The following article is the first of a series of articles that will examine the process of trading cryptocurrencies in detail. This particular article focuses on basic trading ideas and provides an introduction for new traders who want to start active participation in the cryptocurrency exchange market. We will look at what constitutes trading, what kind of trading styles exist, and why it’s extremely important to treat trading as a business, rather than as a hobby.
The definition of trading is to actively involve yourself in the financial markets. Trading is usually associated with exploiting short-term price variation on the markets with the goal of making a profit. You often hear the phrase ‘buy low, sell high’ which succinctly captures the essence of trading. The long-term investment train of thought is also centered on profit, but allows for a longer time-frame, often associated with at least 30 days in between trades, but it can also last years or even decades. Long-term investing or trading is often described as a passive form of trading.
In order to be successful in any business endeavor such as trading, you are required to create a precise and realistic plan. Questions regarding your strategy, capital, work hours, as well as both short and long-term objectives, together with their appropriate answers need to be included in this plan. It should also contain a projection of events, a timeline if you will, determining the amount of profit you want in a pre-conceived period of time. A key aspect to this is setting realistic expectations.
Great trading plans are one’s that you’ve created for yourself, that you’ve tested in live markets, based on research and data. Also, you need to understand that this plan will change, especially if you reevaluate it regularly. Since trading is a zero-sum game, meaning somebody has to lose, and you’re “playing” against real people, there are no real fixed patterns that can be implemented in order to maximize your chances of profit. This means that all traders on the markets have to understand the inner psychological workings of the human mind, so they can achieve awesome success, by actively influencing and expecting other’s decisions and behaviors.
Trading is a time-intensive investment, with all the research and planning one needs to do in order to be truly successful. Keep in mind the importance of a good plan before you decide to aimlessly enter the trading world, hoping to make a quick buck.
For a lot of people, the first trading experience with financial markets is through the process of investing. Like we mentioned before, investing is a passive form of trading with the goal of holding the investment for a long period of time. Since long-term investors are able to go wait though price dips due to the expectation that the price will rise up, profit is usually slow but more probable. Usually investors are motivated by creating security and a regular income for their eventual retirement.
Contrary to investing, which can span over years in duration, trading incorporates the regular buying and selling of currency pairs, cryptocurrencies, commodities, and corporate stocks, with the intent of generating profit higher than one can expect by simply investing. Trading profits naturally are realized by selling high and buying low, with short-term market entry and exit. Depending on your trading style, short-term can mean a few seconds, but it can stretch up to a year as well. There are four main styles of trading, which we will touch upon below. What is useful to consider is that, in reality, not a single trader belongs to a certain style exclusively, as they could potentially invest in long-term projects, while at the same time aggressively trading on open markets. This makes the classification of styles vague in some ways, but clear enough that they present valuable information for amateur traders.
This form of trading is closely related to investing, but in comparison, we can clearly see fundamental differences in the approach, as they will only hold for up to a year. These traders use technical tools to analyze historical data, typically referring to monthly and weekly charts, while ignoring the short-term price action. Unlike investors, position traders can easily participate in short trading strategies as well.
One month, but no more. These traders rarely hold their positions for more than 30 days, typically focusing on the daily and weekly price-action. Together with analysis tools they are able to identify when to profitably enter and exit the markets, but they don’t invest a lot of time in trading fundamentals. Market exits are based on reaching the desired profit, when the value of trade starts moving in the opposite direction, or when a fixed period of time has passed. This style of trading usually assumes the trades happen over the course of days and weeks, averaging at only a couple of days between trades. Regardless of this, swing trading doesn’t require constant monitoring, so people who are unable to pay constant attention to their trading, often choose to practice this particular style of trading.
Probably one of the most mentioned and popular style of trading, day trading is performed on a day to day basis, which means that these traders don’t leave their positions on the market to last overnight. Trades are stopped when achieving the preconceived profit margin or by performing a stop loss action. These traders use technical tools to analyze and take advantage of daily price fluctuations, closely following the real-time charts. The average time trade occurs in the single-day timeframe. Day trading is a full-time trading experience due to the need for constant attention over the trading platform and held trades.
Feeling extreme? This is the most active style of day trading that includes buying and selling frequently throughout the day. These traders create small gains, but they participate in the smallest price-action and rely on frequency to add up these small gains into substantial profit. In order to manage their operation, they utilize all available automation options being offered on the particular trading platform. Scalp traders generate a lot of volume on the markets they participate on because of their aggressive and frequent trading strategy. This style requires constant and precise monitoring in order to make effective buy and sell decisions.
Choose your own style
In order to be an effective trader you need to plan out your actions, which will be mostly determined by the trading style that you prefer. There are many factors to consider in order to make an objective decision regarding style, such as:
- How much time you would want to dedicate to trading?
- Are you risk averse?
- How much capital do you plan on using on the markets?
- At what level is your current personal trading experience?
- What type of personality do you have?
- Are you able to invest substantial amounts of time into researching?
Like we said before, many traders and investors do not belong to only one particular style of trading. Usually, traders mix and match their investments and they change things up in their strategy. Whether this is a good idea, we cannot say, because markets are unpredictable and volatile, as is the case with the cryptocurrency markets.
There is a deeply connected relationship between the expected length of time for a trade and your ability to direct your attention to the state of the markets. Position traders usually spend a couple of hours each week, reevaluating trades, while day and scalp traders are basically financial freelancers, working at least 8 hours, during which most of the time their attention is directly pointed toward the markets.
The business of trade
For quite some time now, people have been attracted to the idea of trading, since it allows you to be self-directed, have your own work schedule and even work from home. At the same time, it allows you to potentially create massive amounts of wealth! All you need is a computer with an internet connection and a small number of liquid assets ready for the purpose of trading. Apart from this, there are no other barriers for entry and participation, and while education is a benefit, it isn’t necessary.
All of this sounds nice and dandy, but what most people fail to realize is the emotional, monetary, and time commitment one has to make in order to be a successful trader.
There are no guarantees that you will manage to end up with profits. There is no way to make good trades 100% of the time. You need a lot of money to make a lot of money, because some money will only make some money. Independent and successful traders usually earn enough to comfortably support themselves, while about 80% of day traders completely fail within their first year.
It’s extremely easy to enter the trading business, just sign up with an exchange and buy, but doing this doesn’t guarantee that you will eventually become a successful trader. Instead of failing like the rest of the 80% of day traders, enter the market at your own terms with a strategy and plan already developed before-hand. You wouldn’t start a business without a business plan, would you?
Remember, effectively trading isn’t easy, otherwise, everyone would be doing it and enjoying the profits. Because of this, it is very important that you thoroughly inform yourself about techniques and strategies before creating your own. Just reading this article shows that you’re already taking the first step towards becoming a trade master.
In the next article we will explore trading technology, order types, and will explain the process of creating your first trading plan and effectively testing it.
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