Trading Cryptocurrencies - Crypto Academy / Season 4, Week 6- Homework Post for @reminiscence01

• Spot Trading

Spot Trading is a form of exchange, where the buy purchases a crypto asset at the current spot or market price, with the anticipation that the value of the crypto asset will rise. The trader can also sell these crypto assets that are in their possession when the value has increased and can also repurchase the crypto asst when the value decrease, this is called shorting the spot market.

The purchase of these crypto assets can be bought using digital fiat currencies or another preferable crypto pair, but it is not guaranteed that there would not be a change in price while trying to execute an order in the spot market due to high volatility in the crypto eco-system.

• Advantages

(a) The spot or market price is not hidden and it is solely based on public interest. this means that price is driven by only the public demand and supply of the crypto asset, unlike Forex or Futures which are driven by price actionand Technical Tools/Indicators.

(b) Trade on the Spot market can be executed and left for years, unlike Derivatives where you have to be afraid of having a margin call or being liquidated.

(c)With Spot trading you can not be afraid of losing any unit of the crypto asset, even with a decrease in value of the asset, the number of assets you purchase stays the same.

• Disadvantages

(a)When trading in the Spot market, one can hardly make huge profit over a short period due to a slow increase in price, unlike derivatives or margin trading where you have a choice of using leverage or taking loans to gain huge capital which could yield huge profit.

(b)When an investor who is in need of capital, but only trades the spot market, get a huge opportunity for an investment which needs a fiat capital, the investor cannot sell when in loss because it takes time for spot markets to gain profit.

(c)Holding Spot assets over a long period, requires safe guarding it with security measure, but could be prone to attacks by hackers, or thieves.

• Margin trading

Margin trading is a form of training which gives the trader the opportunity of borrowing a larger amount of capital from a third party which could be a trader or an exchange broker. with this large capital the trader is bound to make huge capital gains when the market moves in favour of his trade.

The downside to this type of trading is that you can be liquidated when you cannot provide sufficient funds to cover up your losses due to the amount of leverage used to execute the trade. For example if a trader has $20 capital and usues a leverage of 100x, the trader will now have a purchasing power of $2000. But note that it is best to use the margin trading in a less volatile market, so as not to incure quick losses which would lead the trader getting a Margin call.

• Advantages

(a)Using the Margin trading, would help the trader acquire greater profits, due to larger purchasing power gotten from leveraging smaller capitals.

(b)Diversification;
Traders can make multiple entries into different crypto asset because of the avaliability of funds or capital made available through leveraging of small capital.

• Disadvantages

(a)The major downside to using the Margin trading is that you can make huge losses which can led to liquidation of you capital or margin calls, this means as a trader you have to have a relative amount which is equivalent to the amount of leverage used inorder to payback, or risk being liquidated.

(b)Trading in volatile Market can be detrimental due to quick up and down movement in price.

(c) Amature traders will have to avoid this type of trading , if not will risk losing all their capital due to not have the basic risk management techniques used properly.

• Futures trading

Futures Trading is a form of derivative that deals with trader, prediction the price direction of an underlying crypto assets by taking long (BUY) or short(SELL) positions in the futures market.

The futures market operates also with the leverage feature , which enables traders to have higher purchasing power due to them leverage smaller capitals, but this is very risky in the crypto ecosystem where the market is very volatile, that is why Exchange Brokers or crypto trading platforms use lower leverages, for example, Binance uses a maximum of 50x inorder to prevent their greedy users from using higher leverages that can wreck or liquidate their capitals.

• Advantages

(a) Traders can make huge profits due to the large capital prodided through leveraging their capital.

(b) Traders can have opportunity to diversify their entries into various crypto assets because of their huge capital.

(c) Good Technical analyst can take advantage of the both a Bullish and Bearish market, unlike the Spot trading where you have no advantage of the Bear market.

• Disadvantages

(a)Due to the Leveraged capital traders are at a risk of losing their capital or funds when the market goes against them.

