Trading Cryptocurrencies - Crypto Academy - S4W6- Homework Post for @reminiscence01

Hello everyone, I am happy to be part of this week's class. It is very rich and knowledge impacting. I learnt a lot and this is my home work.

Homework Task

QUESTION 1

Explain the following stating its advantages and disadvantages:

Spot trading

In cryptocurrency market, there are different ways one can trade. Spot trading is one of the basic and easiest way to trade cryptocurrency. It is so simple that beginners can easily understand and practice it.

Spot trading in cryptocurrency market is the type of trading where traders buy crypto assets and keep them in their wallet until their value rise so that they can sell them later at a higher price to make profit. In this type of trading, when transaction is carried out between buyer and seller, payment and delivery of crpto assets takes place on the spot. Spot trading is done in spot markets where crypto assets traders come together to buy and sell their crypto assets at a spot price.

Advantages and Disadvantages of Spot Trading

Spot Trading like every other thing has some advantages and disadvantages. Below are some of them:

Advantages of Spot Trading

• Spot trading is easy to learn and practice.
• Investors can buy crypto assets and keep them until they find a better deal.
• It allows less capital investment. An investor with little capital can participate in the spot market .
• When an investor buys assets he or she will become the full owner of the assets
• In spot trading, Investors trade on real asset and not on feature contract.
• In spot trading, payment and delivery of crpto assets is immediate.

Disadvantages of Spot Trading

• Because of fluctuations in the value and price of cryptocurrency, investors may buy cryptocurrency at a high price and have to wait for a very long period of time to find a better deal.
• Spot traders do not enjoy leverage like Margin and future traders. They only trade with their own assets

-Margin trading

Margin Trading is a type of cryptocurrency trading where investors use their available crpto asset as a collateral to borrow more fund from a third party so that they can use it to trade in other to maximize their trading profit. When a trader opens a margin accounts, it gives the traders an opportunity to access greater capital, and to leverage their positions.

In margin trading, investors stake their crypto assets as collateral to get bigger loan fund called "Leverage' to enter a trade. This boosts the investor's profit if the trade is successful.

Advantages of Margin Trading

• It helps trader to borrow more fund from a third party to trade in other to maximize their trading profit.
• It allows traders to open different positions for different assets with small capital. This is a very good advantage because an investor will be more safer and better of to diversify his or her investment instead of having all his or her investment in one asset.
• If a trader has a margin account, opening positions becomes easier and quicker, because he would not need to go through the process of shifting money to his account.
• It gives traders who have small capital an opportunity to trade with big amount in other to make huge profit.

Disadvantages of Margin Trading

• It exposes a trader to a very high risk of losing money that exceeds his initial investment. If a trader acquires loan from third party and enters market, if market trend goes against his prediction, he can loose all his money together with the borrowed fund.
• It is complex and requires a lot of experience to trade. It is not suitable for newbies.

Futures trading

Futures trading is derived from financial contracts, an agreement to buy or sell a particular asset or commodity at a future date. In this agreement, the purchaser has the right to buy or sell a commodity for a particular price at a future date.

Futures contracts involve two parties that agree to exchange a particular asset at a future price, on a predetermined date. Cryptocurrency futures trading is a high-risk, high reward endeavor. Cryptocurrency futures trading is a high-risk, high reward endeavor.

Futures trading in cryptocurrency refers to the prediction of the fluctuating Cryptocurrency price at a future date, whereby the predictors, traders are allowed to buy or sell crypto assets when they predict that the price will go up (bullish) or when they predict that the price will go down (bearish) respectively with the aim of making profit.

Futures trading is a complex and advanced trading meant for experienced and professional traders. This type of trading involves high level of risk that does not allow inexperience traders and newbies to participate.

In Futures trading, investors take advantage of the fluctuating cryptocurrency price movement to make huge profits. Traders make profits by properly analyzing and forecasting price movement. They enter Long Positions (buy) when they anticipate that the price a particular asset will go up(bullish) and enter Short Positions (sell) when they anticipate that the price a particular asset will go down(bearish).

However, future traders do not buy and sell the real crpto asset as in the case with Spot Trading, instead they buy and sell futures contracts which deals with the price value of the real asset.

In addition, futures trading provides opportunity for traders who have little capital to access leverage which gives them purchasing power to buy large contracts.

Advantages of Futures Trading

• It provides a more flexible market for traders. In Future trading, users are allowed to decide for themselves. Traders can enter market any time they like, to either buy when the market is bullish or to sell when the market is bearish.to make profit.
• It offers traders greater Leverages that help them make large profit in their investment.
• It offers traders opportunity to diversify their investment.
• It offers traders hedging advantage which allows them opportunity to protect their investment against loss even when market trend goes against there prediction
• It offers traders lower trading costs. It's commissions and execution costs are low especially for large transaction.
• It offers traders opportunity to make fast money
• It offers traders longer trading hours

Disadvantages of Futures Trading

• It has a very high risk of investment because of the constant fluctuations of price and value of assets. Asset prices can go up and down in a matter of minutes and every day. This can make traders lose a huge capital within a short period of time.
• It is very complex and requires a lot of experience to trade. It is not suitable for newbies.
• It does not allow traders the opportunity to own or be in custody of the real asset.
• Traders using leverage to trade can run into high debt if the market trend goes against their prediction.
• Wrong market decision can lead to fast trader's account liquidation.

QUESTION 2A

Explain the different types of orders in trading

In cryptocurrency trading, we have three basic types of orders. They include:

• Market order
• Pending order: Under this order we have:- Limit order, stop limit order and OCO order
• Exit order

Let me briefly explain each one of them:

1. Market Order:-

This is the types of orders in cryptocurrency trading in which transactions are executed instantly at the best available current market price. Market order is the easiest way to buy or sell crypto asset. This is because traders who use market order are ok with the current market price of the asset and do not bargain. They take the market price as they see it. This type of traders are called market takers. They buy and sell at the current market price without complain.

