Guide to Cryptocurrency Trading – Bitcoin, Litecoin, Ethereum and More

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If you’re interested in learning more about trading cryptocurrency for profit, then you have come to the right place. In this lesson, we’re going to take an in-depth look into the multifaceted world of crypto trading. You’ll learn how to create a watch list, and the different ways you can trade cryptos. Additionally, I’ll provide a few tips on building a profitable crypto trading system.

Download the short printable PDF version summarizing the key points of this lesson….Click Here to Download

Cryptocurrency Trading Basics

Cryptocurrency trading is becoming increasingly popular among traders and investors. This is particularly true of younger investors who have grown weary of traditional financial products following the great financial crisis of 2008. Unlike the equities or futures markets, the crypto market is a decentralized marketplace with many different cryptocurrency exchanges competing for order flow. Crypto transactions are recorded digitally on a blockchain, and further verified through a procedure referred to as mining.

There are quite a few choices for cryptocurrency traders and investors who are interested in pursuing this investment category. We will discuss the various venues in the later sections. But for now let’s detail some of the basic considerations that should be taken into account when selecting a crypto currency or portfolio of crypto currencies. The three essential characteristics that should be accounted for include trading volume, market capitalization, and market bias.

Trading volume – Trading volume refers to the level of participation seen in the particular digital currency over a certain time period. Essentially, the trading volume tells us how much interest there is from investors and speculators for the specified cryptocurrency. The higher the trading volume, the more liquid the instrument. This means that you will have a much easier time buying and selling a crypto without incurring large slippage cost. In a highly liquid crypto market our orders will be executed quickly, because there is a relatively deep order book on both sides of the market.

Market capitalization – Currently there are several thousand cryptocurrencies available in the marketplace. This is an astonishing amount, however, the majority of these are highly speculative and risky. In order to narrow the field of cryptos that are worth trading, we must evaluate its market capitalization. Market capitalization simply refers to the total value of a particular asset. Market capitalization is derived by calculating the asset price by the total number of shares outstanding.

A prudent method would entail limiting your crypto watchlist to the top five or 10 instruments with the highest market capitalization. Although we may be giving up the opportunity of some obscure cryptocurrency coming to the forefront and rewarding its early investors with huge gains, the uncertainly and risk of picking such a needle in a haystack, makes it an undesirable option to pursue.

Market bias – All cryptocurrencies are not created equal. There are some that will offer a much greater potential for gains at any particular time. It is our job as crypto traders to do the hard research to find those optimal trading opportunities. If you’re more inclined to chart reading, then you may exercise your technical analysis skills in search of the best cryptos to trade. If on the other hand you’re more suited to a fundamental analysis approach, then you may need to dig deep into relevant research in an attempt to create your watchlist. Either way, you must form some market bias for the group of cryptocurrencies that you will ultimately want to trade.

cryptocurrency listTop Cryptocurrency List

We laid out some guidelines for selecting the best cryptocurrencies to trade. We will now expand on those ideas, and detail some major cryptocurrencies that are worth consideration. All four of these cryptocurrencies have high daily turnover in terms of volume, and relatively large market capitalizations as well. This list includes Bitcoin, Ethereum, Ripple, and Litecoin. Let’s take a look at each of these in more detail.

Bitcoin – No mention of crypto trading can begin without the discussion of bitcoin, the world’s most popular digital currency. Bitcoin is a dominant cryptocurrency that is on every crypto trader’s radar. It offers the highest liquidity compared to all others in the market. The originator of Bitcoin was a man by the name of Satoshi Nakamoto. The original idea behind Bitcoin was to become a worldwide digital currency free of any government regulation. A limit of 21 million has been set on the number of Bitcoin that can be in circulation. The price of bitcoin soared from its inception to a high of over 19,000 in late 2017.

Ethereum – After Bitcoin, Ethereum is the next most popular crypto to trade. One of the great advantages of Ethereum is that it allows for other developers to create their own projects on top of the platform. As such it has built a strong secondary network. This enables it to become more ubiquitous and powerful in its application. The specific token on which the Ethereum platform runs is referred to as Ether. Ethereum prides itself on being able to “codify, decentralize, secure and trade just about anything”.

Litecoin – In terms of market capitalization, Litecoin also ranks relatively high on the list. It offers blazing speed transaction processing. There is a limit of 84 million Litecoins that are allowed to be in circulation. Litecoin offers a few major advantages over Bitcoin. For one, Litecoin is able to take on more transactions due to the reduced block generation time. Additionally, the transaction fees associated with Litecoin are relatively low. More specifically, the cost to process a transaction is approximately .001% irrespective of size of the transaction.

