Kickstart Your Bitcoin Trading Career With These 8 Key Lessons
Do you want to make money trading Bitcoin, but don’t know what it’s all about?
Look no further. It’s time to learn the basics of Bitcoin trading, so you can go into the market armed with knowledge and confidence.
Barely a day goes by without hearing about Bitcoin in the news. I’m sure you’ve heard a lot of different things about Bitcoin and the rest of the cryptocurrency world, least of which, it’s making people RICH!
Never before has a financial market been so open, and accessible. Everyone seems to be getting a slice of the pie, except you. Now it’s time to change that. Now it’s your turn to take a slice. Hell, why not the whole pie?!
For decades, traders have been making truck loads of money in the markets. Bruce Kovner, Larry Hite, Richard Dennis, Michael Marcus, George Soros, Stanley Druckenmiller, Ed Seykota, and Bill Lipschutz to name a few.
Some traders have had extraordinary success in the markets. Take Ed Seykota. He’s considered one of the fathers of systems trading. He turned $5,000 into $15,000,000 over a 12-year period in his model account (an actual client account). That’s a 250,000% increase! I think I heard your jaw hit the floor. And during his career as a money manager, he achieved average annual returns of over 60%, not including fees. Incredible!
Another great is Larry Hite. In 1981, he co-founded Mint Investment Management Company, and achieved an average annual return of over 30%, net of fees, for 13 years! To put this in perspective, if you’d invested $10,000 with Larry in 1981, you’d have over $300,000 after 13 years. Over the same period, the S&P index averaged just under 11% each year in the same period. Your $10,000 would only be worth about $35,000. I know where I’d put my money.
Cryptocurrencies weren’t around in the days when these guys made their fortunes, but there are some amazing success stories in Bitcoin too! Take the 16 year-old from Ohio who made over $500,000 from his bar mitzvah money, or the hedge fund that made a return of 25,004%!
Hold on a sec before you get too excited and put your life-savings into Bitcoin. You don’t want to be the guy or gal who lost almost 200 BTC as the market crashed from its ~$20K peak.
Just because there are success stories, doesn’t mean that money is just going to flow out of the market into your trading account. Unfortunately it just doesn’t work like that. To be consistently successful in the markets you need to know how the market works, have a trading strategy, trade your strategy with discipline, and have excellent risk control. Stick with me, and I’ll teach you all of these things, and more!
Ready to become the next George Soros? Then let’s begin.
1) Emotions don’t belong in the market
“The key to trading success is emotional discipline. If intelligence were the key, there would be a lot more people making money trading.” — Victor Sperandeo
You shouldn’t personalize your trades. Becoming too emotionally involved with market movements kills objectivity, and to be a great trader you have to be objective about the markets. Bad traders chase their losses and end up losing more because their emotions cloud their judgment, making them unable to see and accept what is happening in the market. When the market speaks, you have to listen. At the start you’ll be wrong a lot, and you will make losses. Great traders understand this, accept it, and they don’t take losses personally.
You need to learn to trade without emotional attachment to your trades. Only then can you ascend to greatness. As such, I highly recommend trading with a practice account before putting a single dime in the market. Through practice trading you can find a strategy that you’re comfortable with and works consistently for you. Most new traders lose money in the beginning, and you’re no exception! So start with a practice account. I know I’d rather lose a fake $100,000 than a real $100,000.
“Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money.” — Ed Seykota
If you think this is boring or “no fun”, then you’ve come to the wrong blog. I’m not here to teach you how to have fun in the markets, I’m here to teach you how to make money and win. If you don’t have the discipline to practice trade for 3–6 months then stop reading now, because you’re never going to make it as a trader. If you can’t even do that, what makes you think you can hold on to a $200,000 position when it’s down 15%? There’s no risk in practice trading. I’m not saying its going to make you a rockstar trader overnight, but it will give you a significant advantage over Average Joe who puts his life-savings into Bitcoin, only to see it drop 50% the next day, shit his pants, sell, and watch the market rise to be up 60%.
If you’re trading to get an adrenaline rush, then go pick a tip line on Twitter and trade their signals. I can’t help you.
Still here? Then let’s get down to business.
