A Complete Guide to Cryptocurrency Trading for Beginners

A Complete Guide to Cryptocurrency Trading for Beginners

What is trading?
Trading is a fundamental economic concept that involves buying and selling assets. These can be goods and services, where the buyer pays the compensation to the seller. In other cases, the transaction can involve the exchange of goods and services between the trading parties.

In the context of the financial markets, the assets being traded are called financial instruments. These can be stocks, bonds, currency pairs on the Forex market, options, futures, margin products, cryptocurrency, and many others. If these terms are new to you, don’t worry – we’ll explain them all later in this article.

The term trading is commonly used to refer to short-term trading, where traders actively enter and exit positions over relatively short time frames. However, this is a slightly misleading assumption. In fact, trading may refer to a wide range of different strategies, such as day trading, swing trading, trend trading, and many others. But don’t worry. We’ll go through each of them in more detail later.

What is investing?
Investing is allocating resources (such as capital) with the expectation of generating a profit. This can include using money to fund and kickstart a business or buying land with the goal of reselling it later at a higher price. In the financial markets, this typically involves investing in financial instruments with the hopes of selling them later at a higher price.

The expectation of a return is core to the concept of investment (this is also known as ROI). As opposed to trading, investing typically takes a longer-term approach to wealth accrual. The goal of an investor is to build wealth over a long period of time (years, or even decades). There are plenty of ways to do that, but investors will typically use fundamental factors to find potentially good investment opportunities.

Due to the long-term nature of their approach, investors usually don’t concern themselves with short-term price fluctuations. As such, they will typically stay relatively passive, without worrying too much about short-term losses.

Trading vs. investing – what’s the difference?
Both traders and investors seek to generate profits in the financial markets. Their methods to achieve this goal, however, are quite different.

Generally, investors seek to generate a return over a longer period of time – think years or even decades. Since investors have a larger time horizon, their targeted returns for each investment tend to be larger as well.

Traders, on the other hand, try to take advantage of the market volatility. They enter and exit positions more frequently, and may seek smaller returns with each trade (since they’re often entering multiple trades).

Which one is better? Which one is more suitable for you? That’s for you to decide. You can start educating yourself about the markets, and then learn by doing. Over time, you’ll be able to determine which one suits better your financial goals, personality, and trading profile.

Sneak a peek at the latest Bitcoin (BTC) prices right now.

What is fundamental analysis (FA)?
Fundamental analysis is a method for assessing a financial asset’s valuation. A fundamental analyst studies both economic and financial factors to determine if the value of an asset is fair. These can include macroeconomic circumstances like the state of the wider economy, industry conditions, or the business connected to the asset (if there’s one). And these are often tracked through macroeconomics leading and lagging indicators.

Once the fundamental analysis is complete, analysts aim to determine whether the asset is undervalued or overvalued. Investors can use this conclusion when making their investment decisions.

In the case of cryptocurrencies, fundamental analysis may also include an emerging field of data science that concerns itself with public blockchain data called on-chain metrics. These metrics can include the network hash rate, the top holders, the number of addresses, analysis of transactions, and many more. Using the abundance of available data on public blockchains, analysts can create complex technical indicators that measure certain aspects of the overall health of the network.

While fundamental analysis is widely used in the stock market or Forex, it's less suitable for cryptocurrencies in their current state. This asset class is so new that there simply isn’t a standardized, comprehensive framework for determining market valuations. What’s more, much of the market is driven by speculation and narratives. As such, fundamental factors will typically have negligible effects on the price of a cryptocurrency. However, more accurate ways to think about cryptoasset valuation may be developed once the market matures.

What is technical analysis (TA)?
Technical analysts work with a different approach. The core idea behind technical analysis is that historical price action may indicate how the market is likely to behave in the future.

Technical analysts don’t try to find out the intrinsic value of an asset. Instead, they look at the historical trading activity and try to identify opportunities based on that. This can include analysis of price action and volume, chart patterns, the use of technical indicators, and many other charting tools. The goal of this analysis is to evaluate a given market’s strength or weakness.

With that said, technical analysis isn’t only a tool for predicting the probabilities of future price movements. It can also be a useful framework for risk management. Since technical analysis provides a model for analyzing market structure, it makes managing trades more defined and measurable. In this context, measuring risk is the first step to managing it. This is why some technical analysts may not be considered strictly traders. They may use technical analysis purely as a framework for risk management.

The practice of technical analysis can be applied to any financial market, and it’s widely used among cryptocurrency traders. But does technical analysis work? Well, as we’ve mentioned earlier, the valuation of the cryptocurrency markets is largely driven by speculation. This makes them an ideal playing field for technical analysts, as they can thrive by only considering technical factors.

