If you’re like me, you think you missed out on the boom of the cryptocurrency industry. You’ve probably heard stories of Bitcoin millionaires - regular, working class people who turned one month’s paycheck into a fortune that will keep them from ever having to work again.
I’m here to tell you that the industry is still booming and it’s not too late to turn your own profit.
This is The Definitive Guide to Trading Cryptocurrency in 2018. By no means is this a guide to becoming a millionaire overnight, but by the end, you will know everything you need to know to begin trading, as well as some of the techniques and strategies that have proven to provide consistent gains.
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Before we jump right into trading, there are are a few things that we need to cover.
What Is a Cryptocurrency?
You should have a general understanding of what a cryptocurrency is because knowing the functional use of a coin can give you an edge when deciding your investments. There are hundreds of coins ranging from major players like Bitcoin (BTC) and Ethereum (ETH), to smaller coins that we refer to as “altcoins.” Each coin is unique and offers their own flunctional use cases. If you’re feeling unclear about what a cryptocurrency is, check out some of the resources below. They give great explanations of Bitcoin and Ethereum, and blockchain, the underlying technology of which cryptocurrencies are built upon.
There Are Some Risks With Cryptocurrencies
Like any investment, you should be aware that there are risks with cryptocurrencies. It’s going to take some work to protect your investment and some more work to grow it. Much about the direction that cryptocurrencies will take in the future is in turmoil, and this creates a very volatile market.
Trading is all about taking advantage of this volatility; the key is being smart about your investments, and patient enough to stick to your strategy.
The other major risk to be aware of is that hackers are always looking for vulnerabilities to exploit. One example is the more than $30 million worth of Tether coins that were stolen. The most surefire way to ensure the safety of your coins is by using a hardware wallet such as these by Ledger. Keep in mind that this will slow down your ability to trade those coins, as you will be transferring them between the device and your exchange accounts (more on wallets and exchanges soon).
If all of this sounds daunting, don’t worry. As promised, we’ll discuss more of what you need to know soon enough.
Cryptocurrencies Are Taxable In Most Countries
With the booming industry that cryptocurrency has become, it is recommended to be aware of, and follow tax regulations.
There Are Other Ways To Invest In Bitcoin
As you know, the focus of this guide is all about trading cryptocurrencies, but there are other ways to get a hand in the pot. Some people choose to buy a cryptocurrency and forget about it, much like you would do with some stock in say, Amazon. Other’s are actually investing through the stock market via the Bitcoin Investment Trust (GBTC). If you are a firm believer in the future of Bitcoin, both are perfectly fine ways to go about it.
The advantage that trading has over these options is in the power of compounding.
In other words, our initial investments have the potential to grow exponentially, compared to those that sit on a flat amount of coins or stock.
Begin Your Path To Crypto Trading
Now that we have that stuff out of the way, let’s work on making our first trade. The first things we’ll need is to learn about are exchanges and wallets.
These are what allow us to buy and sell cryptocurrencies. There are a handful of popular crypto exchanges, some of them have advantages over others. For example, some exchanges don’t allow us to deposit and withdraw using fiat currency like the U.S. dollar and euro; others aren’t available in certain countries. In this guide we will focus on two very popular exchanges, GDAX and Poloniex. GDAX gives us the ability to use our fiat currency to buy Bitcoin. Poloniex does not, but does give us a wide array of altcoins to trade. There, we’ll be using major coins like Bitcoin and Ethereum to buy the altcoins, and vice versa. Other popular exchanges such as Kraken and Bittrex offer even more coins.
Keep in mind that keeping the number coins that you are trying to follow to a manageable amount is going to make trading a lot easier.
A “manageable amount” is obviously subjective and will vary for each person based on things such as time available to dedicate to trading. Feel free to do your own research to find the right exchange for you. I tend to value user experience of an exchange over the amount of coins on it. Ultimately, what exchanges you use is going to depend on your own personal preferences. GDAX and Poloniex will provide sufficient resources needed to be a successful trader, so they are definitely a good place to start.
No matter which you choose you will need to go through a verification process when signing up for your accounts. This sometimes involves submitting a picture of your id. All in all it’s usually a pretty straightforward process and shouldn’t take more than a few minutes.