2) Market Structure
The cryptocurrency market is decentralized. You’ve probably heard this before, but what does it mean? Let’s start by understanding what a centralized market is:
In a centralized market, all buyers and sellers must trade via the central party (“The Market” in the diagram above). There’s one price to rule them all, and the central party controls the price spread (the difference between the buy and sell prices).
Stock markets are very centralized markets. The NYSE has a certain set of companies listed, and there is one price for every company listed on the exchange. You can’t knock on your neighbour’s door and ask if he wants to buy 100 shares of JP Morgan from you, and do the trade right there in his front yard. No. You have to contact your broker, and put in an order to sell, that will be sent (probably via a large bank) to the NYSE. Your trade will hopefully be matched with a buyer, who’s put in a buy order with his broker, and a trade occurs. This is an oversimplification, but the point is all trades go through a single party, the exchange.
In a decentralized market, anyone can trade with anyone else:
Decentralization is the real power of Blockchain technology. Anybody can transact with anybody else, the result is validated, and then stored in a transparent, distributed ledger that anyone can inspect. You don’t have to be a ridiculously wealthy person to access the market, you can go to any one of a number of exchanges and buy Bitcoin from with as little as $2! Then you can trade wherever you want, with whoever you want.
Decentralization has it’s downsides, especially when coupled with such a new market. There’s a lot of fraud in the market. Bitcoin is so hyped up that people seem to go brain dead when they see a new ICO advert, or someone pumping AnyOldCoin on Twitter. Fraudsters are taking advantage of this, and taking people’s money. Like taking candy from a baby. You should read up on common scams in the market and protect yourself.
The key market players in the crypto trading are exchanges (e.g. Coinbase, Poloniex, Bitstamp), market makers (e.g. Genesis Trading, Cumberland Mining), investment managers (e.g. Binary Financial), hedge funds (e.g. Pantera Capital, Polychain Capital), OTC trading platforms (e.g. LocalBitcoins), and last, but not least, individuals. Investment banks are becoming interested in Bitcoin too, but none have officially entered the market (as far as we know…). Goldman Sachs was rumoured to be setting up a Bitcoin trading desk, but they’ve since denied these rumours.
For you, the two most important players are exchanges and OTC trading platforms. These are where you’ll make your millions, and stake your claim in the bitcoin gold rush.
Exchanges provide a marketplace for buyers and sellers to meet and trade. They provide market data (i.e. prices and trade volume) and execute your orders for a small fee. Don’t let this fee business put you off. If you’ve ever dealt with buying or selling stocks you may have been put off by the high fees (relative to your trading capital) that brokers impose on their clients. In the cryptocurrency markets, fees are tiny. Seriously, we’re talking about 0.25% on each trade. So, If you buy $100 of Bitcoin, your fees will be $0.25. Peanuts compared to what you’ll be making trading.
3) Is there a “best time of day” to trade Bitcoin?
No. Next question.
Okay, it’s more complicated than that, but the general consensus is, “No”. Unlike other financial markets, the cryptocurrency markets are open 24/7 365, barring any technical difficulties *cough*Binance*cough*. You set your trading hours. You decide when you trade. You’re the boss.
I said it’s more complicated than that, and I’ve yet to do the analysis, but watch this space! There may be certain times of day with greater volatility or trading volumes that’d be beneficial to traders. I’ll find out and report back soon!
4) Cryptocurrency Pairs & Quotes
Well alright, alright. We’re getting to the business end of things. You want to know why exchanges quote 2 different prices? And how to know which one you’re going to pay?
Like traditional foreign exchange (Forex) markets, cryptocurrency prices are given as a pair of quotes. For example:
This is what you’ll commonly see when you look at an exchange, a table of flashing numbers. This shows all the open orders that other traders have put into the market. The bids (buy orders) on the left, and the asks (sell orders) on the right. The bids are sorted by price from highest to lowest, and the asks are sorted by price from lowest to highest. The highest bid represents the highest price that anybody in the market is willing to pay for some sweet, sweet bitcoin. And the lowest ask is the lowest price that anyone is willing to sell their bitcoin for. Got it?
The highest bid will always be lower than the lowest ask (otherwise the buyer and seller would match and their orders would be executed against each other). Buyers need sellers, sellers need buyers, and they both have to agree on the price! The difference between the highest bid and the lowest ask is called the spread, and the spread can fluctuate depending on the market conditions. It can get wider (greater price difference) and narrower (smaller price difference) depending on market conditions.