Fundamental analysis vs. technical analysis – which is better?
That entirely depends on your trading strategy. Actually, why not use both? Most market analysis methods work best when they’re combined with other methods or indicators. This way, there’s a bigger chance of finding more reliable investment opportunities. Combining different trading strategies can also help eliminate biases from your decision-making process.

This concept is sometimes referred to as confluence. Confluence traders combine multiple strategies into one that harnesses benefits from all of them. The idea is that the trading opportunities presented by the combined strategies may be stronger than the ones provided by only one strategy.

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What drives the financial markets?
The price of an asset is simply determined by the balance of supply and demand. In other words, it’s decided by the buyers and sellers. Where supply meets demand, there’s a market. But what else can drive the value of a financial asset?

As we’ve discussed earlier, there can be fundamental factors, such as the state of the economy. In addition, there can be technical factors like the market capitalization of a cryptocurrency. Also, there may be other factors to consider, such as market sentiment or recent news.

However, these are just that – factors to consider. What really determines the price of an asset in a given moment is simply the balance of supply and demand.

What is a market trend?
A market trend is the overall direction where the price of an asset is going. In technical analysis, market trends are typically identified using price action, trend lines, or even key moving averages.

Generally, there are two main types of market trends: bull and bear market. A bull market consists of a sustained uptrend, where prices are continually going up. A bear market consists of a sustained downtrend, where prices are continually going down. In addition, we can also identify consolidating, or “sideways” markets, where there isn’t a clear directional trend.

Bitcoin price chart since creation
Bitcoin has been in a bull market throughout all its existence.

It’s worth noting that a market trend doesn’t mean that the price is always going in the direction of the trend. A prolonged bull market will have smaller bear trends contained with it, and vice versa. This is simply just the nature of market trends. It’s a matter of perspective as it all depends on the time frame you are looking at. Market trends on higher time frames will always have more significance than market trends on lower time frames.

A peculiar thing about market trends is that they can only be determined with absolute certainty in hindsight. You may have heard about the concept of hindsight bias, which refers to the tendency of people to convince themselves that they accurately predicted an event before it happened. As you’d imagine, hindsight bias can have a significant impact on the process of identifying market trends and making trading decisions.

What is a market cycle?
You may have heard the phrase that “the market moves in cycles”. A cycle is a pattern or trend that emerges at different times. Typically, market cycles on higher time frames are more reliable than market cycles on lower time frames. Even so, you can eventually find small market cycles on an hourly chart just as you may do when looking at decades of data.

Markets are cyclical in nature. Cycles can result in certain asset classes outperforming others. In other segments of the same market cycle, those same asset classes may underperform other types of assets due to the different market conditions.

It’s worth noting that it’s almost impossible to determine in any given moment where we currently are in a market cycle. This analysis can be done with high accuracy only after that part of the cycle has concluded. Market cycles also rarely have concrete beginning and endpoints. As it turns out, being in the present moment is an exceptionally biased viewpoint in the financial markets.

If you’d like to read more about market cycles, check out The Psychology of Market Cycles.

Chapter 2 – Financial Markets and Trading Instruments

Contents

What is a financial instrument?
What is the spot market?
What is margin trading?
What is the derivatives market?
What are forward and futures contracts?
What are perpetual futures contracts?
What are options contracts?
What is the foreign exchange (Forex) market?
What are leveraged tokens?

What is a financial instrument?
In simple terms, a financial instrument is a tradable asset. Examples include cash, precious metals (like gold or silver), a document that confirms ownership of something (like a business or a resource), a right to deliver or receive cash, and many others. Financial instruments can be really complex, but the basic idea is that whatever they are or whatever they represent, they can be traded.

Financial instruments have various types based on different classification methods. One of the classifications is based on whether they are cash instruments or derivative instruments. As the name would suggest, derivative instruments derive their value from something else (like a cryptocurrency). Financial instruments may also be classified as debt-based or equity-based.

But where do cryptocurrencies fall? We could think of them in multiple ways, and they could fit into more than one category. The simplest classification is that they are digital assets. However, the potential of cryptocurrencies lies in building an entirely new financial and economic system.

In this sense, cryptocurrencies form a completely new category of digital assets. What’s more, as the ecosystem evolves, many new categories may be established that wouldn’t otherwise be possible. Early examples of this can already be seen in the Decentralized Finance (DeFi) space.

What is the spot market?
The spot market is where financial instruments are traded for what’s called “immediate delivery”. Delivery, in this context, simply means exchanging the financial instrument for cash. This may seem like an unnecessary distinction, but some markets aren’t settled in cash instantly. For example, when we’re talking about the futures markets, the assets are delivered at a later date (when the futures contract expires).

