Trading cryptocurrencies - Crypto Academy / S4W6- Homework
WHAT IS CRYPTOCURRENCY TRADING
Crypto currency trading involves the act of buying and selling cryptocurrencies most often in exchange platforms, it also involves the act of speculating the price movement in platforms offering contract for difference (cfd).
In exchange platforms, there are built in mechanism to suit a traders needs and style. These mechanisms can help a trader take a trading decision, minimize lost and more.
In general, there are common known types of trading. These types are listed below.
Spot trading is the act of buying and selling cryptocurrencies and on which trade is settled instantly or on the spot.
The exercise involves buying and holding crypto assets until it appreciates in value. The purchase is done on the spot. When the crypto asset appreciates in value the trader can decide to sell off the asset on the spot.
Margin trading is a leveraged market. It is when a trader trades with borrowed money. With margin trading, a trader can open a position larger than his account and can make huge profit when the market moves in his favor. The opposite is true when it comes to losses.
Many brokers offer leverages or simply put they borrow money to their clients. This money allows the trader open larger positions. Take for example, John has $100 account, and his broker offered him a leverage of 1:10, it means that with $100 account John can enter position requiring $1000. In this case #900 is borrowed. If John had made profit and decide to leave the market, he can withdraw his profit plus his investment while the borrowed money is returned to the broker plus interest it attracted.
In feature markets Traders do not buy and hold cryptocurrencies as done in spot trading, rather Traders speculate on the movement of a crypto asset, betting wether the asset will rise or fall in price at a stipulated time.
A trader will become profitable if his prediction are accurate, when the opposite is the case, it means loss.
Explain the different types of orders in trading.
To buy or sell cryptocurrencies, a trader uses different orders.
1: MARKET ORDERS.
A market order is an order placed to be executed immediately. What it means is that a trader placing market order accepts to buy or sale at or close to the current price.
A buy order is a market order placed to be executed at the current ask price. The buy is immediate since the trade gives no concern on the price, be simply satisfied with it.
A market sell order is an order placed at the current bid price.
Limit orders are orders placed by an investor to buy or sell crypto currency at a preferred or desired price.
Buy limit orders are orders placed below the current price. Take for example, the price of
crypto A is currently $3 USD. John a crypto trader wishes to obtain the crypto at $2.5. He believes the coin will dip to $2.5 usd, therefore he can set a limit order which will be filled once the price hit $2.5 USD. He do not need to wait before his screen for the crypto to fall to the desired price.
A sell limit order is a sell order set above the current bid price. Just like the buy limit order, a sell limit order allows a trader to choose the price to sell his asset. Take for example that John purchased
crypto A at $2.5 and wish to sell at $3, he can set a sell limit order to be filled once the price hit the intended amount.
Stop orders are often used as a protective approach to manage risk.
Buy stop order is an order placed above the current price. Let's just say that John is skeptical of a market price movement and in order to protect himself he places a buy stop order above the current price. Once price hit this target it is triggered automatically. This stop order will protect John suppose the crypto price falls further downward.
A sell stop order or stop loss is usually placed below a current price. This is to protect a trader from incurring more loss suppose the market moves against him. Trailing stop loss is equally a stop order.
How can a trader manage risk using an OCO order? (technical example needed).
OCO order means one cancels one. It implies that with OCO a trader can place two type of others a sell stop order ( to take profit order ) or a stop order ( stop loss) and also a stop limit order.
Take for an example, I bought $61 worth of solana. I believe that sol token can get to $70, that is the price I would like to sell my sol token. Therefore I will set my price ( take profit) at $70. To protect myself in an event the market goes against me, I place a stop loss order at $55. In an event maybe due to too many sell orders going on the binance chain my order was unable to be filled on time, I set up stop limit order at $55 this is the limit I can sell, in order that if the stop order didn't get filled at $55, it be filled at $50. This is done so that I will not continue on losses.
See image below.
Open a limit order on any crypto asset with a minimum of 5USDT and explain the steps followed. (Screenshots needed from any cryptocurrency exchange).
In this exercise, I will use binance market place.
I followed the following process.
1: I opened binance app and locate trades.
2: I went to "spot" option.
3: Below the spot option I had to select my pair. In this case I chose BTCUSDT. I have to select sell trade because I want to make profit from my BTC which is worth above $7.
4: From the drop-down box, I selected limit.
5: instead of setting the amount I want to sell, I chose percentage of profit (50%). It means that I want to sell when the value of my BTC balance increase by 50 %.
6: lastly, I clicked on sell.
The sell limit order will be filled once BTC value reaches desired amount.
See image details below.
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 have chosen Solana for this exercise.
Solana is the fastest Blockchain presently in the cryptocurrency world with the capability of completing up to 70000 transaction per second.
Aside from speed, Solana is cheap when compared to it's competitor Ethereum in terms of Ethereum high gas fees. Being
built on proof of stake and proof of history, Solana is currently experiencing a influx of DEFi projects within it's ecosystem.
Solana is comparable to cardano when it comes to use case. I must equally comment on how the native token sol has performed over the year 2021, experiencing over 6000% increase. Although sol priced dipped after September high, expects believe that this is an opportunity for investors to invest in the token.
Put simple, solana is an amazing project.
Now ranked #7 in coin ranking
With $1,647,458,591 24/h volume.
Market cap $47,074,473,626
INDICATORS FOR THE ANALYSIS.
I chose a trend indicator Bollinger bands and a momentum indicator RSI.
Bollinger bands is an easy to understand indicator. The indicator points to trend direction and can spot reversals. It can equally show how strong a trend is through it's shades. It has three bands, the upper, lower and middle lines. The upper line can serve as resistance line, the lower line can serve as support. The middle line can serve as support or resistance depending on the market formation.
When the lines and shades of the Bollinger points up, it shows uptrend and when it point down it shows downtrend.
In my strategy, I combine Bollinger and a confirmation tool like the RSI. The RSI help me to be more sure of the signals of the Bollinger.
Bollinger breakout is a strong signal and when such is confirmed by RSI overbought or oversold areas, it gives more confidence to enter the market.
Below is a sample of a trade using the above indicators.
In the solusdt chart above, we can see price movement up and down. The lined up blue candles of the heikin ashi shows an uptrend and we saw how the Bollinger bands follow the trend. Same can be said of the red candles downtrend.
In the area I marked
1, you will notice an uptrend followed by a breakout in the upper Bollinger. Such shows that bearish reversal is imminent and a trader should be ready to trade sell. However, such can be a false or weak signal, therefore using RSI we can confirm if the signal is true. In the area marked
1 in RSI, we saw the confirmation and we are good.
The area marked
A shows a false buy signal. The RSI did not confirm the Bollinger signal
The area marked
2 is a good buy signal and here is where we will be placing our trade.
The area marked
3 is where to set our take profit and stop loss.
I have placed the trade in below image.
Trading cryptocurrencies involves buying Bitcoin or altcoins at a cheaper rate and sell when the value appreciates. It also includes betting if the price will go up or down in feature markets.
Market orders are orders placed and to be settled immediately, the trader is comfortable with the price while on limit orders a trader determines preferred price at which he wishes to transact.
Stop orders are used to manage risk. Example include stop loss, trailing stop loss.
OCO trade is another risk management strategy.