And another thing, all currencies, including cryptocurrencies, are traded in pairs. That is, you’re always buying one currency and selling another, and you’ll often see the currency given like so:
This is called a quote. The currency on the left is known as the base currency, and the currency on the right is the quote currency (sometimes called the counter currency). The given price indicates how much of the quote currency the market is willing to exchange for the base currency (and vice versa).
For example, the price in the screenshot below shows the Bitstamp’s order book for BTC/USD. The highest bid is 10866.17. This means that someone is willing to sell (i.e. pay) 10866.17 USD for every 1 BTC they buy.
This is very important. You do not want to get your quotes mixed up. Imagine if you accidentally put in an order to buy 10866.17 BTC?! You would not make that mistake again.
5) Pips & Lots
This is a very important concept, so pay attention! You shouldn’t trade until you know this inside out.
Pips are the unit of measure for price changes of a currency pair. They’re usually the last decimal place of a quote. For BTCUSD, the price is given to 2 decimal places, so 1 pip is equal to 0.01 USD. In many trading platforms, you can set your take-profit and stop levels in terms of pips, e.g. Buy BTC @ 10,700.00, Stop Loss @ 1,100 pips, Take Profit @ 12,000 pips.
Don’t worry if this is confusing. Let’s go through a few examples to help solidify the concept of “pips”.
Example 1 — BTCUSD = 9,900.00
A 1 pip move is equal to 0.01 USD. But how much is that in BTC?
The change in price of the quote currency (USD) multiplied by the exchange rate ratio will give you the pip value in the base currency (BTC).
So, a 1 pip move at this price:
0.01 USD * ( 1 BTC / 9900.00 USD ) = 1 BTC * ( 0.01 USD / 9900.00 USD ) = 1 BTC * 0.00000101 = 0.00000101 BTC
That’s a lot of zeroes!
Example 2 — ETHBTC = 0.07500000
Here, a 1 pip move is equal to 0.00000001 BTC.
So to get the value in ETH, you can do the same as above. The change in price of the quote currency (BTC) multiplied by the exchange rate ratio will give you the pip value in the base currency (ETH).
So, a 1 pip move at this price:
0.00000001 BTC * ( 1 ETH / 0.07500000 BTC ) = 1 ETH * ( 0.00000001 BTC / 0.07500000 BTC ) = 1 ETH * 0.00000013 = 0.00000013 ETH
These numbers might not mean a lot to you right now, but with time you’ll become familiar with big and small price moves, and their pip value.
Converting to other currencies
You might also want to track your portfolio in terms of your country’s currency.
Take example 2, how much is 0.00000013 ETH in USD?
Well, you can apply the same calculation to find out. With BTCUSD @ 9900.00 and ETHBTC @ 0.07500000:
BTCUSD → 1 pip = 0.01 USD = 0.00000101 BTC
ETHBTC → 1 pip = 0.00000013 ETH = 0.00000001 BTC
ETHUSD → 1 pip = 0.00000001 BTC * ( 0.01 USD / 0.00000101 BTC ) = 0.01 USD * ( 0.00000001 BTC / 0.00000101 BTC )
= 0.01 USD * 0.00990099 = 0.00009901 USD
A 1 pip move in ETHBTC is equal to 0.00009901 USD, at the given prices! So every 10,100 pip move in ETHBTC is equal to about $1. The same calculations can be applied to ANY currencies, as long as there’s a common denominator (in this case it was BTC).
Okay, that’s quite enough math for now. What’s next? Lots. No literally, we’re going to talk about Lots.
A Lot is the number of units of an asset that you can trade. In traditional Forex markets, the standard lot size is 100,000! Fortunately cryptocurrency lots are significantly smaller. For BTCUSD, the lot size is 0.00000001 BTC (approximately 0.00009839 USD). Tiny. Minuscule. Nano. However, exchanges will impose a minimum position size, generally between $2 — $20. That’s hardly going to break the bank. And if it will, then you shouldn’t be trading anyway!
6) Order Types
To make money in trading, you have to trade. Stating the obvious, I know, but there’s a point to this. To trade you have to create orders. But which type of order should you make?
