The most exciting form of investment making ways into the world today is cryptocurrency trading. It has lured many investors and presents a different set of opportunities and challenges.

This article will give insight into what cryptocurrency trading and its workings are about. We will as well discuss major factors to know before getting involved in this fast-paced market.

Understanding Cryptocurrency Trading

Cryptocurrency trading is the act of selling, buying, or exchanging digital currencies in the financial markets. Traders benefit from every increase in the values of these digital currencies amid fluctuating prices.

Simply put, this means one has to buy at a low price and sell at a high price in order to make gains from the price difference. Normally, this is simply called the ‘spread.’

Typical Modes of Trading in Cryptocurrency

These modes include spot, derivatives, and peer-to-peer trading:

Spot Trading

In this case, traders in spot trading buy and sell actual cryptocurrencies, such as Bitcoin or Ethereum.

All these purchases and sales are in real-time action and almost instant settlement. It represents a basic way of digital currency trading, often used by beginners.

Spot trading involves cryptocurrency exchanges such as Coinbase, Binance, and Kraken. You can trade cryptocurrencies against other cryptocurrencies or even fiat money.

Derivatives Trading

Trading involves a contract whose value is derived from another underlying asset; in this case, various cryptocurrencies. Common cryptocurrency derivative contracts include futures and options.

Through trading, it enables traders to make positions in the prices of movements of cryptocurrencies without really owning those assets.

This way is much riskier and more complex than spot trading and is used only by the more advanced traders.

Peer-to-Peer (P2P) Trading

These platforms enable people to trade directly with each other, eliminating any intermediary. The platforms bring together buyers and sellers to bargain on prices and terms for the trade.

Peer-to-peer trading is a famous concept in areas with little or not-so-developed banking facilities. It normally includes the purchase of cryptocurrencies with local fiat money.

How Does Cryptocurrency Trading Work?

Trades in cryptocurrencies happen via cryptocurrency exchanges. The latter are web-based platforms where you can create an account, deposit some money into it, and conduct transactions.

You can also view it as an intermediate exchange that matches buyers and sellers and offers the necessary infrastructure for trade to take place.

Now, here is how cryptocurrency trading works in simple steps:

1. Cryptocurrency Exchange Selection

First and foremost, you will need to choose a trustworthy crypto exchange. You need to compare several exchanges in terms of security, fees, available cryptocurrencies, user interface, and customer support.

This list of prominent exchanges includes Coinbase, Binance, Kraken, and Bitstamp.

2. Create an Account

Once you have selected an exchange, you need to sign up. On most crypto exchanges, it generally means registering with your personal information.

After that, it’s getting identity verification done—or so-called KYC—and setting further security measures in place, such as 2FA.

3. Deposit

Now that you have verified your account, feel free to start depositing some funds into the exchange account.

Most of these exchanges accept deposits in either fiat money—such as USD or EUR—or even cryptocurrencies like Bitcoin or Ethereum. This is again a matter of personal preference and what is allowed by the platform.

4. Choosing a Trading Pair

Since cryptocurrency trading occurs in pairs, you sell one cryptocurrency against another.

Choose a trading pair that most appropriately suits your trading strategy and goals.

5. Analyze the Market

A trade can only be executed after technical and fundamental analysis of the market conditions, price trends, and other catalysts that might be at play.

This includes some of the more common tools and resources that traders use. These usually include price charts, technical indicators, and news sources.

6. Place an order

Depending on the evaluation made, you can place an order. There are several order types, including market and limit orders.

Market Order: It is an order where a trade executes instantaneously at the current market price. It is an absolute order, meaning, of course, the trade will be executed; however, you may not exactly get the price for it.

Limit Order: You will be able to limit your trade to being executed only at a particular price with a limit order. This will only be executed if the market hits your price or beyond.

7. Monitor Your Trade

After placing an order, the next step will be monitoring how your trade is going. Cryptocurrency markets are very volatile; hence, the prices can move up and down within seconds.

Many traders set stop-loss and take-profit orders to limit their risk and even sell automatically.

8. The Trade Is Executed

If conditions are met, then the trade gets executed by the exchange. This will match your buy order with a corresponding sell order or vice versa. The exchange will deduct fees from the proceeds of your trade.

9. Withdraw or Further Trade

Once your trade is complete, you may withdraw to your external wallet for keeping your funds safe or use the same account balance to further trade.

7 Essential Crypto Trading Strategies and Techniques

It simply goes without saying that successful cryptocurrency trading is more than just low buying or high selling.

Traders apply varied ways and techniques to help their way through the complexities and volatility of cryptocurrency markets.

Here are some of the common approaches:

Day Trading

This involves selling and buying of digital currencies within a day. One trades to and fro within a short period to gain profit from the price fluctuation, normally making several trades.

Day trading requires quick decision making and constant monitoring of the market.

Swing Trading

The swing trader looks to catch the price swings that occur over several days or even weeks. The traders use technical analysis to identify the entry point and exit position, basing on the trends and patterns in the security.

Scalping

A scalper gets in and out of very short-term trades to take advantage of small changes in price. This strategy involves an opening and closing of positions within minutes, looking forward to taking small profits from frequent price changes.

Arbitrage

They are traders who utilize price differentials between cryptocurrency exchanges. Buy low on one and sell high on another.

Trend Following

Trend followers trade according to trends prevailing in the markets. They identify the trend through indicators and analysis.

Fundamental Analysis

Some traders believe in fundamental analysis, where they look closely at the underlying technology, team, and possible use cases that a cryptocurrency has to make investment decisions.

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9 Steps to Do Cryptocurrency Trading the Right Way!!