The next thing we’ll need to do is deposit fiat currency into our account. The easiest way to do this is by adding a bank account. Once you’ve initiated the deposit, it will take 4 business days to appear in your account. Kind of a bummer, I know; but the idea is to only need to do this once, as we’ll be growing this initial investment day by day with our trades.
When buying or selling on crypto exchanges, you have 3 different types of order at your disposal. You should be comfortable with each of them in order to be a successful trader.
Note that all orders have fees on them, though they are relatively small.
Market orders allow us to exchange any amount of coin right away at the current market price. Orders are filled using the best available price in the exchange’s order book. For example, if you placed a market buy order for $100, it would buy from the lowest priced sell order(s) until you had used that $100. The advantage is that this transaction is always completed immediately; the disadvantage is that we don’t know exactly what price we are going to get.
Limits orders allow us to place an order at a specific price. We can specify the amount of coin that we want to buy or sell, at the price that we want this to happen at. You may have noticed that the order book is always full of sell orders that are a little higher than the current price and buy orders that are a little lower. The advantage with limit orders is that we can do do the same with our orders. The disadvantage is that our transaction likely will not be filled immediately and will count on the market price to make its way towards us.
Stop limit orders are really only useful when selling coins. They allow us to set a condition: we specify a price, and if the price becomes less than or equal to that price, a market order is automatically placed for us. The advantage here is that if we need to step away and will not be able to watch the price, we have some protection if the market begins to plummet. The disadvantage is that we are counting on there being good buy orders available to fulfill our sells. If a massive amount of market sell orders were to be executed right before your stop is triggered, it’s technically possible to be left with the bottom of the barrel. This has happened before, but is not common.
I can’t emphasize this enough: Trading cryptocurrencies is all about minimizing losses and maximizing gains. We’re not going to win every time.
We’ll need to utilize all of these order types to do that to the fullest.
Making Our First Trade
Once our GDAX account has been verified, and we’ve deposited some fiat currency we can finally make our first Bitcoin trade!
Here we are placing a market order. Notice that $100 would get us about 1% of a Bitcoin. Remember than with a market order, the amount of Bitcoin may differ slightly from the estimate here because the price of Bitcoin is constantly fluctuating.
Now imagine we’ve seen some indication that we are ready to sell.
A small loss, but perhaps the price was about to fall, in which case we got out just in time, minimizing our loss.
We’ve made our first trade, simple as that!
We mentioned the various exchanges and now we need a way to transfer our Bitcoin between them. Wallets allow us to send and receive Bitcoins. If you’re interested in a more technical explanation of wallets, you can check this out, but it’s certainly not required knowledge.
Creating accounts on GDAX and Poloniex gives us wallets that we can send Bitcoins between. Let’s walk through sending Bitcoin from GDAX to Poloniex.
First, we need the deposit address of our Poloniex wallet. Find this by going to Balances, and then Deposits & Withdrawals:
Next we’ll go to GDAX and initiate a withdrawal.
Fill in the amount of Bitcoin you’ll be transferring, and paste the address that you copied from your Poloniex wallet in as the destination.
Be careful to put the correct address because there’s no getting your Bitcoin back if sent to the wrong address.
Once the transfer is initiated, it could take some time for it to be verified on the blockchain. It’s not uncommon for it to take 15 minutes or more. Scaling and faster transaction speed is one of the major technical issues that Bitcoin and others are trying to solve.
Trading Techniques That Will Grow Your Investment
There are several proven ways to make money trading cryptocurrencies. A lot of these techniques have been proven by their use on the traditional stock market. But the thing with traditional stocks is that you’d be hardpressed to find the same kind of price swings as we see everyday with cryptocurrencies.
Consistent, significant price fluctuations mean more opportunities for us.
To use these techniques, we need to understand how to read charts.
Fundamentals of Reading Charts
If you’ve already opened up GDAX or some other exchange and you were overwhelmed at first, don’t worry; you weren’t alone. They’re called candlestick charts. I co-created a quick video that explains the fundamentals really well.
Soon, we’ll learn what you can do to perform a more technical analysis on these charts, and some things that you can look for to make informed decisions during your trading. For now let’s go over some of those techniques we were talking about before.
