The development of Bitcoin has revolutionized the financial market. Not only does it offer lower fees, faster transaction processing, and significant value increases for consumers, Bitcoin is also one of the rising vehicles for speculation among traders and investors.
However, even in an already unpredictable industry, Bitcoin takes the cake for being one of the most volatile assets commonly traded. All trading is essentially a zero-sum game, so be prepared to take some losses while you’re still learning.
Here are some of the top things that you need to consider before you start trading Bitcoin.
Choose A Trading Style
There are different styles of trading. The main difference between these styles is the length of time that you will be holding a trade. Choosing the style that best suits your personality will be crucial for your long-term success as a trader.
Here are some of the most popular trading styles:
- Day trading involves multiple trades in a given day and trying to profit from short-term price changes. Basically, you’ll have to be active throughout the day and just close all your trades at the end of the day.
- Scalping is a strategy that tries to make considerable profits on small price fluctuations. Timing is of utmost importance since the idea is to make small profits repeatedly to limit risks. With scalping, you’ll most likely make dozens, and even hundreds, of trades in a day.
- Swing trading hinges on seeing the big picture. As a swing trader, you’ll need to look for indicators of a specific price movement and enter the trade then. You’ll hold the position open, sometimes for months, until you reach the desired result.
Before you choose a trading style, always keep in mind that prices are greatly influenced by public sentiment. If you’re planning to do swing trading with Bitcoin, you need to be updated with regulatory and industry changes.
After knowing what style to adapt, make sure that you check out a reliable Bitcoin trading website to help you make informed decisions. These websites provide up-to-date information and guides to help you pick the best trading platform.
Study Charts and Identify Trends
As much as possible, avoid buying or selling in huge reactionary swoops. Experts recommend trading only a few times a week to keep your fees low and ensure that your bets have ample opportunity to perform.
Additionally, make sure that you analyze the charts to see any trends that you can take advantage of. Checking out moving averages on a chart, for example, will help you determine whether a given price is over or undervalued.
Adopt A Sustainable Pace
The saying, “It’s a marathon, not a sprint” really finds good application in Bitcoin trading. One of your top goals is to create a schedule that’s sustainable in the long term. It is impossible to trade effectively 24/7. Putting in long hours every day can only lead to suboptimal performance and burnout.
Adopt a schedule that works for you by researching the best times to trade. Never start trading unless you’re in the best state of mind to make informed decisions and have an established trading plan.
Remember that you’ll get plenty of chances since the market hours for Bitcoin are long:
- Futures: 23 hours a day, 5 days a week
- CFD: 24 hours a day, 5 days a week
- Cash market: 24 hours a day, 7 days a week
Never rush since pressure can adversely affect your trading skills. Furthermore, remember that your objective is not to be right as often as possible. Your goal is to make as much money as you possibly can. It’s better to be right 10 percent of the time and see considerably more returns than you would if you were correct 80 percent of the time.
A stop-loss refers to an order that setups the maximum loss level you can afford before a position gets closed. Implementing a stop-loss level is necessary since one of the primary attributes of Bitcoin markets is its consistent volatility. It’s normal to see 5 to 10 percent fluctuations in valuations every single day.
Bitcoin markets offer exciting opportunities for traders who love risk. However, when extreme volatility is the norm, it’s not wise to let your ego take control and face catastrophic consequences. Use a stop-loss to protect any open position.
Use Risk Management Tools
Bitcoin, as previously mentioned, tends to be more volatile than other asset types as it’s a relatively new technology, facing numerous challenges. Although many experts believe that the overall trend for Bitcoin is mostly upward, trading Bitcoin involves significant risks that you need to manage.
Here are some examples of risk management tools that you can use:
- Diversify – Smart Bitcoin trading involves the same techniques that you would use for stock markets or forex. The adage that you shouldn’t put all your eggs in one basket still holds true here.
Diversification allows you to overcome uncertainties and not lose all of your digital assets in a flash. Hedge your bets and check out other up-and-coming cryptocurrencies.
- Trailing stops – Regular stops are those that are fixed at one price. On the other hand, trailing stops entail setting a price that follows the price of the market. This means that the stop is only implemented once the market falls a specified number of points.
For instance, you can set a trailing stop at 20 points below the market price. Thus, when Bitcoin rises by 1000 points before falling back down, your trailing stop will close the position while the trade is still at 980 points.
- Price alerts – You can set price alerts to trigger a price that you choose. For example, if Bitcoin price falls drastically in a single session, you’ll receive an e-mail or app notification once the market hits your predetermined price.
Risk management protects your trade from rapid changes in the market. By using these tools, you can avoid risking more than you can afford.
Even though Bitcoin trading can be profitable, it can also be a very bumpy ride for traders. The extreme volatility of the Bitcoin market means that even experienced traders need to exercise more caution. Make sure that you’re prepared for any eventuality by adopting a strict risk management strategy.