Ripple– Ripple is a growing crypto that has a stable network for use in banking and commerce. It was launched in 2012 and enables a real-time global network for instantaneous cross-border payments. One major player that has partnered with Ripple is MoneyGram. They been able to scale their capacities using Ripple’s On Demand Liquidity. As more and more partners adopt Ripple services, the demand will ultimately lead to higher prices in XRP going forward.

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Buying and Selling Cryptocurrencies

There are a few ways that you can get started with trading cryptocurrencies. One way is by trading what are known as CFD’s or contracts for difference on cryptocurrencies. Essentially CFD’s are derivative products that allow you to speculate on the price movements of a financial instrument without the requirement for actually owning the underlying instrument. So in this case, a CFD on cryptos would enable you to speculate on the price movements of a specific crypto without the need for owning it outright.

CFDs on cryptos only require that the trader put up a small deposit in the form of margin for the privilege of controlling a specified amount of the digital coin. CFDs give you the benefit of leverage in your crypto trading account. Keep in mind that leverage can help amplify your returns, but can also magnify your losses as well.

Alternatively, you can choose to trade in cryptocurrencies through an exchange. In this scenario you would buy your desired digital coins through the cryptocurrency exchange platform. You would have to pay the full value of the coin as the owner of that asset. Additionally you will need to make some arrangements to store the coin. This is a viable option for those who are more interested in holding the coins for a longer period of time, and for those who are interested in passive investing in cryptocurrency.

There are some pros and cons to each, so you will need to figure out the venue that best suits your needs. It’s also helpful to know the different tax implications within your jurisdiction when it comes to trading via CFDs versus purchasing digital coins via an exchange. This can help you arrive at your decision in a more informed manner.

Best Crypto Exchanges

Let’s now assume that you’ve done all your due diligence and have decided to begin trading cryptocurrencies by buying and selling via an exchange. In this case, you will want to research the different crypto exchanges to decide on which one offers the best mix of instruments, features, and services that best suit your specific needs. Below we have listed some of the best cryptocurrency exchanges based on reputation and service offerings.

Bianace – Biance is one of the world’s largest and most respected crypto exchanges. It offers over 125 crypto currencies to its user base. Additionally Biance also supports its own coin called Binancecoin BNB. The company is known for offering a relatively low transaction cost basis of just 0.1%.

BitMex – BitMex is based in Hong Kong and specializes in bringing in users around the world who are most interested in trading bitcoin. They offer leveraged contracts as well, and you have the ability to sell short on their crypto platform. Currently, BitMex does not accept US clients.

Coinbase Pro – This cryptocurrency exchange was founded in 2012 and is one of the oldest exchanges around. One of the highlights of Coinbase Pro is that it is a fully regulated crypto exchange based in the United States. Their fees are in line with other competitors. Client funds are also backed and insured by several large entities. This provides additional security for users on the platform.

Kraken – This exchange was founded by Jesse Powell in 2011. Kraken supports 17 different cryptos with fees based on a liquidity model. You will pay less in fees by providing liquidity to the order book, while those that take liquidity will pay higher transaction fees. It’s also worth noting that the first crypto bank on the globe has partnered with Kraken. This has certainly added to their credibility in the market.

OKEx – OKEx is based in Hong Kong based exchange that supports over 140 different digital coins. Their pricing structure is based on a maker or taker fee which can range from .02% to .2%. The exchange also supports margin accounts and allows short selling activities.

Bitfinex – They are known for their deep liquidity, and are well regarded by many short-term crypto traders. If you are most interested in day trading cryptocurrency, then this exchange is worth a look. Bitfinex also provides a facility for traders seeking to use leverage in their accounts. This is done through a proprietary peer margin platform. Additionally, as a client you are able to earn interest on your crypto assets.

Bittrex – A US based crypto exchange that offers over 180 digital coins to choose from. Their cost structure includes a fixed .25% fee for each side of the trade. Their crypto trading platform is well known for its excellent security features. Additionally, unlike many other exchanges, Bittrex is well suited for newer crypto traders learning the ropes.

Cryptocurrency Trading Strategy

We’ve now laid out a solid foundation for you to better understand the different facets of the crypto market. We will now begin to create an actual strategy that we can use to trade crypto currencies. This particular crypto trading strategy aims to take advantage of a volatility expansion that occurs after a prolonged consolidation.

Our strategy will be based on the consolidation chart pattern known as a symmetrical triangle. This is a pattern that occurs quite often in the crypto markets and one that offers a solid risk reward profile when trading in the direction of the overall trend. Typically, in a symmetrical triangle we will see a prolonged sideways move with progressively lower highs, and higher lows. This structure is indicative of a buildup of energy that will ultimately lead to a subsequent price leg, typically in the direction of the breakout.