Using Stop Limits To Trail a Bull Run
Now that we’ve learned about bullish candlesticks in the chart reading video above, let’s take a look at a bull run.
Trailing a bull run using stop orders is one of the most important techniques you can learn.
Let’s do a case study. Here, I’ve taken a 24 hour chart for Ethereum:
Notice the small bull run. Now imagine we had decided to buy Ethereum somewhere around that dotted line and just before 8pm. We saw it tick up after a string of bearish candles, and for whatever reason, thought it might continue it’s way upward. To minimize our losses (remember our goal is minimize losses and maximize gains), we set a stop order right away. We’ll set it near the bottom of those last couple bearish candles (about $474). Now as we watched the price work it’s way up, we would continue to raise our stop price. To do this, we would go to our open orders (every exchange will show this), and click cancel on the stop limit that we had just set. Shortly after 8pm, we might’ve had a stop at $480 that would’ve been triggered. If you’re stop limit is triggered and the signs point to the trend continuing you’re able to buy back in with a profit already in your pocket.
We were protected, setting ourselves up for a quick profit, while at the same time being prepared for a huge profit if the price continued skyrocketing. This is the idea behind what can be a very powerful technique.
Evaluating a Coin
When buying cryptocurrencies, specifically altcoins, it is important to know a few details about them.
A major thing to note when evaluating a coin, are it’s functional use cases. Most coins will have some form of mission statement on their homepage. By understanding what purpose a coin serves in the real world, we will have a better idea of how to evaluate it further.
For example, there are cryptocurrencies, such as Litecoin, with the same goal as Bitcoin. In this case, it would be a good idea to compare its market capitalization with Bitcoin. This site ranks coins by market cap. Always be sure to check there when evaluating a new coin. If you notice a large shift in market cap on a certain date, it may be worth it to check for any news that day to see what may have caused it.
On the other hand, some coins serve a very unique function in the real world. For example, Power Ledger is a fairly new and interesting cryptocurrency. The goal of this project is to provide a system for consumers to trade electricity with one another. For a young project such as this, the best thing you can do is first decide whether you believe in the technology and the team behind it. The second thing you can do is read news surrounding the project. All of that information, along with a look at the coin’s market cap, is going to ultimately determine whether you think the technology might reach mainstream adoption, thus making an investment worth your while.
ICOs: Initial Coin Offerings
Now that we have an idea on how to get started evaluating a coin, we are better equipped to profit using another popular technique among traders.
ICOs, as you may have guessed, are much like IPOs. This is where coins are offered for the first time to the public. ICOs are not offered through exchanges, but rather you buy them directly from the creators of the project. Usually (it’s different for each project) you will send them Bitcoin or Ethereum that they will use to fund their project; in turn you receive a certain amount of their new coin.
One of the best resources for finding out about current or upcoming ICOs is here. If you see a coin that peaks your interest, be sure to be extra diligent when evaluating it. Since we have no historical data to gauge how the coin might perform, it’s very important to understand the real-world purpose of the coin. Another thing to note is whether the ICO is capped or not. Some ICO’s will be capped at a certain number, meaning that people who are late to the part, will need to wait for the coin to be offered on exchanges.
Make sure to read up on all this information that you can find, including the coin’s white paper. It’s common practice for coins to have one up on their site, explaining the technical details on how they plan to accomplish their goal. As you read it, see if you can determine whether you think those goals can be accomplished by the team or not.
The reason that we, as traders, would want to invest in these coins at their cheap initial price is simple: Once these coins do become available on exchanges, all of those people who missed out on the ICO, will want to buy in right away. This can lead to the price to skyrocket in a very short amount of time.
As traders, we will take a 10% quick profit any day of the week.
Margin Trading & Short Positions
So far, everything we’ve discussed has involved taking a long position on a coin. That is, our focus has been buying a coin at a lower price than what we think we will be able to sell it at later. What if we have some indication that leads us to believe that the value of a coin is about to decrease? In this case, we could take a short position, which is the same technique that made some people boatloads of money during the 2008-2009 housing bubble.
