Profitable Cryptocurrency Trading for Beginners

Cryptocurrency Trading for Beginners

The cryptocurrency space is growing rapidly by the day, and with it comes a lot of opportunities. One of the most sort after opportunities is cryptocurrency trading, which is fast becoming a great way for cryptocurrency traders to earn their fortunes from the crypto industry. Therefore, in this article, we will be helping you unlock the secrets of cryptocurrency trading for beginners by making you understand the basics of crypto trading.

Meaning of trading

Trading, in layperson’s terms, involves buying and selling assets. These can be goods and services, where the buyer pays compensation to the seller. In other cases, the transaction can involve the exchange of goods and services between the trading parties.

Meaning of Cryptocurrency Trading

Cryptocurrency Trading, in layman’s terms, means the buying and selling of cryptocurrency assets. Cryptocurrency is one of the many assets that is traded on the financial markets; therefore, it can also be called a financial instrument.

Trading is commonly used to refer to short-term trading, where traders actively enter and exit positions over relatively short time frames. However, this is a slightly misleading assumption as this type of trading is just one of the numerous trading methods. A wide range of strategies is involved in trading, such as day trading, swing trading, trend trading, and many others.

What is Cryptocurrency investing?

Investing means allocating resources/ funds with the expectation of generating a profit. This can include using money to fund and kick-start a business or buying land to resell later at a higher price. In the cryptocurrency markets, investing typically involves buying cryptocurrency assets and keeping them for an extended period of time with the hopes of selling them later at a higher price after their values have appreciated.

In cryptocurrency investing, the most important thing to the investor is the returns gotten from the investment, which is known as the Return on Investment (ROI). Unlike cryptocurrency trading, Crypto investing, or hodling, as most crypto traders typically call it, takes a longer-term approach to wealth accrual. An investor aims to build wealth over a long period (months or even years). The most common approach crypto investors use in carrying out their market research is using fundamental factors to find potentially good investment opportunities rather than using technical analysis.

Due to the long-term nature of their approach, investors usually don’t concern themselves with short-term price fluctuations. As such, they will typically stay relatively passive without worrying too much about short-term losses. Investors also allocate a more significant amount of resources to these long-term investments as compared to regular trading. This would therefore have more ROI and would be worth the time taken for the investment.

From what we have written above, we should now be able to differentiate between cryptocurrency trading and cryptocurrency investing, or hodling as people call it. This should therefore help us understand better what cryptocurrency trading really means and its difference from the regular buying, holding, and later selling of the asset.

In cryptocurrency trading, Traders strive to profit from the market’s turbulence. They are more likely to join and leave positions more often as they seek opportunities regularly on the market, and they may seek lesser profits on each trade (due to the fact that they are periodically making several transactions).

Seeking opportunities regularly from the cryptocurrency market is what cryptocurrency traders do, and the best way to do that is by carefully analyzing the market, looking and waiting for opportunities in which you can enter trades and make a profit. There are three significant ways by which cryptocurrency traders analyze the cryptocurrency market, and in this article, we will be explaining the three major types of market analysis and how they can be used by you to determine profitable opportunities in the cryptocurrency market.

Types of Market Analysis

1. Fundamental Analysis
2. Technical Analysis
3. Sentimental Analysis

Cryptocurrency Trading for Beginners: Fundamental Analysis 

fundamental analysis involves poring over economic data reports and news headlines. (And even random tweets from a particular world leader before he was banned.)

Fundamental analysis is a way of looking at the foreign exchange & cryptocurrency market by analyzing economic, social, and political forces that may affect currency prices.

If you think about it, this makes a lot of sense! Just like in your Economics classes, it is supply and demand that determines the price, or in our case, the currency rate.

Using supply and demand as an indicator of where prices could be headed is easy. The hard part is analyzing all of the factors that affect supply and demand. In other words, you have to look at different factors to determine which cryptocurrency project, coin, or token has a higher probability of flourishing and which project has minimal potential.

You have to understand the reasons why and how certain events and information affects the general price movement of a crypto asset. Some of the information to pay attention to are; the use case scenario of the project, which is always in the crypto project’s white paper, also the community size of the crypto project users, as the increase in crypto assets usage affects the price of the asset, the problem the cryptocurrency project is likely to solve, the project Capital base, the diluted market capitalization of the crypto project and also the maximum supply of the crypto project. All these ultimately affect the level of demand for a particular cryptocurrency.

The idea behind this type of analysis is that if a cryptocurrency asset structure and project goals are reasonable and accepted by a large community of users, its value should strengthen. The value of such crypto assets also diminishes/declines if the project is not accepted by a large community of users. The better shape a Cryptocurrency project is, the more foreign businesses and investors will invest in that project. This results in the massive expansion of such projects, increasing the value of the crypto asset.

Cryptocurrency Trading for Beginners: Technical Analysis

Technical analysis is a process that traders use to examine price movement. Its theory suggests that by analyzing historical price movements, traders can determine current trading conditions and potential price movements. Individuals who use technical analysis are called technical analysts, and traders who rely on this method are referred to as technical traders.

The primary reason for using technical analysis is due to the belief that all current and past market information is reflected in the price displayed on charts. Technical traders subscribe to the notion that “It’s all in the charts!” meaning that all known fundamental information is already priced into the current market price. This implies that price action is all that is necessary to make a trade. However, this is not always the case since real-life events also influence current market prices; as we have seen on several occasions with cryptocurrency trading, a random tweet by a crypto influencer could instantly override all the technical forecasts and move prices in a direction totally unexpected.

