Steemit Crypto Academy Season 4 Week 6 - Homework Task for @reminiscence01 | Trading Cryptocurrencies
Hello everyone, I hope you're all doing fine. The same goes for me.
In this post, I'll be posting a homework task for crypto professor @reminiscence01
This Homework post will be based on Cryptocurrency trading. We'll talk about different methods of tradings such as Spot Trading, Margin Trading and Future Trading, their uses, advantages and disadvantages. We'll see different types of orders in the market that a trader can place and see how to use them.
I'll explain these topics related to cryptocurrency trading, their uses and examples, and many other aspects using fully referenced and markdown images from various sources present on the internet. Also, the post is optimised for mobile devices and Pcs running on Windows and Macs systems only, which use (1388X768)resolutions and for a bit higher. In case of any irregularity, please consider switching devices. In any case of problems and issues, you can also reach out to me in the comment section.
Explain the following stating its advantages and disadvantages:
(i) Spot trading (ii) Margin trading (iii) Futures trading
Trading is simply the buying and selling of digitalised crypto assets in the crypto market. There are many types of trading practices in the market. To avoid losses and maximise profits, A good trader always keeps an eye for these trading styles and patterns and chooses the best one for the current market conditions.
The word "Spot" means at the point. Spot trading is the simplest method of trading in which the assets are bought or sold at the spot or immediately. In simple terms, we can say that the trading is carried out immediately on the spot. In Spot trading, The user can place a spot order for the crypto asset he wants and instantly get it delivered to his wallet.
The trading will be carried out at the current price on the market, also known as "Spot Price" and the market as "Spot Market."
For example, if I want to buy Bitcoin(BTC) worth $100 with spot trading technique, the first thing I need will be a sum of $100 in my Spot wallet at the settlement date (usually T+2 days the trade). If the same condition doesn't match, the exchange will not allow me to enter the process.
Instant asset transfer: As the trading is carried out on the spot, the buyer, will instantly get the asset, which also applies to the seller side. There is no need to store assets for long time durations before the transactions actually take place.
Ease of use: It is the easiest way to trade for an asset. A trader can simply place an order at the current market rates without any fundamental analysis or Calculations. It is a very good method for newcomers in crypto markets.
No minimum purchase required: there is no minimum amount required on the buyer side. He can freely choose the amount for which he wants to buy the asset, and he can start from any amount, whether it's big or small.
Chance to make a profit after loss: spot traders can hold their assets in their wallets if the price is on bearish trends, and they can hold and wait for the price reversal from bearish to bullish forms and then make profits by selling assets for higher prices. But for this to happen, a trader should be very patient.
Not good for big trades: spot trading is not good for big trades and bulk buying or selling crypto assets. As it's not relevant for the traders to invest a large amount and get low profits from it. They can use margin or future trade for these purposes instead of spot trading.
Low-risk management: There's a majority of buyers who use spot trading, but one limitation is that due to being new in the market, one can buy an asset at its peak or high prices. As we know, the crypto market is highly volatile and can show trend reversals at any time.
If a trend reverses from its price to bearish patterns, it may cause panic situations in buyers who are still newcomers to the crypto market, which leads them to sell their assets for a lower price leading to loss.
Margin trading is a trading technique by which a trader can buy an asset with leverage capital or borrowed capital. In this kind of trading, the traders have purchasing power as they borrow funds from third party lenders, which can be other traders or an exchange. They get some interest by lending these funds. It allows the traders to place spot orders with borrowed funds from the other investors.
This helps traders buy or invest funds in assets that they cannot buy with their current capital. In simple terms, we can say that by doing margin trading, one can take leverage from a third party in funds to buy a crypto asset that is far greater than their initial capital.
For example, if I want to purchase a crypto asset of $1000, there's no need for me to have $1000 in my wallet. I just need to have 1% capital of the purchase amount in my account. I.e. I can purchase a $1000 asset for $10 using margin trading, and it gives me 100 times leverage and maximises the gains. It is to be noted here that the other 99% of capital will be borrowed from other users or exchanged. In a severe loss situation, the third party lender can perform a Force sale and close the position in the borrower's account with full authority over the debtor account.
High Profit: with this trading technique, a trader can gain a high amount of profits, i.e. if the price goes as predicted by the trader.
provide capital to small investors: As small investors don't have much capital support. This trading technique will provide a solid solution to the cause. If the trader is certain of the price movement and has a good knowledge of the crypto market prices and movements, then he can borrow funds from third party lenders and use them for gaining profits.,
Margin trading has some good advantages as compared to spot trading. But, if we talk about the risks involved, then it's also a very risky method to consider as an option.
