How to trade cryptocurrency
Discover how to trade cryptocurrency like a pro. Unlock profitable strategies and navigate the market confidently with our introduction to trading BTC, ETH and more!
Key takeaways
The cryptocurrency market is subject to high volatility
Trading cryptocurrency CFDs offers profit potential from both rises and falls
You don’t need to own or buy crypto coins to benefit from crypto movement
Why trade crypto?
At FXTM, we cater for the short-term cryptocurrency trader. These traders are more inclined to trade the cryptocurrency market with the objective of short-term gains using derivatives such as CFDs. There are a number of reasons why speculating on crypto market movements is appealing:
Volatility
Crypto is a highly volatile market. Market fluctuations are fast and frequent, offering ample opportunities for traders looking to take advantage of market movements.
As always, the potential of high rewards comes with high risk, and you’re encouraged to do your own research and implement efficient risk management strategies before trading cryptocurrency.
Leverage
Trading cryptocurrency with CFDs means access to leveraged trading, or trading on margin. This allows you to control a larger position (bigger exposure) with a smaller percentage of capital.
For example, if bitcoin is trading at $25,000, then 1:100 leverage means you could open a $25,000 position for just $250!
Leverage magnifies outcomes, meaning that any potential profits are amplified, but so are any losses incurred. Effective risk management such as setting a stop loss or take profit is essential.
Go long or short
One of the greatest benefits of CFDs is the opportunity to potentially profit from market prices both increasing and decreasing. You can either go long and buy a CFD on the expectation that the price will increase or go short and sell a CFD anticipating the price to decrease.
Hedging
Speculative trading on cryptocurrency can be used to hedge existing cryptocurrency holdings. For example, a long-term cryptocurrency investor may use CFD contracts to protect their portfolio from potential price declines, helping to minimise losses.
Lower capital outlay
Trading cryptocurrency coins can be costly, especially for higher-valued, more liquid coins. In contrast, CFD trading allows you to speculate on the price movement of the cryptocurrency without buying the underlying asset, with up to 1:100 leverage, and with spreads as low as zero. This means you can enter the market with a smaller initial investment.
No custody concerns
Unlike trading of cryptocurrency coins, with speculative trading on derivatives, traders don’t take ownership of crypto coins. As such, they don’t need to concern themselves with the secure transfer and custody of coins. This can be a technical process and poses risks of cyberattacks on exchanges and wallets, which have led to significant losses in the past.
Types of crypto trading
As mentioned, there are two primary forms of cryptocurrency trading popular with traders: Buying coins and speculative trading using CFD.
Buying cryptocurrency coins
Buying coins may be considered more investing than trading as the underlying objective is to accumulate coins and hold open positions for an extended period.
Long-term traders will be more concerned with the fundamentals of the cryptocurrency project and utility, looking at the potential increase in value over the long term. Price decreases are seen as an opportunity to buy more coins at a lower price.
Trading with cryptocurrency CFDs
Cryptocurrency CFDs, on the other hand, are ideal for short-term traders aiming to maximise profit in the short-term. CFDs allow for leveraged trading, meaning traders can enter the market with a low capital percentage compared to exposure.
As CFDs are based on price movements, traders are spared the technical requirements of owning and securely storing the cryptocurrency, while benefiting from a more liquid market.
Using leverage in crypto CFD trade:
Let’s look at a quick example of using leverage to trade crypto CFDs. By using the 1:100 leverage offered by FXTM, trading a 0.01 lot of bitcoin valued at $25,000, means you’d be able to open the position with only $250 capital as a deposit.
Furthermore, the estimated trading fees on such a trade are around $0.80, which includes the spread and commission costs.
How cryptocurrency CFDs work
To trade a crypto CFD, a trader agrees to buy or sell a certain amount of cryptocurrency at a specified time with a CFD trading broker, like FXTM. At the end of the contract, the trader will either make a profit or loss based on the difference between the opening and closing prices less applicable fees.
Key differences between trading cryptocurrency CFDs and buying crypto coins
| Trading cryptocurrency CFDs | Buying crypto coins | |
|---|---|---|
| Goal | Short-term profits | Long-term value gains |
| Initial capital | CFDs need less capital due to leverage | Need substantial initial capital to buy certain cryptocurrencies |
| Ownership | You don’t own the cryptocurrency; you speculate on its price movement. | You own the cryptocurrency |
| Storage and security | No need to manage crypto storage or security | You’re responsible for wallet security and crypto custody |
| Leverage | Leverage available, allowing for larger positions for less capital | No leverage |
| Shorting | CFDs allow you to trade based on both a price increase and a decrease. You may potentially profit from a downward price trend | No potential profit in a downward price trend |
| Risk management | Various risk management tools available, like stop loss and take profit orders. | Limited risk management tools |
| Liquidity | Greater liquidity compared to coin trading. Fewer currency conversions allow for faster execution. | Limited liquidity may affect the ability to buy or sell, especially when price is climbing or falling quickly. |
| Transaction costs | Spreads as low as zero, but overnight financing fees may apply. | You may incur fees like exchange fees, deposit or withdrawal fees, as well as higher spreads. |
Cryptocurrency CFD trading strategies
Each of the below trading strategies has its own advantages, risk tolerance, and suitability for different market conditions. You should carefully choose a strategy that aligns with your risk tolerance, availability in terms of time and your experience.