In simple terms, you could think of a spot market as the place where trades are made “on the spot.” Since the trades are settled immediately, the current market price of an asset is often referred to as the spot price.

So, what does this mean in the context of cryptocurrency markets? What can you do on the Binance spot market? You can exchange coins with each other. So, if you want to exchange your BNB to BUSD, you go to the BNB/BUSD spot market, and voilá! In the same way, if you’d like to exchange your BNB to BTC, you’d go to the BNB/BTC spot market. Once your orders are filled, your coins will be swapped instantly. This is one of the easiest ways of trading cryptocurrencies.

What is margin trading?
Margin trading is a method of trading using borrowed funds from a third party. In effect, trading on margin amplifies results – both to the upside and the downside. A margin account gives traders more access to capital and eliminates some counterparty risk. How so? Well, traders can trade the same position size but keep less capital on the cryptocurrency exchange.

When it comes to margin trading, you’ll often hear the terms margin and leverage. Margin refers to the amount of capital you commit (i.e., put up from your own pocket). Leverage means the amount that you amplify your margin with. So, if you use 2x leverage, it means that you open a position that’s double the amount of your margin. If you use 4x leverage, you open a position that’s four times the value of your margin, and so on.

However, be aware of liquidation. The higher leverage you use, the closer the liquidation price is to your entry. If you get liquidated, you’ll risk losing your entire margin. So, be very aware of the high risks of trading on margin before getting started. The Binance Margin Trading Guide is an essential resource before you get started.

Margin trading is widely used in stock, commodity, and Forex trading, as well as the Bitcoin and cryptocurrency markets. In a more traditional setting, the funds borrowed are provided by an investment broker. When it comes to cryptocurrencies, the funds are typically lent by the exchange in return for a funding fee. In some other cases, however, the borrowed funds may come directly from other traders on the platform. This will usually incur a variable interest rate (funding fee), as the rate is determined by an open marketplace.

So, we’ve briefly explained what margin trading is, but there’s always more to learn. If you’d like to read more, check out What is Margin Trading?.

What is the derivatives market?
Derivatives are financial assets that base their value on something else. This can be an underlying asset or basket of assets. The most common types are stocks, bonds, commodities, market indexes, or cryptocurrencies.

The derivative product itself is essentially a contract between multiple parties. It gets its price from the underlying asset that’s used as the benchmark. Whatever asset is used as this reference point, the core concept is that the derivative product derives its value from it. Some common examples of derivatives products are futures contracts, options contracts, and swaps.

According to some estimates, the derivatives market is one of the biggest markets out there. How so? Well, derivatives can exist for virtually any financial product – even derivatives themselves. Yes, derivatives can be created from derivatives. And then, derivatives can be created from those derivatives, and so on. Does this sound like a shaky house of cards ready to come crashing down? Well, this may not be so far from the truth. Some argue that the derivatives market played a major part in the 2008 Financial Crisis.

What are forward and futures contracts?
A futures contract is a type of derivatives product that allows traders to speculate on the future price of an asset. It involves an agreement between parties to settle the transaction at a later date called the expiry date. As we’ve discussed with derivatives, the underlying asset for a contract like this can be any asset. Common examples include cryptocurrency, commodities, stocks, and bonds.

The expiration date of a futures contract is the last day that trading activity is ongoing for that specific contract. At the end of that day, the contract expires to the last traded price. The settlement of the contract is determined beforehand, and it can be either cash-settled or physically-delivered.

When it’s delivered physically, the underlying asset of the contract is directly exchanged. For example, barrels of oil are delivered. When it’s settled in cash, the underlying asset isn’t exchanged directly, only the value that it represents (in the form of cash or cryptocurrency).

If you’d like to trade futures on Binance, make sure to check out The Ultimate Guide to Trading on Binance Futures.

What are perpetual futures contracts?
Futures products are a great way for traders to speculate on the price of an asset. However, what if they want to remain in their position even after the expiry date?

Enter perpetual futures contracts. The main difference between them and a regular futures contract is that they never expire. This way, traders can speculate on the price of the underlying asset without having to worry about expiration.

However, this presents a problem of its own. What if the price of the perpetual futures contract gets really far from the price of the underlying asset? Since there’s no expiry date, the perpetual futures market could have a significant, continual disparity with the spot market.

This is why perpetual futures contracts implement a funding fee that’s paid between traders. Let’s imagine that the perpetual futures market is trading higher than the spot market. In this case, the funding rate will be positive, meaning that long positions (buyers) pay the funding fees to short positions (sellers). This encourages buyers to sell, which then causes the price of the contract to drop, moving it closer to the spot price. Conversely, if the perpetual futures market is trading lower than the spot market, the funding rate will be negative. This time, shorts pay longs to incentivize pushing up the price of the contract.