To be able to take short positions, we need to understand margin trading. Trading on margin means we are trading with borrowed money. On exchanges like Poloniex, we can trade Bitcoin with a handful of coins (there are fewer coins offered for margin trading) with 2.5x leverage. That is, if we own 1 BTC, we can borrow up to 2.5 BTC to trade with. To be clear, this is not 2.5 BTC that we own. Now, on a trade that nets us 10% profit, we are bringing home .25 BTC instead of .1 BTC.
Like any other loan, this borrowed Bitcoin must be paid back with interest. On losses, you will need to pay back the loss and the interest. Poloniex offers up a great guide to margin trading that explains everything you need to know. It’s worth reiterating that the estimated liquidation price is the price at which a forced exit from our position would occur, costing us all of the Bitcoin in our margin account so that it may be used to pay back the borrowed coin. Utilizing stop limits to avoid this is almost always a good idea.
It is NOT recommended to be taking long positions on a margin trade as an inexperienced trader.
So let’s take our hypothetical 1 BTC from before and take a short position on Ethereum. We are able to borrow 2.5 BTC worth of ETH and sell it. 30 minutes later, the price of ETH has plummeted 10%. Now we can close our short position, buying back 2.5 BTC worth of ETH; except now, since the price has dropped, we are buying more ETH than what we sold. Our borrowed coin can be payed back and we take the rest as profit!
The idea here is simple: we’re going to buy a cryptocurrency on one exchange, and sell it on another. You may have noticed that the price of a cryptocurrency is often not the exact same on each exchange. How to take advantage of this is best described in this post.
Sure, it can be difficult to have a constant eye on the price of a coin on every exchange. Luckily traders have already built bots that can help and open sourced them for others to use.
When To Buy and Sell
We’ve come a long ways in our path to becoming crypto traders, but there are still some very important things to learn. So far, we’ve learned how to do a fundamental analysis of a cryptocurrency, and that it’s important to do this so that we fully understand them before investing. But as traders, we need to understand what kinds of things tell us when should buy or sell. We need to understand technical analysis.
What Is Technical Analysis?
Technical analysis is the study of past price patterns. This will allow us to identify opportunities for profit. The cryptocurrency market, maybe more than any other market, has a herd mentality. The tendency, especially with inexperienced traders, is to buy when the price is raising, and sell when the price is dropping. We can take advantage of this with technical analysis.
This skill is much tougher to nail down that fundamental analysis. In today’s world, everyone should be able to read up on a cryptocurrency and stay up to date with news because all the information is at our fingertips. To become a truly successful trader, we need to be using both fundamental and technical analysis all the time.
Bottom line: technical analysis is not a strategy. It is one of the tools we will use to help execute our strategy.
Identifying an opportunity does not mean you should dump 100% of your funds into a coin.
Tools For Technical Analysis
Coinigy is an incredibly powerful tool for anyone who is serious about crypto trading. This video from their team explains exactly what it can do for you, but to put it in layman’s terms: It makes technical analysis a breeze and really simplifies the process of trading across several exchanges. It costs $15 a month and is at least worth trying out the the free 1 month trial to see how you like it.
TradingView offers the best chart reading software there is. It’s also free (with ads that will go away with a paid plan). It helps out a ton with technical analysis, but does not connect with your exchange accounts to allow trading like Coinigy.
Remember those candlestick charts we see on every exchange? By studying them, we can find indicators, and understanding what these indicators mean can help us better predict the future price of the chart. There are tons of indicators and they can take some practice to become adept at identifying. You may find it easier to focus on practicing to identify them one by one until you become comfortable with them, slowly building your repertoire until you feel you’re ready to go full boar with your trading career.
Technical analysis is built on the assumption that the market is trending upwards or downwards.
Trends alone are usually not a great reason to buy into a trade.
If you buy when a coin is trending upwards, and sell when it looks like it’s trending downwards, you’re feeding into the herd mentality that I was talking about earlier. I recommend staying away from that as much as possible; it’s too easy to get burned doing it.
With that being said, trends are important to spot and you can learn the process of tracing them here.
This is a measure of the amount of a cryptocurrency that is traded over a certain period of time.
Like trends, this alone is not a great reason to buy into a trade.
