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How Crypto Trading Works: An Easy Guide to Understanding
Crypto trading has taken the world by storm over the past decade, but the basic concepts of how crypto trading works still elude the vast majority of people. Everyone has heard of Bitcoin by now, but you’d be surprised by how little people would be able to offer a comprehensive explanation as to what that actually is. The fact you looked up this article suggests that you also fall in the category of those struggling to grasp the essence of how crypto trading works. Fret not though, because in this article we will be going through a step-by-step introduction to how crypto trading works.
The term crypto trading refers to the attempts of an individual (or group) to correctly guess the flow of the market regarding a specific cryptocurrency and act accordingly. Buying or selling coins at the right time is how an aspiring trader strives to generate a profit for themselves.
Of course, It cannot be stressed enough that, as is the case for pretty much every other sort of investment, the risks involved in trading cryptocurrency are too great for the uninformed.
Understanding the fundamentals of how crypto trading works, what factors may affect the market and how to properly utilize certain tools is of the utmost importance for a trader.
Diving into the world of the cryptocurrency market without actually understanding how crypto trading works, may as well be considered very risky. It is not hard to make the argument that a well informed guess, while not a certainty, is the far safer option.
The very basic essence of the aforementioned strategies is to anticipate whether a coin’s value will rise or drop and act on its movement beforehand. Just like with any other kind of asset, you want to buy coins when you believe their value is about to rise and sell them when decline seems imminent. Although, this is mostly an oversimplification of how crypto trading works, as there are plenty of other variables in place. Said variables when combined with other factors that we will be covering in later sections of the article, tend to make things a bit more complicated.
How does margin trade crypto work? First of all, we need to clearly define what exactly margin trade crypto is. Basically, a margin trade is the act of borrowing coins in order to try your luck in more trades or just a single bigger one. You don’t need a large sum to be able to make trades, as you can enhance said sum by borrowing underlying coins and use them as leverage for your next move.
Margin trade crypto is considered a high risk - high reward strategy, since it can amplify both potential gains and losses in an instance.
A fair question that may come to your mind while reading this is ‘how is it possible to risk someone else’s money for my own profit without any repercussions’ ?
That is where the liquidation price comes into play. There’s a fixed liquidation price set for its asset given the specific conditions of the trade it’s involved in. When the market reaches that price, the trade will automatically close a position. Liquidation price guarantees that the money lost on a failed trade is the trader’s own money and not the money they borrowed as part of the margin trade.
Let us provide an example to help you understand this better.
Let’s say you buy a token of crypto for 20$ and decide to do a margin trade with double leverage. In this case, you have bought a token with 20$ of your own money and have borrowed an additional 20$, for a total of 40$. In this scenario, the liquidation price would be set at 20$, when normally it would be 0$.
Why is that? Because, by doubling your initial investment through borrowing money, you have effectively doubled your potential gains as well as losses. Normally, for all of your investment to be lost, the price of the coin would have to drop to 0$.
It may all sound very complex, but the formula to calculate liquidation price is actually very simple. All you have to do is divide 100 by the leverage (meaning the size of the margin trade). So, 100 by 2 equals 50. Therefore, the liquidation price is set to 50% of the total price (40 by 2 is 20).
In conclusion, if the coin’s price reaches 20$ (instead of the initial 0$), the exchange closes, securing the loanee’s funds. Margin trading is not recommended for beginners as it requires thorough knowledge of the market and lightning quick reactions because of the volatile nature of cryptocurrency. *Margin Trade Crypto is available for countries outside Europe.
Now that you are starting to have a better understanding of how crypto trading works, let’s get into something a little more advanced. A common question among those who start to delve into cryptocurrency is how pairs trading works in crypto. The headline is as simple as it sounds. Pairs trading in cryptocurrency refers to the action of trading two different assets for each other in an exchange. It should be noted that not all cryptos are compatible with each other, meaning that not every exchange is possible. In addition to that, certain cryptocurrencies can only be acquired through trading with other cryptocurrencies.
Understanding and knowing crypto pairs is a fine art, that while not essential for a novice, it provides an experienced trader with the edge needed to be able to generate profit more often than not. For example, a trader with deep knowledge of pair trades will be able to take advantage of a possible difference in asset prices.