To summarize, if funding is positive, longs pay shorts. If funding is negative, shorts pay longs.

Perpetual futures contracts are hugely popular among Bitcoin and cryptocurrency traders. If you’d like to read more about perpetual futures contracts, check out What Are Perpetual Futures Contracts?.

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What are options contracts?
An options contract is a type of derivatives product that gives traders the right, but not the obligation, to buy or sell an asset in the future at a specific price. The main difference between a futures contract and an options contract is that traders are not obligated to settle options contracts.

When traders buy an options contract, they speculate on the price going in a direction.

There are two types of options contracts: call options and put options. A call option bets on the price going up, while a put option bets on the price going down.

As with other derivatives products, options contracts can be based on a wide variety of financial assets: market indexes, commodities, stocks, cryptocurrencies, and so on.

Options contracts can enable highly complex trading strategies and risk management methods, such as hedging. In the context of cryptocurrencies, options might be the most useful for miners who want to hedge their large cryptocurrency holdings. This way, they’re better protected against events that could have a detrimental impact on their funds.

If you’d like to read more about options contracts, check out What Are Options Contracts?. If you’d like to trade options on Binance, be sure to read our options guide for iOS and Android first.

What is the foreign exchange (Forex) market?
The foreign exchange (Forex, FX) market is where traders can exchange one country’s currency into another. In essence, the Forex market is what determines the exchange rates for currencies around the world.

We may often think of currencies as “safe haven” assets. Even the term “stablecoin” should imply, in theory, that the asset is somehow safe from volatility. However, while this is true to some extent, currencies can also experience significant market fluctuations. How come? Well, the value of currencies is also determined by supply and demand. In addition, they may also be influenced by inflation or other market forces related to global trade and investment, and geopolitical factors.

How does the Forex market work? Well, currency pairs may be traded by investment banks, central banks, commercial companies, investment firms, hedge funds, and retail Forex traders. The Forex market also enables global currency conversions for international trade settlements.

Forex traders will typically use day trading strategies, such as scalping with leverage, to amplify their returns. We’ll cover how exactly that works later in this article.

The Forex market is one of the major building blocks of the modern global economy as we know it. In fact, the Forex market is the largest and most liquid financial market in the world.

What are leveraged tokens?
Leveraged tokens are tradable assets that can give you leveraged exposure to the price of a cryptocurrency without the usual requirements of managing a leveraged position. This means you don’t have to worry about margin, collateral, funding, and liquidation.

Leveraged tokens are an innovative financial product that only exist thanks to the power of blockchain. Leveraged tokens were initially introduced by derivatives exchange FTX, but since then have seen various alternative implementations. The main idea behind them, however, is still the same – tokenizing open leveraged positions. What does this mean?

Leveraged tokens represent open perpetual futures positions in a tokenized form. Remember when we discussed how derivatives can be created from derivatives? Leveraged tokens are a prime example since they derive their value from futures positions, which are also derivatives.

Leveraged tokens are a great way to get a simple leveraged exposure to a cryptocurrency. If you’d like to trade them on Binance, check out A Beginner's Guide to Binance Leveraged Tokens (BLVT).

If you’d like to read about FTX Leveraged Tokens, check out A Beginner's Guide to FTX Leveraged Tokens.

Chapter 3 – Trading and Investment Strategies

Contents

What is a trading strategy?
What is portfolio management?
What is risk management?
What is day trading?
What is swing trading?
What is position trading?
What is scalping?
What is asset allocation and diversification?
What is the Dow Theory?
What is the Elliott Wave Theory?
What is the Wyckoff Method?
What is buy and hold?
What is index investing?
What is paper trading?

What is a trading strategy?
A trading strategy is simply a plan you follow when executing trades. There’s no single correct approach to trading, so each strategy will largely depend on the trader’s profile and preferences.

Regardless of your approach to trading, establishing a plan is crucial – it outlines clear goals and can prevent you from going off course due to emotion. Typically, you’ll want to decide what you’re trading, how you’re going to trade it, and the points at which you’ll enter and exit.

In the following chapter, we’ll get into a few examples of popular trading strategies.

What is portfolio management?
Portfolio management concerns itself with the creation and handling of a collection of investments. The portfolio itself is a grouping of assets – it could contain anything from Beanie Babies to real estate. If you’re exclusively trading cryptocurrencies, then it will probably be made up of some combination of Bitcoin and other digital coins and tokens.

Your first step is to consider your expectations for the portfolio. Are you looking for a basket of investments that will remain relatively protected from volatility, or something riskier that might bring higher returns in the short term?

Putting some thought into how you want to manage your portfolio is highly beneficial. Some might prefer a passive strategy – one where you leave your investments alone after you set them up. Others could take an active approach, where they continuously buy and sell assets to make profits.