(b) Amature trader will be prone to liquidation because of the volatile nature of the market which they will find hard to control due to no applying risk management techniques.

This is the quickest way to carry out an order at the most convenient price. This means that the buyer or seller is convenient with the best available price on the order book, weather it is higher or lower than the original price of the asset.

A pending order is an order created by a trader, with the hope that price will either fall or rise to the price which the order was created with. This means that the trader will actually set the price higher or lower than the original price while executing the order and then will have to wait till the price hits the anticipated price before the order will be executed. There are different types of pending orders which i will list and explain below.

• Limit order

The limit order is an order that a trader creat by setting a specific price in the order book, this price limit is specifically bent-on the choice of the trader, the order will only be carried out when price hits the limit price, this means that price can be set above of below the original price of the asset, with hope that price will hit the limit price which is determined by the trader.

• Stop-limit order

A stop-Limit Order is a combination of the Stop loss and a Limit order, this means that the trader has to set a limit price which is the most convenient price where the trader believes that the original price will hit, also he has to set a desired take profit limit, which is the most satisfactory limit or amount of profit the trader is okay with making.

• OCO order

The OCO order which is also known as One-Cancels the Order, is a combination of both the Stop-Limit Order and the limit Order, but only one of them can be executed at a time. This means that when one of the orders has been finalized the other initiates immediately because if one of them gets cancelled then the whole Order get canceled.

For example if a SOLis approching a resistance level which is anticipated at $165, but with a current price of $161, and price is anticipated to retrace to around $150, with an OCO order you can set a Stop-limit and Limit order, with the sell limit order above $165, with the anticipation that it will break resistance before a retracement, and the Stop-limit order at $150 in case there is a drawback or reversal of the price. This type of order helps experienced traders to trade retracements and breakouts in the market.

• Take Profit Order

This an automatic order that is initiated when a trader is in profit of an executed or ongoing trade, this means that unless the trade is in desired area of profit which is set by the trader, the trade cannot close. The downside to this Oreder is that sometimes the trade can retrace into a loss, which could trigger the stoploss order.

• Stoploss Order

The Stoploss order is an automatic order that is initiated when price hit the desired loss limit set by the trader, this means that if the market goes against the trader, the Stop loss order will help end the trade at the desired loss percentage set by the trader. The purpose of this order is that it works as a risk management Tool.

First Open your Order Book on any trading platform, then Put in the desired amount or limit price which you want to purchase the underlying asset, with the anticipation that it may rise or fall to that limit.

In this case i am using the BTC, but i am anticipating that the Price will reach $61,200, therefore i placed a limit order , while the original price was at $60,948, then i put in the desired amount with which i want to use and purchase the crypto asset, once i click on sell the order was placed, but it was not executed because price has not reached that level or limit.

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• Why I chose the crypto asset

I choose Ether because of its mass adoption in the crypto eco-system. The Etherum is the second largest crypto by market dominance and market capitalization, but its low price also means it still has a long way to go, because low capital investors can still join the project. Also it is the most widely used Blockchain especially for NFT trading an Minting, which means it will attract more users to its Block chain.

• Why I chose the indicator and how it suits your trading style

I choose the Parabolic SAR because it is a lagging indicator and i chose the RSI because it is a leading indicator, the reason for this preference is because i need an indicator that can predict the market movement and an indicator that can confirm this movement.

I am a swing trader that is why i use the SAR which mostly works for short term traders, i also chose the RSI for easy identification of trend reversal and confirmation of how strong the momentum of the trend is.

Trading crypto currency is a very risky aspect of trading especially for new or mature traders, that is why it is needful to clearly understand these trading terminologies and also risk management techniques to avoid losses. Spot trading is a trading that involves purchasing an actual underlying asset at a particular price while margin and Futures both use leverages which involves acquiring a large capital by staking a small amount of your capital, the later is a more risky trading because when the market goes against you , the loss could liquidate your account, this is why it is ideal to understand various trading terminologies.

Thank you professor @reminiscence01, for this amazing lecture.