Also, with this knowledge it is much easier to diversify your asset portfolio, which makes you much more adaptable to any situation and increases your chances of success in this wild market. Another important aspect of pairs trading is base currency. As mentioned above, most cryptos don’t offer pair trades for all other cryptos. So, before venturing into pairs trading, one needs to ascertain which assets are accepted for the specific coin they seek to acquire. The accepted crypto you choose for your exchange is your basic currency and it’s used to compare the rate of a coin in relation to another one.
Once you’ve familiarized yourself with the concepts mentioned above, the natural next step would be to put your knowledge to good use. Of course, turning theory into practice without any hiccups is easier said than done.
First things first, you’ll need an account on NAGAX. When opening a trade exchange account, you are required to provide sensitive information. Since we’re dealing with virtual stocks after all, signing up couldn’t possibly be as straightforward as opening a social media account for example. Your personal information is obviously, confidential and private, but it is necessary to avoid potential frauds and discourage individuals looking to exploit the market in any way.
To invest in crypto you first need to acquire crypto, thus you will need to make a deposit on your account. This can be done easily via credit or debit card on most platforms.
Now your trading journey begins. You may understand how crypto trading works to a certain extent, but actually getting started can be overwhelming. Choosing an asset in a sea of possibilities is a daunting task for a beginner. What you need to understand is that the largest and most common coins, such as Bitcoin or Ether, tend to be more stable than other, more niche alternatives. Bitcoin is by no means a guarantee for success or the sole option to kickstart your trading endeavors, but it certainly is a good way to ease yourself into cryptocurrency.
You can either trust your own acumen and try navigating the market actively or you could entrust your funds to a trading bot. Trading bots are very commonly used, especially among beginners, since they are designed to adjust to your specific needs and pursue the best returns in the most efficient way possible. There are also customization options to ensure the automation works in a way that best suits your needs and ambitions.
Understanding how crypto trading works is paramount to your attempts to analyze the market’s flow and being able to catch up on its trends in time to take advantage of them.
Whilst the general idea of ‘the market’ may sound intimidating and technical, that is not entirely true. After all, the market is not some complex software, but the people involved in crypto trading. The movements of the market are affected by the actions of the ‘big players’ and the reactions of the average trader. The ‘big players’ are those who have invested very large sums of funds in cryptocurrency, whose moves tend to swing the market one way or the other.
Every kind of market can be monitored and analyzed. The cryptocurrency market is of course, no exception. Certain statistics, when tracked over long periods of time, tend to make patterns and habits more apparent. The flow of how crypto trading works is obviously not predetermined, but it’s also not entirely unpredictable to the well trained eye.
The ratio of buying orders to selling orders is what determines the direction of the market at any given moment. An increased number of buying orders leads to the rise of prices of assets, while a large number of selling orders results in the exact opposite. Spotting those increasing or decreasing patterns in time and acting accordingly is the key to being a successful trader.
The cryptocurrency market is however, not a constant roller coaster. Usually, after a sharp rise or dropoff in value, assets tend to be more stable, which leads to what is called ‘consolidation’. Consolidation occurs when trades start to temporarily stabilize within a certain spectrum of prices and volatility is lowered.
We mentioned earlier that the market is not a lifeless entity or a kind of software. The market’s existence is more akin to a collective subconscious. It is the actions of people that drive the market, which means that psychological factors should most definitely be taken into account. The relationship between prices and traders is a vicious cycle. The price of assets influences the psyche of traders and their decision making and vice versa.
Traders are human beings with feelings, hopes and fears and as such are subject to mood swings. Because of that, it is vital for an aspiring trader to learn to rely on their own knowledge and understanding of how crypto trading works and not let their feelings dictate their choices. Obviously, this is a skill you could not hope to have from day one, but it is highly important to try and train yourself to be as calm as possible.
In summary, the world of crypto trading is as deep and complex as it is exciting and potentially rewarding. However, it should not by any means be taken lightly, as poor understanding and impulsive movements could result in large losses very quickly.
Before deciding to take the plunge and try your luck in crypto trading, make sure you are in a good state of mind. Also, try to have a firm grasp of all of the essential components of crypto trading, in order to avoid running into unexpected situations unprepared.
Good luck in realizing your ambitions!
Risk Warning: Cryptocurrencies are highly volatile and trading can result in the loss of your invested funds. Before investing you should be aware that cryptocurrencies may not be suitable for all investors. You should therefore carefully consider whether trading or holding digital assets is suitable for you in light of your financial condition and not invest money that you cannot afford to lose.