What is risk management?

Managing risk is vital to success in trading. This begins with the identification of the types of risk you may encounter:

Market risk: the potential losses you could experience if the asset loses value.
Liquidity risk: the potential losses arising from illiquid markets, where you cannot easily find buyers for your assets.
Operational risk: the potential losses that stem from operational failures. These may be due to human error, hardware/software failure, or intentional fraudulent conduct by employees.
Systemic risk: the potential losses caused by the failure of players in the industry you operate in, which impacts all businesses in that sector. As was the case in 2008, the collapse of the Lehman Brothers had a cascading effect on worldwide financial systems.
As you can see, risk identification begins with the assets in your portfolio, but it should take into account both internal and external factors to be effective. Next, you’ll want to assess these risks. How often are you likely to encounter them? How severe are they?

By weighing up the risks and figuring out their possible impact on your portfolio, you can rank them and develop appropriate strategies and responses. Systemic risk, for example, can be mitigated with diversification into different investments, and market risk can be lessened with the use of stop-losses.

Be sure to check out Financial Risk Explained and A Beginner’s Guide to Understanding Risk Management.

What is day trading?
Day trading is a strategy that involves entering and exiting positions within the same day. The term comes from legacy markets, referencing the fact that they’re only open for set periods during the day. Outside of those periods, day traders are not expected to keep any of their positions open.

Cryptocurrency markets, as you probably know, are not subject to opening or closing times. You can trade around the clock every day of the year. Still, day trading in the context of cryptocurrency tends to refer to a trading style where the trader enters and exits positions within 24 hours.

In day trading, you’ll often rely on technical analysis to determine which assets to trade. Because profits in such a short period can be minimal, you may opt to trade across a wide range of assets to try and maximize your returns. That said, some might exclusively trade the same pair for years.

This style is obviously a very active trading strategy. It can be highly profitable, but it carries with it a significant amount of risk. As such, day trading is generally better suited to experienced traders.

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What is swing trading?
In swing trading, you’re still trying to profit off market trends, but the time horizon is longer – positions are typically held anywhere from a couple of days to a couple of months.

Often, your goal will be to identify an asset that looks undervalued and is likely to increase in value. You would purchase this asset, then sell it when the price rises to generate a profit. Or you can try to find overvalued assets that are likely to decrease in value. Then, you could sell some of them at a high price, hoping to buy them back for a lower price.

As with day trading, many swing traders use technical analysis. However, because their strategy plays out across a longer period, fundamental analysis may also be a valuable tool.

Swing trading tends to be a more beginner-friendly strategy. Mainly because it doesn’t come with the stress of fast-paced day trading. Where the latter is characterized by rapid decision-making and a lot of screen time, swing trading allows you to take your time.

What is position trading?
Position (or trend) trading is a long-term strategy. Traders purchase assets to hold for extended periods (generally measured in months). Their goal is to make a profit by selling those assets at a higher price in the future.

What distinguishes position trades from long-term swing trades is the rationale behind placing the trade. Position traders are concerned with trends that can be observed over extended periods – they’ll try to profit from the overall market direction. Swing traders, on the other hand, typically seek to predict “swings” in the market that don’t necessarily correlate with the broader trend.

It’s not uncommon to see position traders favor fundamental analysis, purely because their time preference allows them to watch fundamental events materialize. That’s not to say technical analysis isn’t used. While position traders work on the assumption that the trend will continue, the use of technical indicators can alert them to the possibility of a trend reversal.

Like swing trading, position trading is an ideal strategy for beginners. Once again, the long time horizon gives them ample opportunity to deliberate on their decisions.

What is scalping?
Of all of the strategies discussed, scalping takes place across the smallest time frames. Scalpers attempt to game small fluctuations in price, often entering and exiting positions within minutes (or even seconds). In most cases, they’ll use technical analysis to try and predict price movements and exploit bid-ask spread and other inefficiencies to make a profit. Due to the short time frames, scalping trades often give a small percentage of profits – usually lower than 1%. But scalping is a numbers game, so repeated small profits can add up over time.

Scalping is by no means a beginner’s strategy. An in-depth understanding of the markets, the platforms you’re trading on, and technical analysis are vital to success. That said, for traders that know what they’re doing, identifying the right patterns and taking advantage of short-term fluctuations can be highly profitable.

What is asset allocation and diversification?
Asset allocation and diversification are terms that tend to be used interchangeably. You might know the principles from the saying don’t keep all your eggs in one basket. Keeping all of your eggs in one basket creates a central point of failure – the same holds true for your wealth. Investing your life savings into one asset exposes you to the same kind of risk. If the asset in question was the stock of a particular company and that company then imploded, you’d lose your money in one swift movement.