Technical analysis involves examining the rhythm, flow, and trends in price action. The adage “History tends to repeat itself” is a significant definition of technical analysis. Traders use previous price movements and market data to speculate on future prices. However, it is essential to note that technical analysis cannot determine the future price of any crypto asset, but it can only speculate or predict prices. Sometimes, these speculations are accurate, while other times, they are not. Therefore, traders also include fundamental analysis to get more precise market speculations.

When a particular price held as a significant support or resistance level in the past, traders will keep an eye out for it and base their trades around that historical price level. Technical analysts look for similar patterns that have formed in the past and will develop trade ideas believing that price could act the same way it did before. Technical analysis is highly speculative since it relies on historical price action shown in charts to identify patterns and determine the future direction of prices.

In the trading world, when someone says “technical analysis,” the first thing that comes to mind is a chart. Technical analysts use charts because they are the easiest way to visualize historical data. Technical analysts are often referred to as chartists since they live, eat, and breathe charts.

Using past data to spot trends and patterns can help traders find excellent trading opportunities. Additionally, with numerous traders relying on technical analysis, these price patterns and indicator signals tend to become self-fulfilling. The more traders look for particular price levels, and chart patterns, the more likely these patterns will manifest themselves in the markets.

It is important to note that technical analysis is highly subjective, meaning each trader has varying techniques used in analyzing charts and would come up with varying speculations based on their techniques. Even though traders are looking at the same chart setup or indicators, they may still come up with a different idea of where the price may be headed. Understanding the concepts under technical analysis and the various indicators used in analyzing the market is crucial.

Cryptocurrency Trading for Beginners: Sentiment Analysis

Sentiment analysis is also called opinion mining, as its the process of analyzing the attitudes, opinions, and emotions of other traders in the market. It involves using various techniques such as natural language processing, data mining order blocks, and many others to identify and extract subjective information from different sources such as social media, news articles, forums, chat rooms, and the Forex market itself.

See Also: Cryptocurrency for Beginners: A Comprehensive Guide

One of the simplest ways to gauge market sentiment is to analyze news and social media. News and social media have become increasingly important in today’s society and can have a significant impact on the financial markets. By analyzing the news and social media chatter surrounding a particular asset, you can get a good idea of how traders feel about that asset.

Another way to gauge market sentiment is to analyze price action. Price action is the movement of an asset’s price over time. By analyzing price action, you can get a good idea of how traders feel about that asset. For example, if an asset’s price steadily increases, it could be a sign that traders are bullish on that asset.

Using technical indicators is another tool that can be used to gauge market sentiment. Technical indicators such as the Relative Strength Index (RSI), Stochastic, Average True Range (AVR) can be used to identify trends and potential trading opportunities. By analyzing technical indicators, you can get a good idea of how traders feel about a particular asset.

The goal of sentiment analysis is to determine the overall sentiment of the market, whether it’s bullish (optimistic) or bearish (pessimistic), as well as the sentiment of individual traders towards a particular asset or market event.

Why is Sentiment Analysis Important in cryptocurrency trading for beginners?

One thing you should know as a beginner trader is that price action alone does not always reflect all the available information in the market. Traders have their own opinions and biases that can influence their decision-making, which can lead to a market sentiment that is not reflected in the price action.

Therefore, sentiment analysis is a handy tool in cryptocurrency trading as it helps cryptocurrency traders gain insight into how the market feels and adjust their trading strategy accordingly. If the sentiment is bullish, for example, traders may choose to go long on an asset or buy into a particular market event. Conversely, if the sentiment is bearish, traders may decide to go short or sell off their assets. There are also other very ingenious ways you, as a beginner cryptocurrency trader, can use sentimental analysis for cryptocurrency trading.

Using Sentiment Analysis as a Contrarian Indicator in Cryptocurrency Trading

One exciting application of sentiment analysis is using it as a contrarian indicator. This means that traders go against the prevailing sentiment in the market and make their trades in the opposite direction of what most other traders are doing.

This approach is based on the idea that if everyone is doing the same thing, then it’s time to go against the crowd. For example, if the sentiment in the market is overwhelmingly bullish, then it might be time to consider going short on the asset.

This is because the majority of traders in the market are usually retail traders, and their actions alone cannot move the market in a significant way. The major market movers are typically large financial institutions and hedge funds, who have the power to influence the market in their favor.

Therefore, if the sentiment among retail traders is one-sided, it’s possible that the major market movers may be taking the opposite side of the trade, with large sums of equity that is enough to move price in their directions, thus giving them the advantage in the market as they are able to take all the equity of the retail traders. If you then, as a cryptocurrency trader, decides to use the contrarian approach in this case and go against the crowd, you may end up making a profit.

One thing to remember in cryptocurrency trading when performing sentiment analysis is that it’s not science. Market sentiment can change quickly, and it’s important to be aware of any changes in sentiment. Additionally, sentiment analysis should be used in conjunction with other tools and analysis techniques to make informed trading decisions.

Finally, sentiment analysis is an essential tool to help you make more informed trading decisions. By understanding how traders feel about a particular asset, you can better gauge market sentiment and incorporate it into your trading strategy. So next time you’re considering a trade, take the time to perform sentiment analysis and make a more informed decision.

Conclusion

Cryptocurrency trading is very broad, and that is why understanding the basics is very important, as it would help set you up for a smoother and more profitable cryptocurrency trading journey. We, therefore, hope you find this article helpful as you kick-start your crypto trading career.

We will be updating this article from time to time to ensure that our readers are equipped with the most up-to-date information.