No matter which strategy you prefer, you should understand and implement effective risk management techniques to protect your capital.
| Timeframe | Strategy | Risk tolerance | Market conditions | |
|---|---|---|---|---|
| Scalping | Very short-term trades, often with positions held for seconds to minutes. | Scalpers rely on technical indicators and algorithms to execute rapid trades, aiming to profit from even miniscule price movements. Involves many small trades throughout the day. | Scalping carries high risk due to its fast-paced nature. Traders must be skilled at analysing short-term price movements and managing risk effectively. | Scalping is most effective in highly liquid markets with low spreads and minimal slippage. |
| Day trading | Open and close positions within the same trading day | Day traders use technical analysis, chart patterns, and real-time data to identify short-term trading opportunities. They make multiple trades during the day, aiming to profit from intraday price fluctuations. | Day trading involves moderate to high risk, depending on the trader's strategy and risk management. It requires a deep understanding of market dynamics. | Day trading is most effective in volatile markets with significant intraday price movements. |
| Swing trading | Typically hold positions for a few days to several weeks | Swing traders use technical and fundamental analysis to identify potential entry and exit points, aiming to profit from short- to medium-term price swings. They look for price patterns, trends, and key support or resistance levels. | Swing trading often involves moderate risk. Traders are exposed to short- to medium-term price fluctuations but have more time to make decisions compared to day traders or scalpers. | Swing trading is effective when markets are exhibiting trending behaviour or moving within defined ranges. |
| Range trading | Short to medium-term strategy focused on price movements within a defined range | Range traders identify key support and resistance levels and aim to buy near support and sell near resistance. They profit from price fluctuations within the established range. | Range trading is considered a lower-risk strategy compared to day trading or scalping, but there's still risk, especially if the price breaks out of the range. | Suitable when markets are consolidating or lack a clear trend. It may not be as effective in strongly trending markets. |
| Event trading | Short-term strategy that revolves around specific events or news releases that can impact the crypto market. | Focus is on fundamental analysis and identifying significant news events, such as regulatory announcements or major crypto-related developments. They aim to profit from the price movements that occur in the wake of these events. | Event trading can carry moderate to high risk, depending on the nature of the event and the trader's ability to predict market reactions accurately. Prices can be highly volatile around news releases. | Effective when there are expected news events or major developments on the horizon. Traders often position themselves before the event, anticipating the market's response. |
Managing risk for cryptocurrency CFD trading
While CFD trading for cryptocurrency may be highly rewarding and profitable, the opportunity to trade on margin, i.e., with leverage and exponential exposure or positions compared to capital outlay, the potential for loss is also that much greater. Effective risk management is crucial to minimise any losses.
Stop loss orders:
Set Stop loss Levels: Always use stop loss orders to limit potential losses. Determine a specific price level at which you will exit the trade if it goes against you. Stop loss levels are based on technical analysis, support and resistance levels, or other indicators.
Trailing Stop loss: Consider using a trailing stop loss, which automatically adjusts as the price moves in your favour. This can lock in profits while still protecting against significant losses.
Watch our video: What is Stop Loss?
Understand Leverage: Be aware of the leverage offered. While leverage can amplify profits, it also magnifies losses. Use leverage cautiously to reduce risk.
Margin Calls: Be prepared for margin calls where further deposits may be required. Make sure you have enough funds in your trading account to cover potential losses and avoid liquidation.
Risk per Trade: Decide the amount of capital you are willing to risk on each trade. This is typically a percentage of your total trading capital. For example, if your trading capital is $10,000 and you risk 2% per trade, your maximum risk per trade would be $200.
Take profit orders
Set Take profit Levels: Define a specific price level at which you will take profits. Take profit orders help you secure gains before the market reverses.
Partial Profits: Consider taking partial profits at predefined levels and trailing the rest with a stop order. This strategy allows you to lock in some profits while giving the remaining portion the opportunity to grow.
Watch our video: What is Take Profit?
Lot Size: Calculate the appropriate lot size based on your risk per trade and the distance to your stop loss level. Smaller lot sizes reduce the potential loss on a trade. Our profit calculator can help.
Stay Informed: Stay updated on cryptocurrency news and events that can impact the market. Be prepared for unexpected price movements and adjust your risk management accordingly.
Emotional Discipline: Follow your trading plan and risk management rules consistently, regardless of emotions. Avoid impulsive decisions based on fear or greed.
FREQUENTLY ASKED QUESTIONS
To trade cryptocurrency, you’ll need access to a trading account on FXTM. You can open an account here. Before you place your first cryptocurrency trade, you should be sure you understand all the benefits and risks and have a clear, defined strategy.
The bottom line
Trading cryptocurrencies with CFDs presents an exciting opportunity in a market with enormous potential. It’s a market is known for its price swings, which can result in substantial gains, but also significant losses. Therefore, it's paramount to approach CFD trading in crypto with a well-thought-out strategy, diligent risk management, and a commitment to ongoing education. By doing so, traders can harness the opportunities presented by this dynamic and ever-expanding industry while safeguarding their capital in the face of market volatility.