Effective Guide to Cryptocurrency Trading
What is trading?
Effective Guidelines to Cryptocurrency Trading . Trading is an essential economic concept that involves buying and selling assets. Where the buyer pays the reparation to the seller. In other cases, the transaction can involve the exchange of goods and services between two trading parties.
The assets being traded are called financial instruments. These can be stocks, bonds, currency pairs on the Forex market, options, futures, margin products, cryptocurrency, and many others. If these terms are new to you, don’t worry – we’ll explain them all later in this article.
The term exchange is commonly used to refer to short-term trading, where traders actively enter and exit positions over relatively short period of time. However, this is a slightly misleading theory. In fact, trading may refer to a wide range of different approaches, such as day trading, swing trading, trend trading, and many others. But don’t worry. We’ll go through each of them in more facet later.
Effective Guide to Cryptocurrency Trading
What is investing?
Investing is assigning resources (such as capital) with the expectation of generating a profit. This can include using money to fund and start a business or buying land with the goal of selling it later at a higher price. In the financial markets, this usually involves investing in financial instruments with the hopes of selling them later at a higher price.
Trading vs. investing
Both traders and investors seek to make profits in the financial markets. Their methods to realize this goal, however, are quite different.
Mostly, investors seek to produce a return over a longer period of time – think years or even decades. Since investors have a larger time skyline, their embattled returns for each investment tend to be larger as well.
Traders, on the other hand, try to take benefit of the market volatility. They enter and exit positions more frequently, and may seek smaller returns with each trade (since they’re often entering multiple trades).
Which one is enhanced? Which one is more suitable for you? That’s for you to choose. You can start educating yourself about the markets, and then learn by doing. Over time, you’ll be able to determine which one suits better your financial goals, personality, and trading profile.
What is fundamental analysis (FA)?
Fundamental analysis is a method for weighing a financial asset’s valuation. A fundamental analyst studies both economic and financial factors to determine if the value of an asset is fair. These can include macroeconomic circumstances like the state of the wider economy, industry conditions, or the business connected to the asset (if there’s one). And these are often tracked through macroeconomics leading and lagging pointers.
Once the important analysis is complete, experts aim to determine whether the asset is underrated or overvalued. Investors can use this conclusion when making their investment decisions.
In the case of cryptocurrencies, fundamental analysis may also include a rising field of data science that concerns itself with public blockchain data called on-chain metrics. These metrics can include the network hash rate, the top holders, the number of addresses, analysis of transactions, and many more. Using the richness of available data on public blockchains, analysts can create compound technical indicators that amount certain aspects of the overall health of the system.
While fundamental analysis is broadly used in the stock market or Forex, it’s less fit for cryptocurrencies in their current state. This asset class is so new that there just isn’t a standardized, comprehensive framework for defining market valuations. What’s more, much of the market is focused by theory and narratives. As such, fundamental factors will typically have negligible effects on the price of a cryptocurrency. However, more accurate ways to think about crypto asset valuation may be developed once the market matures.
What is technical analysis (TA)?
Technical analysts work with a different method. The essential idea behind technical analysis is that historic price action may indicate how the market is likely to behave in the future.
Technical analysts don’t try to find out the basic value of an asset. Instead, they look at the historical trading activity and try to identify
openings based on that. This can include analysis of price action and volume, chart patterns, the use of technical indicators, and many other charting tools. The goal of this analysis is to assess a given market’s strength or weakness.
With that said, technical analysis isn’t only a tool for forecasting the probabilities of future price movements. It can also be a useful framework for hazard management. Since technical analysis provides a model for analyzing market structure, it makes managing trades more defined and measurable. In this context, measuring risk is the first step to managing it. This is why some technical analysts may not be considered strictly traders. They may use technical analysis decently as a framework for risk management.
The practice of technical analysis can be useful to any financial market, and it’s broadly used among cryptocurrency traders. But does technical analysis work? Well, as we’ve mentioned earlier, the valuation of the cryptocurrency markets is largely driven by speculation. This makes them an ideal playing field for technical analysts, as they can thrive by only considering technical factors.