2. Pending Orders:-

This is the types of orders in cryptocurrency trading that are not executed immediately at the current market price. Pending Orders allow traders to place the price they are willing to buy and sell their asset so that when the crypto price gets to that point in the market, the transaction will be executed.

Traders who use pending order are not always comfortable with the current market price and they are not in a hurry to buy or sell their assets. They place the price they are willing to buy or sell and they patiently wait until price goes up (in the case of buying) or comes down (in the case of selling) to that point before the order can be executed. The type of traders who use this order are call Market Makers.

We have different types of pending orders available in cryptocurrency trading. They are:

* Limit order:

In this type of pending order, traders place their specific price in which the trade should be executed when market price get to that point.

For example, if the current price of ADA/USDT is $2.10, and after my analysis, I discovered that the price of ADA may fall to about $2.08. What I will do to place a limit order to buy ADA at $2.08 is to enter a position that I want to buy 15 ADA(for instance) when the price comes down to $2.08. What it means is that my buy order to purchase 15 ADA should be executed when the price comes down to $2.08.

Stop-limit order:

This type of pending order involves two different prices features known as the limit price and the stop price. The Limit price is the price that a trader is willing to buy or sell his or her crpto asset, while the Stop price is the price at which the limit order should be placed or executed. Therefore, Stop-limit order occurs when the price of asset hits the stop price level, then the limit order will be placed in the order book.

For example, if the current price of ETH/USDT is $3900, and after my analysis, I discovered that the price of ETH may drop to about $3850. I can set my buy stop order to be $3890 and my limit order to be $3870. What this means is that when the price gets to $3890 that my limit order of $3870 should be executed.

OCO Order:

OCO is an acronym which means "One Cancel the Other" It is the type of pending order where traders place two different orders at the same time and as soon as one of the order is executed, the other order is canceled. OCO order allows traders to setup a limit order and a stop- limit order to help them reduce loss if the market trend goes against their prediction. It helps traders to avoid some risk and possible lose in the market.

3. Exit order:

This is the type of trading order that enables traders to automatically leave the market either when the market is against their prediction or when the market is in their favour that they want to take their profit and exit the market position to avoid unexpected change that may not be in their favour. Exit order can be classified into two forms; "Stoploss Order" and "Take Profit Order". "Stoploss Order" enables traders to leave the market when the market is against their prediction to help them limit their loss. While "Take Profit Order" enables traders on a favorable market prediction to take their profit and leave the market when the market is still favourable.

QUESTION 2B

How can a trader manage risk using an OCO order? (technical example needed).

Management of risk in cryptocurrency trading is very vital and should not be taken for granted. OCO order is one of the ways through which a trader can manage risk in trading crypto assets. To manage risk using the OCO order, a trader should properly understanding the concept of OCO and how to use it effectively.

A trader can also manage risk using OCO order by setting up a limit and stop- limit order always to help reduce loss.T his is because market trend may not go according to the trader's prediction. A trader need to also avoid greediness, he should apply limit and stop- limit order to take profit and leave the market when the market is still favourable.

QUESTION 3A

Open a limit order on any crypto asset with a minimum of 5USDT and explain the steps followed. (Screenshots needed from any cryptocurrency exchange).

To open a limit order, I will use Binance exchange platform. These are steps I followed to open my limit order:

Step 1: I logged in to my Binance account

Step 2: located "Trade" on the menu bar and clicked on "Advanced" and a trading page appeared

Step 3: I searched for ADA/USDT pair I want to use

Step 4: I clicked on "Spot" and under it, I selected "Buy" and "Limit"
Step 5: Then I choose to buy 10 amount of ADA at the lower price of 2.20 when it's current price is 2.215.
After that, I clicked on "Buy".

QUESTION 3B

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.

To carry out a technical analysis, I am going to use my Btc-alpha demo account. I will be using ETH/USDT cryptocurrency pair and Relative Strength indicator (RSI).

Why I chose ETH/USDT cryptocurrency pair.

The reason I choose ETH/USDT cryptocurrency pair is because it is the cryptocurrency pair I always like to use, I am very familiar with it and the way it's wave appears on chart makes it clear and easy for me to carry out my analysis.

Why I chose Relative Strength indicator (RSI) and how it suits my trading style

I chose Relative Strength indicator (RSI) because it is simple and easy to use. It has only one line which follows the market trend. It shows when an asset is overbought and oversold which gives traders a clear signal of when to enter and exit the market. RSI is also one of the most popular indicators in the cryptocurrency market.

The indicator is really a good one and it suits my style of trading in the sense that it gives me what I want. It helps me a lot to know and confirm when I should buy or sell my crypto assets.

Indicate the exit orders. (Screenshots required).

I logged in to my Btc-alpha demo account, I choose ETH/USDT cryptocurrency pair and I added my Relative Strength indicator (RSI).

From my analysis, the indicator shows that there was a price upward movement(bullish) approaching overbought region, suddenly it shows a slight price reversal and was above 60. This indicates that the market is turning from bullish to bearish trend which is a signal to enter sell order. The current price was 3943.01, so I entered a stop sell order of 4002.00 and a limit price of 4000.00 with the amount of 5 ETH. Below are the screenshots.

Conclusion

Learning and properly applying the principles of cryptocurrency trading is a highway to financial prosperity. This week's lecture has really exposed us to different principles we need to apply in our cryptocurrency trading. I am happy to be part of this class. I hope very soon with the knowledge I am acquiring from this platform that I will become a professional trader.

A big thank you to our amiable lecturer, prof. @reminiscence01. May Almighty God continue to bless you.