This isn’t just true of single assets, but of asset classes. In the case of a financial crisis, you’d expect all of the stock you hold to lose value. This is because they’re heavily correlated, meaning that all tend to follow the same trend.

Good diversification isn’t simply filling your portfolio with hundreds of different digital currencies. Consider an event where the world governments ban cryptocurrencies, or quantum computers break the public-key cryptography schemes we use in them. Either of these occurrences would have a profound impact on all digital assets. Like stocks, they make up a single asset class.

Ideally, you want to spread your wealth across multiple classes. That way, if one is performing poorly, it has no knock-on effect on the rest of your portfolio. Nobel Prize winner Harry Markowitz introduced this idea with the Modern Portfolio Theory (MPT). In essence, the theory makes the case for reducing the volatility and risk associated with investments in a portfolio by combining uncorrelated assets.

For more on the topic, check out Binance Academy’s Asset Allocation and Diversification, or Binance Research’s Exploring the Diversification Benefits with Bitcoin.

What is the Dow Theory?

The Dow Theory is a financial framework modeled on the ideas of Charles Dow. Dow founded the Wall Street Journal and helped create the first US stock indices, known as the Dow Jones Transportation Average (DJTA) and Dow Jones Industrial Average (DJIA).

Though the Dow Theory was never formalized by Dow himself, it can be seen as an aggregation of the market principles presented in his writings. Here are some of the key takeaways:

Everything is priced in – Dow was a proponent of the efficient market hypothesis (EMH), the idea that markets reflect all of the available information on the price of their assets.
Market trends – Dow is often credited with the very notion of market trends as we know them today, distinguishing between primary, secondary, and tertiary trends.
The phases of a primary trend – in primary trends, Dow identifies three phases: accumulation, public participation, and excess & distribution.
Cross-index correlation – Dow believed that a trend in one index couldn’t be confirmed unless it was observable in another index.
The importance of volume – a trend must also be confirmed by high trading volume.
Trends are valid until reversal – if a trend is confirmed, it continues until a definite reversal occurs.

It’s worth remembering that this isn’t an exact science – it’s a theory, and it might not hold true. Still, it’s a theory that remains hugely influential, and many traders and investors consider it an integral part of their methodology.

For more, check out An Introduction to The Dow Theory.

What is the Elliott Wave Theory?
Elliott Wave Theory (EWT) is a principle positing that market movements follow the psychology of market participants. While it’s used in many technical analysis strategies, it isn’t an indicator or specific trading technique. Rather, it’s a way to analyze the market structure.

The Elliott Wave pattern can typically be identified in a series of eight waves, each of which is either a Motive Wave or a Corrective Wave. You would have five Motive Waves that follow the general trend, and three Corrective Waves that move against it.

An Elliot Wave Cycle, with Motive Waves (blue) and Corrective Waves (yellow).

The patterns also have a fractal property, meaning that you could zoom into a single wave to see another Elliot Wave pattern. Alternatively, you could zoom out to find that the pattern you’ve been examining is also a single wave of a bigger Elliot Wave cycle.

Elliott Wave Theory is met with mixed reviews. Some argue that the methodology is too subjective because traders can identify waves in various ways without violating the rules. Like the Dow Theory, the Elliott Wave Theory isn’t foolproof, so it should not be viewed as an exact science. That said, many traders have had great success by combining EWT with other technical analysis tools.

Check out An Introduction to the Elliott Wave Theory for more information on the topic.

What is the Wyckoff Method?
The Wyckoff Method is an extensive trading and investing strategy that was developed by Charles Wyckoff in the 1930s. His work is widely regarded as a cornerstone of modern technical analysis techniques across numerous financial markets.

Wyckoff proposed three fundamental laws – the law of supply and demand, the Law of Cause and Effect, and the Law of Effort vs. Result. He also formulated the Composite Man theory, which has significant overlap with Charles Dow’s breakdown of primary trends. His work in this area is particularly valuable to cryptocurrency traders.

On the practical side of things, the Wyckoff Method itself is a five-step approach to trading. It can be broken down as follows:

Determine the trend: what’s it like now, and where is it headed?
Identify strong assets: are they moving with the market or in the opposite direction?
Find assets with sufficient Cause: is there enough reason to enter the position? Do the risks make the potential reward worth it?
Assess the likelihood of the movement: do things like Wyckoff’s Buying and Selling Tests point to a possible movement? What do the price and volume suggest? Is this asset ready to move?
Time your entry: how are the assets looking in relation to the general market? When is the best time to enter a position?
The Wyckoff Method was introduced almost a century ago, but it remains highly relevant to this day. The scope of Wyckoff’s research was vast, and therefore the above should only be seen as a very condensed overview. It’s recommended that you explore his work in more depth, as it provides indispensable technical analysis knowledge. Start with The Wyckoff Method Explained.