The best way to use volume is to determine whether a rally (the price is trying to come back up from a dip), is real or phony. For example if a price begins to climb, but the volume does not jump with it, you can usually expect that rally to be short lived. This link explains more how to use the volume indicator.
The simple moving average is an indicator that can help us better see price trends. It smooths out all of the price fluctuations giving a nice smooth visual. Each point in calculated by taking the average over a given period. So the higher number you set as your period length, the smoother of a trend line you’ll see.
In the image above you can see a candlestick chart for the cryptocurrency Dash, followed by it’s simple moving average with a period length of 3. See how we are still seeing the price fluctuations? Let’s increase that period length and smooth things out for a more general trend.
With a period length of 30, we a much cleaner trend to go off of.
The exponential moving average on the other hand, hugs the price a lot tighter. Obviously this alone does not tell us much that we don’t already know. We need to see how to use the SMA and EMA together to tell the story of a chart.
This link explains how to use moving average analysis to identify potential opportunities. The short version is that if we see the EMA cross above the SMA and begin shooting upwards, we know that the price is beginning to beat the trend, forcing the trend to change directions. This can make these cross points a good entry point for a trade. Similarly, a good exit point for a trade is usually when the EMA crosses below the SMA.
Moving average convergence divergence is another useful indicator that can tell us how the momentum (the rate of change of the price) of the market is changing. The market needs volume and momentum to continue driving a price up so understanding which direction momentum is going can give us indication where the price will head.
RSI: Relative Strength Index
RSI is another great momentum indicator to help us identify out-of-the ordinary prices, giving us an opportunity to try and take advantage of that.
There are tons of patterns out there and some of them can get kind of complicated. I’m going to link a few patterns that are more on the simple side that are tried and true by other crypto traders.
Fibonacci Retracement - shows an assets common areas of market support and resistance
Symmetrical Triangle - can help indicate the continuation of a trend or the reversal
Ascending Triangle - indicates a bullish pattern
Descending Triangle - indicates a bearish pattern
Flags and Pennants - indicates a second sharp movement following a recent sharp movement
Head & Shoulders Top - indicates reversal after an uptrend
Head & Shoulders Bottom - indicates reversal after a downtrend
If you really have an affinity for patterns and want to learn more, this site probably lists every one that you can imagine.
Moving average alone can often work alone as an indicator, but it’s much better to have more support from other indicators, like volume, to confirm.
Position sizing will be an important part of our next topic, which covers strategies. We need to decide how much of our capital we’re going to invest for each trade (we call this taking a position). There are tons of different position sizing methods. Decide on one that works for you and stick with it.
One Position Per Fixed Amount Example: Take 1 Position for every $100. This means won’t be able to take 2 positions until you have $200.
Good for: trading with smaller sums. This is because other models may have you splitting your capital to take multiple smaller positions. Fees can hurt you on tiny positions.
Equal Position Sizes Example: Take X equal sized positions. So if you have $1000 and want to be able to take 5 positions, each position size will be $200.
Good for: trading with larger sums (e.g. over $5000) because it’s easy to manage. You know the set amount for each position and can easily see how much your profiting at any time. If you have 2 positions with different sized, you have to do some math to find your current profit.
Downside: If you see an opportunity that is exceptionally promising, your profit may be restricted since every position must be sized equally.
Percent Risk Example: Only risk X% of capital. So if you have $1000 and you find 2 opportunities, you can take one at $750 and one at $250. Then you’ll set a stop limit at 1% on each, giving you a risk of $7.50 + $2.50 = $10.00 which is 1% of $1000.
Good for: taking as many positions as you want, all at varying sizes.
Downside: difficult to manage. If you have 2 positions with different sized, you have to do some math to find your current profit.
Build a Strategy and Stick To It
Let me be clear: picking out indicators arbitrarily and running with it is not going to be profitable in the long run. Crypto traders need strategies and they need to be persistent with them.
A strategy should answer four questions: 1. How to protect your capital when the market turns against you 2. How or when to take profits 3. How much to buy or sell when you get a signal 4. When the strategy works and when it fails
A solid strategy will give us leeway to be wrong in half of our trades and still profit.
Read this if you don’t believe me.