As the lender have authority over the trader account as he's paying for the asset, he can place a forced sale over the assets held by the trader in case of a loss.
This technique is not optimal for a newcomer as it requires higher expertise in the crypto market.
One should have great price and trend reading skills and do technical analysis to perform margin trading.
In this type of trading, the traders don't buy any assets as they do in spot trading, and they purchase future contracts with prices as same as the real asset value. It's not recommended for newcomers as it requires a higher level of crypto knowledge.
They made predictions based on the trends and price movement after doing different kinds of analytics. By analysing the trends and prices of the assets, they predict the future movement and place orders, making profits. It's a great way to earn profits but also involves risk far greater than spot trading.
It also offers leverage like in margin trading from third-party investors, which is a great way to invest and involves the risk of loss. In this kind of trading, leverage maximises both profits and losses.
Big Profits with low investment: A trader can make big profits using this trading technique as it can be used for both long (buy) when he predicts that price will increase or short (sell) if he predicts that price will drop. The investment here is as same as the margin trading, and the capital can be borrowed to provide leverage to buy a contract of future price for the asset. A trader can make a huge amount of profits with low capital.
Bidirectional trends predictions: traders can predict the price in any direction irrespective of being bullish or bearish because that's how the principle of prediction works. So, a trader can predict both high and low prices for an asset.
Authority Issues: As investors don't buy actual assets but future contracts. It poses an issue of the authority of an asset. The price for the asset is paid, but the asset will come in future. Since the asset is not actually in the wallet as spot trading, it sometimes has authority issues.
High-Risk in predictions: As the crypto market is highly volatile, there is no guarantee that the price or trend will follow the predicted path. If a trader makes wrong predictions, then it can take him to huge losses.
- External Factors affecting analysis: Even if you're a good trader and market expert, there may be a situation where the price may not follow your prediction there are many external factors like competition, regulation, technology advancement,t and many others which can disrupt price and trend movements and eventually interrupt your analysis.
2a) Explain the different types of orders in trading.
2b) How can a trader manage risk using an OCO order? (technical example needed).
This is an order which a trader places at the current market price. The fastest way to execute an order is through market orders. There is no waiting, and the order will be filled instantly as it is being carried out at a current market price. The investors, in this case, are called price takers, as they take any price that the market currently offers.
These are the orders which get executed after certain requirements are met from the buyer and seller side. The investors make these orders irrespective of the current market price as they offer the price they're willing to pay for the same asset. The order will be filled when the asset price will coincide with the quoted price by the investor. In this case, the investors are known as market makers as they try to bend the market according to them.
There are types inside the pending order category named Limit orders, OCO(One Cancels the Other)order and stop-limit orders.
Stop limit orders are the orders which provide both of the features from limit orders and market orders. In this, the order goes in pending after the conformation and the order will be first received as a pending stop order. There's a stop level price; when the market price reaches the stop price, the order automatically converts to limit order and executes when the limit order price is filled.
A limit order is a type of pending order in which the order will be filled when the market price will coincide with the limit order price filled by the investor for the asset. Simply, a limit order allows the trader to set a specified price for an asset to buy or sell, and it is executed when the asset's market price reaches the limit order price or higher.
Generally, users put the limit orders to a lower price than the market price as a trader would always want to buy an asset for the lower price. The order becomes pending and is waited until the price comes to the market.
For example, if the market price for an asset is $100, a limit order will be placed on it for $90.now, the order will be registered as a pending order and will be filled, then the price of the same asset will come down to $90.
This is a type of order in which the user places two orders simultaneously, but only one fills or gets executed. The one which gets executed gets another cancelled. It is very useful for minimising risk factors.
For example, the price for a crypto asset have a fixed range from a period of I. e, $6 to $6.5 and the user or investor placed an OCO order on it.
The placed OCO Order will have two orders, one of $6 and another of $6.5. The higher price order will be a buy stop order, and the lower one will be the sell stop order. As they're both for the same asset, the other will automatically be cancelled if one gets executed.
These are the exit orders, the point where an investor or a trader must close a position.
It is further classified into categories such as:
Stoploss order
It is used when the prediction made by a trader does not go as predicted. If the price follows a different path than predicted, these stop-loss orders will sell the asset for a predetermined price filled by the user, which is the lowest price he's willing to take for the asset, hence minimising loss.
