Guide to trading cryptocurrency
The large price fluctuations can make it tempting for many to trade cryptocurrencies, and if you know what you are doing, it is possible to make a good profit. But what´s important to think about when actively trading crypto?
In this article, Firi's own crypto enthusiasts, Software Developer Ronny-André Steinslett and Data scientist Aleksander Hyggen Haarstad, will share their experiences of trading actively in cryptocurrency.
What is trading and what is the difference between investing?
The very first thing we want to emphasize is that only you know which investment strategy is best for you, whether it is long-term investment or active trading.
To actively trade means to carry out frequent purchases and sales of, for example, cryptocurrencies or shares. This is in contrast to traditional investing, where one has a long-term goal of making money.
Traders take advantage of exchange rate changes and are happy to carry out more transactions per day. Traders are therefore dependent on actively following the market, while investors are less concerned with the daily price fluctuations and more with the long-term price development.
Some strategies in active trading
There are many different strategies in active trading, and here are some of the most common:
- Scalping: Short-term form of trading. Here, positions are kept open in short time intervals such as seconds or minutes, so that you can take advantage of small price changes during the day.
- Day trading: In day trading, several positions are opened and closed within the same day, based on price changes during the day.
- Swing trading: In swing trading, the position is held for a few days or weeks, depending on how the price changes during the period.
Beat the cryptomarket
Aleksander explains that the goal of trading is to "beat the market", and thus profit on the investments. Successful traders usually have a lot of knowledge about the market, strategies and are up to date on the news. Furthermore, you must be aware that you are competing against the best traders out there, and it is thus likely that you will lose money on active trading. It is therefore good to have some capital and be prepared
You also need a good dose of luck when trading. Even the most experienced trader has bad days.
- Many who take too high a risk may not have much knowledge. But you also have those who have a lot of knowledge and who can take high risks because they are comfortable with it, says Aleksander.
Here it boils down again to coincidences and luck, and whether you can afford to rely on your own gut feeling and analyzes. Other qualities that can be helpful when a trader is discipline and the ability to have ice in his stomach. It is important not to get too emotionally affected, even when there is a lot of uncertainty in the market.
- The advantage of long-term investment, as opposed to trading, is that one can ignore the tidal valleys that affect the market over time and which can be frustrating and time-consuming to understand, Aleksander suggests.
Get inspiration from experts, but do not copy them
Luckily or not, as a beginner in cryptocurrency and trading, knowledge is still power. But where should you turn to find the knowledge needed to succeed?
- Get inspiration from experts, but do not copy them. When it comes to investing and trading, do what suits you, your risk appetite and your savings horizon best, is Ronny's top advice.
A beginner in cryptocurrency steps into a complex universe where there are as many experts as opinions. Aleksander points out that understanding the foundation of what cryptocurrency is built around and how the market works is absolutely essential to becoming a successful trader.
- Read up on the basics of cryptocurrency, such as key concepts and technologies. This makes you better equipped to understand and thus distinguish technologies and currencies from each other. Each cryptocurrency has different goals about what they want to contribute.
The idea behind Bitcoin, for example, was a decentralized, digital currency that would take away the need for a central authority or third party. Ethereum, which is also used to send and receive funds globally, was created to enable developers to build and publish smart contracts and distributed applications, Aleksander explains.
Be critical of finfluensers
It is also recommended to be critical of who and what tips you follow. Many fine influencers can appear as experts in their field, but recent cases have shown that several of them are also beginners themselves. A "finfluencer", or financial influencer, is a person who has many followers on social media, and who posts tips on personal investments. As we say in the crypto world: DYOR (Do Your Own Research).
- Still, it may be worthwhile to follow social media and news channels actively. Here you can stay up to date and get in touch with other like-minded people. Even if you should never copy others, you can always find good discussions and interesting reading material to learn more about what you are involved in, says Ronny.
What is needed to trade actively?
We have already mentioned that knowledge, experience and discipline are fundamental to being able to trade at a level that will be profitable. In addition, need an available time.
Some will argue that trading is a full-time job, and even those who trade as a hobby must be prepared for the fact that it is time-consuming and will go beyond other priorities, says Aleksander.
Furthermore, traders often use specific strategies, as mentioned above, and tools that give an edge compared to other traders. Technical analysis, for example, is a useful method for achieving the goal of hitting bottoms and peaks in the crypto market.
- Technical analysis are methods where one looks at previous data to be able to predict future data and thus decide when one should invest and in what, Aleksander explains.
One looks at how the prices have moved over time, possibly in accordance with technical indicators. Technical analysis is not about finding the final answer, but rather trends that would be typical or atypical in relation to previous outcomes.
- It is rarely a fundamental cause of the fluctuations that take place day to day, or week to week. Traders who base their buy and sell orders on technical analysis look for these patterns in which cryptocurrencies typically move.
You can almost be sure that there are thousands of others who have drawn exactly the same lines as you draw yourself, and it is often that is the reason why technical analysis often finds a support and resistance on which one can make an assessment, Ronny explains. He adds that he himself makes as simple technical analyzes as possible.
Should you actively trade?
As mentioned above, active trading requires time and energy. Does it really pay off for most people? Probably not. Still, research shows that 25 percent of day traders make money, so it's entirely possible if you have the time and dedication.
Furthermore, the research article shows that the human brain often overestimates gains and underestimates losses. Several small profits that traders get through the day are often eaten up by larger losses without one noticing it. It can therefore be confusing and difficult to keep track of what one has gained or lost.
Most day traders give up
85 percent of all day traders give up within three years. Finding a golden mean between active trading and long-term investing can be the solution to avoid falling into these statistics. This is what Ronny and Alexander have done.
- I trade less often now than before, but I still make exceptions and try to outsmart the market by timing purchases and sales. Risk-adjusting my positions has meant that I have saved myself many falls. If time is there and I see something I feel is obvious, then I take a chance, says Ronny.
He also suggests having multiple accounts where one can split trading and long-term investments. In addition, Ronny stays below a certain amount when he trades to minimize the risk of large losses. Aleksander has also reduced trading because it requires a surplus of time and energy at times, but he actively follows.
- I see a clear advantage in being active at the same time as investing in the long term, as you have the opportunity to limit potential losses. If you follow the market and see that the value decreases, you can try to sell out in time. When the value starts to rise, you can buy in again, he explains.
- I see a clear advantage in being active at the same time as investing in the long term, as you have the opportunity to limit potential losses. If you follow the market and see that the value decreases, you can try to sell out in time. When the value starts to rise, you can buy in again, he explains.
In addition, one should also be aware of the cost of frequent buying and selling of cryptocurrencies. Any trading fees / commissions, currency surcharges if you use international stock exchanges, and tax on gains should be included in the calculation when you decide to actively trade.
Summary
Active trading can be lucrative for experienced traders, and while it can be fun and educational, it requires a lot of knowledge, experience and capital. Most people who try end up giving up within a few years, and it's important to familiarize yourself thoroughly with the topic before you begin.
If you feel ready to give it a try, you can sign up with Vipps here. Of course, you do not need to trade actively either, many are content to buy cryptocurrency and leave it at that, so-called hodling. And many have become rich in it too.
Learn more about cryptocurrency? Here you can see the most common myths and misconceptions about crypto.
Remember that buying and selling cryptocurrencies involves high risk, and that historical returns are never a guarantee of future returns.