We will utilize two additional technical studies to validate this crypto trading set up. The first will be a trend confirmation indicator. For that purpose we will use the 200 period simple moving average (200 SMA). We want to ensure that we only initiate new longs when the price is trading above the 200 period simple moving average line. Conversely, we will only take new short positions when the price is trading below the 200 SMA.

Along with this, we will also use the Relative Strength Index (RSI) to help bolster our analysis. We will utilize what is called RSI range rules to confirm that the price retracement within the triangle formation is within an acceptable limit. In short, based on the RSI range rules, in a bullish market, the retracement of the prior leg should not cross below the RSI 40 threshold. And in a bearish market, the retracement should not cross above the RSI 60 threshold.

Let’s now detail the exact rules for our crypto trading strategy:

Rules to initiate a long trade:

  • A symmetrical triangle formation can be seen on the chart
  • Price must be trading above the 200 period SMA line
  • RSI line must not cross below the 40 threshold during the retracement
  • Enter a long position upon a breakout and close of the resistance line of the triangle.
  • Place a stop loss below the low of the triangle support line
  • Take profit using a measured move technique, wherein the target will be a one-to-one relationship to the widest part of the triangle, measured from the breakout point.

Rules to initiate a short trade:

  • A symmetrical triangle formation can be seen on the chart
  • Price must be trading below the 200 period SMA line
  • RSI line must not cross above the 60 threshold during the retracement
  • Enter a short position upon a breakout and close of the support line of the triangle.
  • Place a stop loss above the high of the triangle resistance line
  • Take profit using a measured move technique, wherein the target will be a one-to-one relationship to the widest part of the triangle, measured from the breakout point.

Crypto Trading Example

Now that we have defined the rules for our crypto trading strategy, let’s now see what it looks like on the price chart. Please see below where you will see the price action of Bitcoin, BTCUSD, on the daily chart.

crypto-trading-strategy

Starting at the left end of the chart we can see that the price was trading higher, although it was still below its 200 day SMA. Notice the sharp green candle that breaks through the 200 day SMA line. This suggests that the market is transitioning from a bearish condition to a bullish one. Soon after the upside breakout through the 200 SMA occurs, the price action begins to consolidate as can be seen by the extended sideways price movement.

As the price progresses, we can see a series of lower highs, and higher lows. Once we recognize those characteristics, we can be on alert that a potential symmetrical triangle formation may be evolving. You can see the upper blue line marked which represents the resistance line of the symmetrical triangle, while the lower blue line sloping upward represents the support line of the symmetrical triangle.

Now that we have recognized the symmetrical triangle formation, we can start preparing for a potential breakout, leading to a tradable opportunity. But before we do that, we need to confirm two important things. Firstly, we need to ensure that the price action remains above the 200 SMA line in the case of the upside breakout from the triangle. As is evident from the chart here the entire triangle formation remained above the 200 SMA line during its progression.

What about our second filter, the RSI filter? Well, for a valid long entry, the RSI line must remain above the 40 threshold during the progression of the triangle structure. If you refer to the lower pane on this chart, you will see the RSI indicator, with the 40 threshold plotted as the red horizontal line. Notice how the RSI indicator remained above that 40 threshold during the progression of the triangle formation.

With all of these conditions met, all that was needed next for a buy signal would be a breakout above the upper resistance line. We marked that location on the chart as the buy signal. The stop loss order would be placed below the lower support line of the triangle structure. Notice the dashed black line which represents the stoploss placement.

As for our projected target, that would be calculated using a measured move technique, which would be based on the widest part of the triangle pattern. You can see the yellow bracket near the left side of the chart which depicts this measurement. That distance would then be projected from the breakout point to get to the anticipated target price. The yellow bracket on the right side of this chart shows that approximate level. The sell signal noted on the chart further illustrates where that take profit point would have occurred.

Download the short printable PDF version summarizing the key points of this lesson….Click Here to Download

Summary

You should now have a solid understanding of the framework within which to operate your crypto coin trading business. We have discussed some basic concepts around digital currency trading and investing, the process for selecting the appropriate digital coins to trade, and provided you with a list of reputable crypto exchanges to choose from.

Additionally, we presented a simple chart pattern that you can use to capture potential moves within the crypto sector. You can start taking some of these ideas and demo trade them to gain further experience in the execution process. By doing so you’ll start building more and more confidence in your crypto trading skills. Soon enough you’ll begin to build your own set of trading techniques that you’re most comfortable with.

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