Take profit order
This order is used to maximise profits. The trader sets the order to a higher price than the current market price and then waits for the price to go high. Whenever the price reaches that level, the order will be filled.
In case of a prediction of price for a crypto asset that will not go as planned, a trader can use OCO orders in order to minimise loss. There will be two orders placed. When the market price goes in the stop loss range, the order will be filled, and the asset will be sold at that price.
I have placed my OCO order where I have set my limit order to sell 1 ETH at $4000; if my prediction or setup went wrong, I would set another stop-limit order which has a stop price of $3800 and a limit price of $3750, so when price hits $3800, my stop-limit order will come in action, and my ETH will sell at $3750.
Open a limit order on any crypto asset with a minimum of 5USDT and explain the steps followed. (Screenshots needed from any cryptocurrency exchange).
For this task, I'm using the Binance mobile app.
- firstly, Open Binance app and go to markets.
- Now, search for the currency that you want to buy. I'm choosing ADA here for this task.
- After selecting the currency , click on the buy button, as we're placing a buy limit order.
- Now, fill in the limit price that you want to buy the asset for. It is to be noted that the limit price should be low as compared to the market price.
- The order will become a pending limit order, as you can see in the image above and will be filled when this market price will coincide with the limit price .
Using a demo account of any trading platform, carry out a technical analysis using any indicator and open a buy/sell position on any crypto asset. The following are expected. (i)Why you chose the crypto asset (ii)Why you chose the indicator and how it suits your trading style. (iii)Indicate the exit orders. (Screenshots required).
- I'm opening a buy order for the Polkadot (DOT) crypto asset. I choose this Because of its interactive nature, due to which it's gaining interest from the investors. It improves blockchain technology with a scalable business model, which leaves lots of room for growth. It's still new, but I think in a long investment run, it will perform better. It got parachain technology which is series of connected blockchains that increases the transaction speeds.
The first reason to choose this is Its Interoperability. It can perform tasks between two blockchains, as I explained that it's a network of blockchains.
Governance . The Dot holders have the freedom to vote for upgrades and development proposals as council members, which makes it a completely decentralised system.
Scalability.Polkadot has great scalability as it can perform multiple blockchain transactions.
There are also many other reasons, such as it is widely accepted in different exchange platforms etc.
- First, I've found this trend in DOT current market conditions, and then I put up MACD to predict the next price movement and make a buy order.
As the working goes for the MACD indicator, when the MACD line crosses the signal line, there's a price movement which can be noticed clearly through the graph. When the signal line crosses the MACD line and gets above it, it will indicate a bullish to bearish reversal or downtrend. The vice versa is also true.
The graph follows the MACD patterns. When the MACD line crosses the signal line and gets above it, then an uptrend reversal is possible, or a bearish to the bullish pattern will appear, as you can see from the image above.
- I take entry to the market at 36.11 .with a take profit value of 40.00 and stop-loss at 32.00.
MACD stands for Moving Average Convergence Divergence. An Oscillator indicator is used to carry out technical analysis using trend line patterns and market averages for a crypto asset.
It is very easy to use and pretty handy, and has low false signal probability.
It gives accurate and precise price movements shown through histogram and trend movements using bullish and bearish trends that show increments and decrements in price.
- It is very efficient at any time. A user can use MACD irrespective of time and trend movements which can help him predict the next market trends.
MACD suits my trading style as I always follow trading patterns, deduce theories, and perform some technical analysis before investing or making a trend prediction. It is very helpful in all these sectors.
In This world of cryptocurrencies, it is very crucial to know about the trading methods and techniques. A trader can opt for many different techniques which suits his conditions. Spot trading if he has the capital for it or the Margin and Futures Trading techniques if he's confident enough in his skills and Risk Management. The thing is, a trader should be patient enough to hold the assets as every asset has it high and low.
The knowledge comes with time and experience. It is okay to use different trading styles to know about them. I have learned a lot about the types of orders and trading in cryptocurrencies with this lecture and will be implementing these concepts in my future trading practices.
Being able to gather such knowledge, I am truly blessed and wanted to thank professor @reminiscence01 to deliver such an amazing task.
That'll be all from my side.
Thank you for reading
@reminiscene01
Hello @ashucypher , I’m glad you participated in the 6th week Season 4 of the Beginner’s class at the Steemit Crypto Academy. Your grades in this task are as follows:
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