You’ve probably heard the term “risk to reward ratio” before. The idea in this context is that you find an opportunity where you can possibly make a 2% profit on a trade. You’re going to invest $100. You set a stop limit 1% below the buy in price, so you are only risking $1, but you can make $2 on the trade. Your risk to reward ratio there is 1:2.
We use this concept to answer questions #1 and #2 when building out our strategies. Let’s take a look at an example of a very common trading strategy called the breakout strategy.
A great framework for the breakout strategy uses a 1:2 risk to reward ratio. So we would answer our four questions as follows: 1. Set a 1% stop below entry price. 2. Set a 2% buy above entry price. 3. Buy and sell full position from the start 4. Works well when market is ranging. Does not work well when market is showing any sharp trends.
There are many other proven strategies for trading. Here are a few of them:
Fundamental news strategy: Follow the news. Things posted on reddit, twitter and especially the national news can move the price. Use stop limits to protect your position.
This is worth repeating: finding a strategy that works for you and sticking to it is maybe the most important thing you can learn to do on your path to being a successful crypto trading.
It also might be one of the toughest. You are not going to win all of your trades. Probably not even a majority of them. But as long as your account is growing, there’s no reason to fix it because it’s not broke.
Common Mistakes And How To Avoid Them
We did it! We made it through all the fundamentals needed to start trading cryptocurrency. I think you might agree that each individual concept on it’s own is not terribly complicated. You might even be thinking: “This sounds really easy! I’m going to be a millionaire by Christmas!” It’s great to be ambitious about getting started, but slow your roll. It’s going to take some work to put all of these concepts together, and the only way to do it is to start trading.
When you’re in the thick of things, with real money on the line, you’re going to make some mistakes. There’s not a trader alive that can honestly say that they are perfect at it. We’ll close this guide with a few of the most common mistakes, and what you can do to avoid them.
Stay Level Headed
Perhaps the deadliest mistake a trader can make is letting emotion get the best of them. Those with the wrong mindset will lose in the long run; Whether it’s losing a trade and trying to get it all back by chasing a phantom opportunity that was never really there, or winning a huge trade just to get too greedy and giving it all right back. Set a clear goal each time you sit down to trade and walk away once you’ve hit your goal. Do the same for loses. Walk away and come back tomorrow. There will be opportunities will be there the next day, I promise.
1% profit every day is a great goal. On an initial investment of $1000, compounded at 1% profit every day for one year would grow to $37,783.43! Stay level headed and let compounding profit work for you.
Properly Protect Your Investment
Stop. Limits. That’s really all there is to say here. Too many traders fail because they don’t set proper stop limits. This is an easy fix so don’t let it happen to you.
Be Sure the Opportunity Is Solid
As we learned before, identifying one identifier does not make an opportunity. Technical analysis is your friend. If you’re trading with the breakout strategy, and you see a pattern that signals a possible breakout forming, use multiple indicators like volume and RSI to verify your hypothesis. If you check for 3 indicators and 2 of them confirm your hypothesis, only then should you feel confident opening a position.
On the other hand:
Don’t Overanalyze It
Technical analysis is not the be-all end-all of trading. It’s a tool to help you. Studying charts for hours trying to find patterns is not what’s going to make you money. Zooming in from a 15-minute chart to a 5-minute chart to find a pattern that’s not there is probably going to lose you money. Technical analysis works a good amount of the time, but don’t blindly follow it. If signals point to a trade that you don’t feel right about, it’s best to trust your gut and live to fight another day.
There will be times that all signs point to a breakout that just doesn’t happen. The market is made up of people and people can be irrational. Just continue to keep it simple; find a strategy or two that work for you and roll with it.
Invest What You Can Afford To Lose
We all should know this rule, but it bears repeating. There are too many stories of people leveraging everything, even taking out second mortgages on their house, to put in cryptocurrencies. This is a very bad idea, not specifically for cryptocurrencies, but for any investment.
Be smart and happy trading!
If you liked this article, you’ll love my (free) course that shows you how to make profitable trades. Get the course here.
Some other good resources:
CoinGecko: ranks coins by community buzz
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Leave a comment below if you have any questions about how I make a living day trading cryptocurrencies!