What is buy and hold?
The “buy and hold” strategy, perhaps unsurprisingly, involves buying and holding an asset. It’s a long-term passive play where investors purchase the asset and then leave it alone, regardless of market conditions. A good example of this in the crypto space is HODLing, which typically refers to investors that prefer to buy and hold for years instead of actively trading.

This can be an advantageous approach for those that prefer “hands-off” investing as they don’t need to worry about short-term fluctuations or capital gains taxes. On the other hand, it requires patience on the investor’s part and assumes that the asset won’t end up totally worthless.

If you’d like to read about an easy way to apply this strategy to Bitcoin, check out Dollar-Cost Averaging (DCA) Explained.

What is index investing?
Index investing could be regarded as a form of “buy and hold.” As the name implies, the investor seeks to profit from the movement of assets within a specific index. They could do so by purchasing the assets on their own, or by investing in an index fund.

Again, this is a passive strategy. Individuals can also benefit from diversification across multiple assets, without the stress of active trading.

What is paper trading?
Paper trading could be any kind of strategy – but the trader is only pretending to buy and sell assets. This is something you might consider as a beginner (or even as an experienced trader) to test your skills without putting your money at stake.

You may think, for instance, that you’ve discovered a good strategy for timing Bitcoin dips, and want to try profiting from those drops before they occur. But before you risk all of your funds, you might opt to paper trade. This can be as simple as writing down the price at the time you “open” your short, and again when you close it. You could equally use some kind of simulator that mimics popular trading interfaces.

The main benefit of paper trading is that you can test out strategies without losing your money if things go wrong. You can get an idea of how your moves would have performed with zero risk. Of course, you need to be aware that paper trading only gives you a limited understanding of a real environment. It’s hard to replicate the real emotions you experience when your money is involved. Paper trading without a real-life simulator may also give you a false sense of associated costs and fees, unless you factor them in for specific platforms.

Binance offers a couple of options for paper trading. For instance, the Binance Futures Testnet provides a full-fledged interface. If you’re building trading bots or programs yourself, then the spot exchange testnet can be accessed via API.

Chapter 4 - Technical Analysis Basics

Contents

What is a long position?
What is shorting?
What is the order book?
What is the order book depth?
What is a market order?
What is slippage in trading?
What is a limit order?
What is a stop-loss order?
What are makers and takers?
What is the bid-ask spread?
What is a candlestick chart?
What is a candlestick chart pattern?
What is a trend line?
What are support and resistance?

What is a long position?
A long position (or simply long) means buying an asset with the expectation that its value will rise. Long positions are often used in the context of derivatives products or Forex, but they apply to basically any asset class or market type. Buying an asset on the spot market in the hopes that its price will increase also constitutes a long position.

Going long on a financial product is the most common way of investing, especially for those just starting out. Long-term trading strategies like buy and hold are based on the assumption that the underlying asset will increase in value. In this sense, buy and hold is simply going long for an extended period of time.

However, being long doesn’t necessarily mean that the trader expects to gain from an upward movement in price. Take leveraged tokens, for example. BTCDOWN is inversely correlated to the price of Bitcoin. If the price of Bitcoin goes up, the price of BTCDOWN goes down. If the price of Bitcoin goes down, the price of BTCDOWN goes up. In this sense, entering a long position in BTCDOWN equals a downward movement in the price of Bitcoin.

What is shorting?
A short position (or short) means selling an asset with the intention of rebuying it later at a lower price. Shorting is closely related to margin trading, as it may happen with borrowed assets. However, it’s also widely used in the derivatives market, and can be done with a simple spot position. So, how does shorting work?

When it comes to shorting on the spot markets, it’s quite simple. Let’s say you already have Bitcoin and you expect the price to go down. You sell your BTC for USD, as you plan to rebuy it later at a lower price. In this case, you’re essentially entering a short position on Bitcoin since you’re selling high to rebuy lower. Easy enough. But what about shorting with borrowed funds? Let’s see how that works.

You borrow an asset that you think will decrease in value – for example, a stock or a cryptocurrency. You immediately sell it. If the trade goes your way and the asset price decreases, you buy back the same amount of the asset that you’ve borrowed. You repay the assets that you’ve borrowed (along with interest) and profit from the difference between the price you initially sold and the price you rebought.

So, what does shorting Bitcoin look like with borrowed funds? Let’s look at an example. We put up the required collateral to borrow 1 BTC, then immediately sell it for $10,000. Now we’ve got $10,000. Let’s say the price goes down to $8,000. We buy 1 BTC and repay our debt of 1 BTC along with interest. Since we initially sold Bitcoin for $10,000 and now rebought at $8,000, our profit is $2,000 (minus the interest payment and trading fees).

