Whereas technical analysis involves studying market data to determine one’s trading strategy, fundamental analysis is the study of the underlying industry, technology, or assets that comprise a particular market.
How does one determine if an asset is based on sound fundamentals rather than hype, exaggerated technology, or worse — nothing at all?
For cryptocurrency analysis, several factors should be considered:
Technical analysis uses the concept of price patterns from the past and technical indicators to analyze the charts and predict the future movements in price. This can be applied to any market, including cryptocurrencies such as Bitcoin (BTC).
When done right, technical analysis helps you accurately predict the lows and highs of Bitcoin prices over different time periods. Such predictions will help you make educated and data-driven decisions on buying Bitcoin at a fair price and selling at a potential profit.
To get started with technical analysis, you need a trading platform that provides reliable and advanced tools for the same.
CAPEX WebTrader provides all the necessary tools and more for a beginner to get started with Bitcoin technical analysis.
Among the main tools used in the technical analysis, the following can be useful for beginners.
The cycle can be partitioned into four main parts: accumulation, markup, distribution, and decline. As the market moves between these phases, traders will continuously adapt their positions by consolidating, retracing, or correcting as they deem necessary.
The bull and the bear are quite different creatures and behave in opposition to one another within shared environmental conditions. It is critical that a trader knows not only under which role they fall but also which one is currently dominating the market.
Technical analysis is necessary not only to position oneself within this ever-changing market but also to actively navigate the ebbs and flows as they occur.
The trend is the direction that prices are moving in, based on where they have been in the past. Trends are made up of peaks and troughs. It is the direction of those peaks and troughs that constitute a market’s trend. Whether those peaks and troughs are moving up, down, or sideways indicates the direction of the trend.
- An uptrend is made up of ascending peaks and troughs. Higher highs and higher lows.
- A downtrend is made up of descending peaks and troughs. Lower highs and lower lows.
- A sideways trend (consolidation) is when prices move sideways in a horizontal range.
Charles Dow developed a series of principles for understanding and analyzing market behavior, which later became known as Dow Theory, the cornerstone of the study of technical analysis. Charles Dow believed that prices moved in waves or trends. He believed that much like a rising tide where the waves would move farther up the beach with each ebb and flow, and cause smaller ripples, so too would rising asset prices. Conversely, once the tide had peaked and changed to move farther down the beach until low tide, so too would asset prices. This may seem like a simple concept, but it is part of the foundation of the modern study of trends.
Based on lengths, there are 3 types of trends developing in the same type on the chart of any cryptocurrency:
- Primary – Long-term (i.e., 1 year or longer): the tide in Dow's explanation
- Secondary – Intermediate (i.e., 1 to 3 months): the waves
- Minor – Short-term (i.e., less than 1 month): the ripples
Support and resistance
Two of the most widely used technical analysis tools under the terms “support” and “resistance” relate to pricing barriers that tend to form in the market, preventing the price action from going too far in a certain direction.
Support refers to prices on a chart that tend to act as a floor by preventing the price of an asset from being pushed downward. As you can see from the charts below, the ability to identify a level of support may also coincide with a buying opportunity because this is the area where market participants see the value and start to push prices higher again.
Resistance levels are also regarded as a ceiling because these price levels represent areas where a rally runs out of gas.
Here are some of the most used types of support/resistance levels in cryptocurrency trading.
- A trend line is a straight line that connects 2 or more price points and then extends into the future to act as a line of support or resistance.
- The moving average nicely traces the bottom support levels of an upward trend along with the peaks of resistance throughout a downward trend. Adding 2 standard deviation levels above and below a simple moving average of the price offers crypto traders get another powerful tool, Bollinger Bands.
- Fibonacci retracements are levels (61.8%, 38.2%, and 23.6%) up to which a cryptocurrency can retrace before it resumes the original directional move and can be used to place entry orders, determine stop-loss levels, or set price targets.
- Pivot Points are used to determine the overall trend of the market over different time frames. The pivot point itself is simply the average of the intraday high and low, and the closing price from the previous trading day.
- The Ichimoku Cloud is a collection of technical indicators that show support and resistance levels, as well as momentum and trend direction.
When it comes to cryptocurrency trading and technical analysis, Oscillator indicators are a cornerstone for evaluating Bitcoin or any other digital currency. They oscillate between two fixed values in relation to the actual asset price and help traders gauge the directional movement as well as the strength or momentum. Hence, by using an oscillator indicator, you can figure out if a cryptocurrency price is going up or down as well as how fast it is going in that direction.
Market analysts have developed several popular oscillating indicators.
- The Stochastics indicator measures if a cryptocurrency price has been trending, losing momentum, or simply trading in a range.
- The Relative Strength Index (RSI) is a momentum indicator that measures the magnitude of recent price changes to analyze overbought or oversold conditions.
- Moving average convergence divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of a cryptocurrency’s price.
A chart pattern is a shape within a price chart that helps to suggest what prices might do next, based on what they have done in the past.
How does this relate to cryptocurrency trading? They are called candlesticks because of their rectangular shape and the lines above and/or below that resemble a wick. The wide portion of the candle is where the price either opened or closed, depending on its color. The wicks represent the price range in which an asset is traded during that set period of the candlestick. Candlesticks can encapsulate different timespans, from one minute to one day and beyond, and show different patterns depending on the timeline chosen.
