Cryptocurrency Trading Basics

Cryptocurrency Trading Basics

Here are some simple trading concepts as they pertain to cryptocurrency. 

Price

The ask price is totally determined by the supply (represented by the ones selling) and demand (represented by the buyers). The price (shown) is the price at which the last trade was done, it is the result of buyers and sellers interacting. When they agree to trade at a certain price, operation takes place and a new ask price is determined

The price is determined by the supply and demand of each cryptocurrency on the platform. The price shown on the platform represents the price of the last trade that was made.  

Volume

Trade volume tracks how much cryptocurrency has been bought and sold in a particular cryptocurrency market during a specific time period. 

The more a cryptocurrency is traded, the higher the trading volume. The less it is traded, the lower the trading volume. 

Maker & Taker

“Maker” is short for market maker – a trader who provides liquidity to a market by buying and selling cryptocurrency.Liquidity refers to how easy a trader can convert between cryptocurrency and cash or between cryptocurrency and cryptocurrency. The more liquidity on an exchange, the quicker it is to fill trades or buy and sell. A ‘taker’ buys the maker’s cryptocurrency, taking liquidity off the order book and market.  

“Makers” provide liquidity to a market by placing limit orders on the order book. Some exchanges reward makers with lower fees. 

This model also rewards the most active users by lowering fees (maker-taker) based on trade volume for the previous 30 days. 

Orders

An order book records limit orders placed by buyers and sellers. Each cryptocurrency has its own order book. The order book is continuously updated, and it’s the best way to check out how much a cryptocurrency is being traded for. 

Many types of exchanges offer four types of orders: a market order, a limit order and stop-loss and stop-limit orders. Different types of orders help you choose at which price you’d like to buy or sell.

Market Order

A market order lets you buy or sell at the current asking price. It’s the easiest and quickest way to trade. You don’t decide the price, you trade at what the market is currently. In the order book, a market order is listed as the “last trade.”

Limit Order

A limit order lets you decide at which price you’d like to buy or sell. Limit orders can be handy in times of volatility – when the price of a coin is falling or rising very quickly. For example, if a coin is rising quickly, you can decide at which price you’d like to cash out at. Conversely, if the price of a coin is falling, you can place an order that you’d like to buy-in at. 

Limit orders may or may not be filled. It depends on if someone sees your order in the order book and decides to trade with you!

Stop Orders

A trader sets a stop order ahead of time. When a coin hits a certain price, the stop order will automatically buy or sell at the predetermined price, known as the ‘stop price.’ Exchange users can often use two different types of stop orders: stop-loss or stop-limit.

A stop-loss order allows traders to place an order at a price they’d like to buy or sell at. For example, say a trader wants to buy Bitcoin at $100,000 MXN and the market is currently trading at $150,000 MXN. The trader will set a stop-loss order for $100,000 MXN. If the coin falls to that price, a market order will automatically take place without the trader having to make it at that moment. However, if the price of bitcoin does not fall to that amount, the order will not be filled.

A stop-limit order is made when a trader wants to place an order ahead of time, but they don’t want to risk trading it at market price when the price is dropping or rising quickly. This tool becomes incredibly handy when the market is very volatile.

A stop-limit order has two price fields: a limit order price and a stop-loss order. Say, for example, a trader wants to protect themselves in a downward trend and they want to sell around $20,000 USD predicting the price will drop further. However, since the market is falling quickly, they set a stop-price at $20,000 USD and a limit price at $19,000 USD so that they don’t sell for any less.

Once, the market hits $20,000 USD, a limit order at 19,500 USD will be placed in the order book. 

The stop price determines at which price the limit price order will be placed in the order book

Now that you have the basics down of trading, stay tuned for our next post where we dive deeper into different charting tools and technical analysis tips to help you make more informed and calculated trades.

A trader will make an offer and wait for a taker at a predetermined price. Traders carry less risk on the buying side when they employ a stop-limit order. The order may take some time, or only be filled in part or not at all.

Now that you have the basics down of trading, stay tuned for our next post where we dive deeper into different charting tools and technical analysis tips to help you make more informed and calculated trades. 

Price Pattern

A price pattern graphs a cryptocurrency’s prices over time. Technical traders use chart and price patterns to try and understand price charts and predict future prices.  (But please beware, just because someone uses technical analysis doesn’t mean they can tell future price movements.)

Two fundamental price pattern graphs to use when looking at prices over a period of time are the depth chart and the candlestick chart.

Depth chart 

Depth charts inform traders of supply and demand at different prices, giving a visual picture of all pending orders in an order book. Green lines for buy orders (bids) and red lines for sell orders (asks) provide the data.

A depth chart shows the open buy and sell orders for a cryptocurrency at different prices. The depth provides an idea of a cryptocurrency’s liquidity. 

Candlestick chart

A candlestick chart, which originated in Japan and is also known as a Japanese candlestick chart, is used to display the price movements of a cryptocurrency. 

Technical analysts deploy candlestick charts to understand how trader sentiment affects price patterns. Red candles signify losses and negative sentiment, while green ones signify gains and positive sentiment (at a specific time period, which can be selected) a candlestick can be red (negative sentiment) in a 30m time period but green in a 4h time period.

Trendlines

Sometimes called bounding lines, trendlines are lines drawn on top of a price chart to connect two or more price points. For instance, a trendline connecting the highs or lows in the stock’s price history help identify the current trend and predict what the stock price might do.

Technical Analysis

Traders use technical analysis to evaluate investments and identify opportunities for profit. They do this using statistical trends gathered via trading activity, including price movement and volume. Technical analysts spend a lot of time looking at charts to understand price patterns, trading signals and other charting tools to evaluate a cryptocurrency’s strength or weakness. 

Technical analysts see past trading activity and price changes of a cryptocurrency to give insight into future price. Contrarily, fundamental analysis determines a cryptocurrency’s intrinsic value (payments, store of value, etc.), not price patterns and trends.

Fibonacci Retracement 

Fibonacci Retracement is a technical trading tool based on key numbers discovered by Leonard Fibonacci in the 13th century. Traders might take, for instance, peaks or a lows on a cryptocurrency chart and divide the vertical distance (the space between price points) by Fibonacci ratios 23.6%, 38.2%, 50%, 61.8%, and 100%. Traders believe this helps them gain insights into support and resistance levels. 

Geometric analysis 

Technical analysts apply the science of geometry to forecast cryptocurrency market reversals in price and time. Strategies include trading based on price and time, head and shoulders, the Elliot Waves principle (extreme sentiments based on investor psychology, highs and lows in prices, other group dynamics), and others.

Additional options

Fill or Kill (FOK)

Traders execute Fill or kill (FOK) orders to execute trades immediately and completely or not at all. Such an order must be filled in its entirety or it is canceled (killed). 

Good-Til-Cancelled (GTC)

Good-Til-Cancelled (GTC) orders last until the order is completed or canceled. 

Immediate or cancel orders (IOC)

Traders use Immediate or cancel orders (IOC) to buy or sell a set amount of cryptocurrency either in is entirety or in part. Unfulfilled portions of the orders get canceled.