What is the order book?
The order book is a collection of the currently open orders for an asset, organized by price. When you post an order that isn’t filled immediately, it gets added to the order book. It will sit there until it gets filled by another order or canceled.

Order books will differ with each platform, but generally, they’ll contain roughly the same information. You’ll see the number of orders at specific price levels.

When it comes to crypto exchanges and online trading, orders in the order book are matched by a system called the matching engine. This system is what ensures that trades are executed – you could think of it as the brain of the exchange. This system, along with the order book, is core to the concept of electronic exchange.

What is the order book depth?
The order book depth (or market depth) refers to a visualization of the currently open orders in the order book. It usually puts buy orders on one side, and sell orders on the other and displays them cumulatively on a chart.

Order book depth of the BTC/USDT market pair on Binance.

In more general terms, the depth of the order book may also refer to the amount of liquidity that the order book can absorb. The “deeper” the market is, the more liquidity there is in the order book. In this sense, a market with more liquidity can absorb larger orders without a considerable effect on the price. However, if the market is illiquid, large orders may have a significant impact on the price.

What is a market order?
A market order is an order to buy or sell at the best currently available market price. It’s basically the fastest way to get in or out of a market.

When you’re setting a market order, you’re basically saying: “I’d like to execute this order right now at the best price I can get.”

Your market order will keep filling orders from the order book until the entire order is fully filled. This is why large traders (or whales) can have a significant impact on the price when they use market orders. A large market order can effectively siphon liquidity from the order book. How so? Let’s go through it when discussing slippage.

Eager to learn more? Check out What is a Market Order?.

What is slippage in trading?
There is something you need to be aware of when it comes to market orders – slippage. When we say that market orders fill at the best available price, that means that they keep filling orders from the order book until the entire order is executed.

However, what if there isn’t enough liquidity around the desired price to fill a large market order? There could be a big difference between the price that you expect your order to fill and the price that it fills at. This difference is called slippage.

Let’s say you’d like to open a long position worth 10 BTC in an altcoin. However, this altcoin has a relatively small market cap and is being traded on a low-liquidity market. If you use a market order, it will keep filling orders from the order book until the entire 10 BTC order is filled. On a liquid market, you would be able to fill your 10 BTC order without impacting the price significantly. But, in this case, the lack of liquidity means that there may not be enough sell orders in the order book for the current price range.

So, by the time the entire 10 BTC order is filled, you may find out that the average price paid was much higher than expected. In other words, the lack of sell orders caused your market order to move up the order book, matching orders that were significantly more expensive than the initial price.

Be aware of slippage when trading altcoins, as some trading pairs may not have enough liquidity to fill your market orders.

What is a limit order?
A limit order is an order to buy or sell an asset at a specific price or better. This price is called the limit price. Limit buy orders will execute at the limit price or lower, while limit sell orders will execute at the limit price or higher.

When you’re setting a limit order, you’re basically saying: “I’d like to execute this order at this specific price or better, but never worse.”

Using a limit order allows you to have more control over your entry or exit for a given market. In fact, it guarantees that your order will never fill at a worse price than your desired price. However, that also comes with a downside. The market may never reach your price, leaving your order unfilled. In many cases, this can mean losing out on a potential trade opportunity.

Deciding when to use a limit order or market order can vary with each trader. Some traders may use only one or the other, while other traders will use both – depending on the circumstances. The important thing is to understand how they work so you can decide for yourself.

Eager to learn more? Check out What is a Limit Order?.

What is a stop-loss order?
Now that we know what market and limit orders are, let’s talk about stop-loss orders. A stop-loss order is a type of limit or market order that’s only activated when a certain price is reached. This price is called the stop price.

The purpose of a stop-loss order is mainly to limit losses. Every trade needs to have an invalidation point, which is a price level that you should define in advance. This is the level where you say that your initial idea was wrong, meaning that you should exit the market to prevent further losses. So, the invalidation point is where you would typically put your stop-loss order.

How does a stop-loss order work? As we’ve mentioned, the stop-loss can be both a limit or a market order. This is why these variants may also be referred to as stop-limit and stop-market orders. The key thing to understand is that the stop-loss only activates when a certain price is reached (the stop price). When the stop price is reached, it activates either a market or a limit order. You basically set the stop price as the trigger for your market or limit order.

However, there is one thing you should keep in mind. We know that limit orders only fill at the limit price or better, but never worse. If you’re using a stop-limit order as your stop-loss and the market crashes violently, it may instantly move away from your limit price, leaving your order unfilled. In other words, the stop price would trigger your stop-limit order, but the limit order would remain unfilled due to the sharp price drop. This is why stop-market orders are considered safer than