Western chart patterns are commonly classified as reversal or continuation patterns, but these are rough generalizations that help us organize these patterns in our minds. Reversal patterns are often not followed by trend reversals, and continuation patterns are often followed by breakouts up or down.
The most used in cryptocurrency trading are:
- Head and Shoulders
- Double top and bottom
- Cup and handle
- Ascending, descending, and symmetrical triangle
- Rising and falling wedge
- Flag and pennant
Fundamental analysis is an approach used by investors to establish the "intrinsic value" of an asset or business. By looking at several internal and external factors, their main goal is to determine whether said asset or business is overvalued or undervalued. They can then leverage that information to strategically enter or exit positions.
In the case of crypto markets, the fundamental analysis offers the potential to analyze the external reality that affects them.
Cryptocurrency networks cannot really be assessed through the same lens as traditional businesses. If anything, the more decentralized offerings like Bitcoin (BTC) are closer to commodities. But even with the more centralized cryptocurrencies (such as those issued by organizations), traditional fundamental analysis indicators cannot tell us much.
So, we need to turn our attention to different frameworks.
Among the main factors observed by the fundamental analysis in cryptocurrencies, the following can be mentioned:
- Usability and adoption. This point is intended to examine the level of usability and adoption of a cryptocurrency. The simpler the use and the greater the adoption of the cryptocurrency, the greater its real value.
- Government position and regulations. This point is aimed at studying how governments see a certain cryptocurrency and whether it complies with regulations. A favorable regulatory framework will obviously increase the potential of the cryptocurrency or if it is unfavorable, it will limit its potential.
- Project development and media coverage. Find out how the development of the cryptocurrency project is progressing. Cryptocurrency development activity, its software, its community, and increased media coverage will indicate that the cryptocurrency has potential for greater value.
How risky is cryptocurrency trading?
Risk management is also a significant aspect of crypto trading. Prior to entering a trade, it is important to know how much you are willing to lose on that crypto trade if it goes against you. This can be based on a few factors, such as your trading capital. For example, a person might wish to only risk losing 1% of their overall trading capital either in total or per trade.
Cryptocurrency trading is simply a risky endeavor in and of itself. It’s almost impossible to predict any future market activity with certainty. At the end of the day, it’s important to make your own decisions, using available information and your own judgment, as well as to make sure you are properly educated.
Additionally, cryptocurrency trading strategies can vastly differ from person to person, based on preferences, personalities, trading capital, risk tolerance, etc. Trading crypto comes with significant responsibility. Anyone looking into cryptocurrency trading must evaluate their own personal situation before deciding to trade.
Visit CAPEX Academy for advanced online courses on online trading and investing.
What is the spread in cryptocurrency trading?
The spread is the difference between the buy and sell prices quoted for a cryptocurrency. Like many financial markets, when you open a position on a cryptocurrency market, you will be presented with two prices. If you want to open a long position, you trade at the buy price, which is slightly above the market price. If you want to open a short position, you trade at the sell price – slightly below the market price.
What is a lot in cryptocurrency trading?
Cryptocurrencies are often traded in lots – batches of cryptocurrency tokens used to standardize the size of trades. As cryptocurrencies are very volatile, lots tend to be small: most are just one unit of the base cryptocurrency. However, some cryptocurrencies are traded in bigger lots.
What is leverage in cryptocurrency trading?
Leverage is the means of gaining exposure to substantial amounts of cryptocurrency without having to pay the full value of your trade upfront. Instead, you put down a small deposit, known as margin. When you close a leveraged position, your profit or loss is based on the full size of the trade.
What is margin in cryptocurrency trading?
Margin is a key part of leveraged trading. It is the term used to describe the initial deposit you put up to open and maintain a leveraged position. When you are trading cryptocurrencies on margin, remember that your margin requirement will change depending on your broker, and how large your trade size is.
Margin is usually expressed as a percentage of the full position. A trade on bitcoin (BTC), for instance, might require 15% of the total value of the position to be paid for it to be opened. So instead of depositing $5000, you’d only need to deposit $750.
What is a pip in cryptocurrency trading?
Pips are the units used to measure movement in the price of a cryptocurrency and refer to a one-digit movement in the price at a specific level. Valuable cryptocurrencies are traded at the ‘dollar´ level, so a move from a price of $190.00 to $191.00, for example, would mean that the cryptocurrency has moved a single pip. However, some lower-value cryptocurrencies are traded at different scales, where a pip can be a cent or even a fraction of a cent.
It’s important to read the details on your chosen trading app to ensure you understand the level at which price movements will be measured before you place a trade.
What are good cryptocurrency pairs for beginners to trade?
There is no right cryptocurrency to trade for beginners because each is different, providing a range of benefits and risks to the trader. The best cryptocurrency for you will also depend on your trading goals, attitude to risk, and interests more generally.
With CAPEX, cryptocurrencies are traded against fiat currencies. Our cryptocurrency list includes the most traded digital assets, including the newly launched Bitcoin ETF.
Users/readers should not rely solely on the information presented herewith and should do their own research/analysis by also reading the actual underlying research. The content herewith is generic and does not take into consideration individual personal circumstances, investment experience or current financial situation.
Therefore, Key Way Investments Ltd shall not accept any responsibility for any losses of traders due to the use and the content of the information presented herein. Past performance and forecasts are not reliable indicators of future results.