There are 3 types of order you must know:
- Market: The trade will execute at the next best price available. Use when you want to enter the market ASAP
- Stop: Placed above the market for buys, and below the market for sells. Use when you expect the price to reach a certain level and continue going in that direction
- Limit: Placed above the market for sells, and below the market for buys. Use when you expect the price to reach a certain level and then reverse
These different types of order can be used in combination to get the most out of a position, while controlling your risk, without you sitting in front of the charts all day and night. For example:
I made a market order to sell when the price was around 8996.00, and at the same time I placed a stop order (AKA stop loss) to buy if the price goes up to 9929.30. This limits my risk for the trade, as I can’t lose more than about 10.4% (9,114 pips) on this trade. And I can step away from my computer safe in the knowledge that if the market moves against me by too much, I’ll be stopped out and out of the market. Without a stop loss in place, my losses could be much larger depending on how fast the market moves, and how quickly I can get to a computer.
Limit orders are generally used when you want to enter the market at a lower price than it’s currently at. You expect the market to retrace it’s steps, before going back in the initial direction:
BTCUSD is currently at 9009.67, if you expect the price the retrace a few pips, and then continue to head lower, you can set a limit order to sell above the market. The limit order will execute when the market reaches it. Bear in mind though, if the market doesn’t reach your order, it won’t execute.
You’ll become more familiar with the different types of order when you start practice trading.
7) Candlesticks
I’ve given you a few glimpses of charts, and you might have seen some in your own research or on social media. One thing you’l notice is that they tend to have these weird, red or green vertical blocks and lines on them. What are they? They’re called candlesticks, and they’re thought to have been invented by the Japanese rice trader, Munehisa Homma, in the 18th century.
Candlesticks describe how the price moved over a specific period of time. Most good charting software will produce candlestick charts, and allow you to set the time period anywhere from 1 minute to 1 month.
Candlesticks show you what has happened to the price over time. If the price is going down, it closes lower than it opened, and you’ll see a red candlestick. If the price is going up, it closes higher than it opened, and you’ll see a green candlestick. The thin sticks at either end show the range of price movement over the time period, as does the length of the candlesticks body.
The open tells you what price the first trade in the period was executed at. While the close tells you the price at which the last trade in the period was executed at. And The high and low points indicate the highest and lowest prices that trades were executed at during the period. That’s all there is to it!
I’ll teach you to read candlestick patterns and how you can use them to analyze price movement. It’s a simple and effective way to learn how the market is feeling about a given price level, and is a key part of technical analysis.
8) Knowing when to buy and sell
“I know where I’m getting out before I get in.” — Bruce Kovner
It’s all very well knowing the technical details of how the markets work and how to read charts, but without knowing when to trade you’re shark bait.
For every trade you should know where you’re entering the market, and where you’re going to get out BEFORE placing a single order. This is absolutely critical, so I’m going to say it again. For every trade you need to know where you’re entering the market, and where you’re going to get out BEFORE PLACING A SINGLE ORDER.
Tattoo that on your forehead if you must. As Wall Street traders say, “Plan your trade, and trade your plan.” There’s no better way to lose money than impulsive trading.
“Okay, but how do I plan my trade?!” I hear you shout. Some say it’s as simple as buying the dips and selling the tops. But how do you know if we’re at the bottom or the top? Trade timing depends a lot on your trading style and strategy. Some traders try to identify the start of long-term trends, enter at the very beginning, and exit when they believe it’s changing. Others like to wait for a trend to be confirmed before entering the market and riding it until the trend changes.
It all depends on the individual, what their tastes and preferences are. This is something you’ll develop over time. It can’t be taught, you have to discover what works best for you. And I’m here to provide you with the tools to do just that.
You’ll use your trading system, whether it’s technical, fundamental, algorithmic, or a combination of all of those, to decide when to enter and exit the market. It’s important to practice trading and become familiar with a wide variety of market conditions, so you can find a system that works for you, and learn how to follow it with discipline before putting real money on the line.
Summary
While cryptocurrency markets, in fact all markets, are incredibly complex, these 8 key components will set you on your way to mastering the markets.
If you take just a few things away from this article, remember:
- Don’t bring your emotions to the table
- Know where you’re going to get out of the market before you get in
- Practice trading will help you to hone your skills before putting real money at risk
It’ll take patience, discipline, and lots of mistakes, but YOU can become a great trader and make millions in the markets.
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