What is cryptocurrency trading?

• What exactly is cryptocurrency trading？

• The nature of risk in cryptocurrency trading

• Trading vs. hodling: what's the difference？

• The importance of keeping your feet firmly planted on the earth

One of the most frequent responses when we asked novices to bitcoin what component they would most like to learn about was how to trade cryptocurrency.

This shouldn't come as a shock. Because of its short-term volatility, cryptocurrency is a perfect asset to trade. To put it another way, prices often fluctuate and by large amounts.

Trading cryptocurrencies is a double-edged sword because it is a volatile asset with a lot of opportunities for traders who profit from price fluctuation.

Greater volatility entails larger risk, and the risk of losing money for a beginner trader is higher than the possibility of profiting.

Cryptocurrency is new and immature asset, which makes predicting its long-term potential much more difficult.

Early investors made stratospheric profits, and because adoption is still low, cryptocurrencies still present the potential for substantial returns on investment.

Because of its novelty - particularly in respect to its challenge to traditional forms of money - its use case and legitimacy in the eyes of governments are unknown, and thus there is a great deal of risk to balance against the opportunity.

How to Calculate Bitcoin Volatility To calculate Bitcoin volatility on a given day, you must calculate the difference between the Opening Price and the Average Price for that day. The sum of price variation can be calculated by taking 10 measurements. Divide by 10 after you've squared the sum (the number of measurements). Volatility on that day is the square root of the result.

Take the square root of 365 and multiply by the daily volatility estimate from above to calculate for a given time period, such as a year.

Identifying the Difference Between Trading and Investing

So cryptocurrency is a risky, innovative, and volatile asset with enormous short- and long-term upside potential.

By learning how to trade bitcoin, your challenge is to find out how to tap into that potential, minimize the risk, and make money.

Let's pretend for the time being that generating money from cryptocurrency means selling it for more than you paid for it (we'll explain later in this section that it's potentially far more complicated than that) and use Bitcoin as an example.

With this in mind, and taking into consideration the two primary techniques to benefiting from cryptocurrencies that we've discussed, go through the following two questions:

· Will the price of bitcoin rise or fall in the next 24 hours？

· Will the price of bitcoin rise or fall over the next four years？

Both questions push you to put your money on the line by forecasting the unknown future price movement of bitcoin. The most important difference is the time period, which causes you to think about the uncertainty, or risk to your investment, in a different way.

This is because what drives bitcoin's price over a 24-hour period differs from what influences its trajectory over a four-year period.

Yes, the 24-hour chart is a subset of the four-year chart, and daily variations will smooth out to form long-term patterns in the aggregate, but you can't make a long-term prognosis based on what happens today, or vice versa.

Long-term change is influenced by various elements than short-term change is influenced by.

Trading is what we refer to when we talk about buying and selling for a short period of time. Making repeated wagers on price change in the short term.

Investing, on the other hand, is defined as purchasing and then passively holding for an extended period of time before selling for a profit.

The world of Bitcoin has even coined the term “hodling” to characterize the desire to keep the asset for the long term.

If you want to make money with cryptocurrencies, you must first understand the differences and the numerous decision-making processes involved with each.

You don't have to choose; you can be both a trader and an investor, or neither, as long as you understand the difference and keep your operations separate.

Hodling vs. Trading

Though both Trading and Hodling entail risk management, it takes place across distinct time frames - short and long term - and the implications on risk - how it manifests as cost movement and how to control it - varies.

Technical Analysis is the umbrella term for analyzing short-term asset price movement and trading activity.

Fundamental Analysis refers to a much broader look at the influences on an asset's future success and gauging risk through elements that play out over a longer period of time.

Although fundamental and technical analysis sometimes overlap, they provide a valuable foundation for distinguishing between trading and investing. Both methods, however, boil down to calculating risk.

So let's start with the decision-making process in this section on learning how to trade cryptocurrency:

Understanding price and where it comes from; analyzing price data and pricing charts; interpreting past trends; learning about volume and important price indicators are all examples of technical analysis.

Understanding crypto's main adoption/performance/health metrics; cost association with the larger economy; available adoption/price models are all part of the fundamental analysis.

How to Measure Risk in Risk Management magnitude of trade and risk

We'll move on to implementation after you've grasped the ideas of decision-making:

Making your first transaction - Understanding how to place a trade based on your judgment and the hardships that come with it.

Advanced Trading Topics: Once you've mastered the fundamentals, we can introduce more complex and risky trading methods that can raise your exposure by using leverage or automating the process of implementation.

Footsteps on the Ground

You are effectively wagering that you will be able to sell a cryptocurrency at a better price than when you got it, whether you are Trading or Hodling. Although the phrase 'betting' may make you cringe, trading is a sort of gambling.

The goal is to reduce it to a skill-based decision and tip the odds/risk in your favor by using a disciplined method.

It becomes a luck-based procedure if you merely register an account with an exchange and place transactions based on instinct or a random tweet you read.

You're essentially flipping a coin, except the chances are stacked against you (as will be described) and you'll almost likely lose.

Learning to trade is similar to learning to play poker. You'll have a high learning curve to contend with, and it's likely that the more experienced players will take advantage of the inexperienced.

The Pareto Principle states that the majority of profit will be generated by a small number of players. In relation to the possible profits, the learning curve becomes steeper.

To be effective, you must have your eyes open and your feet on the ground, especially if you wish to trade rather than invest. The majority of traders fail in their first year, and it's not just because they don't get the fundamentals of cryptocurrency trading and the Pareto Principle; it's also because they don't grasp themselves.

Trading necessitates knowledge and quantitative discipline - crunching figures and attempting to discover an edge over the market - but having defined objectives and psychological discipline are as crucial.

It's unrealistic to expect to buy at the precise bottom and sell at the exact peak of the market. This tweet encapsulates how transitory the Bitcoin market's highs have been.

Instead, you should set reasonable goals and, if you begin actively trading, keep track of your activities in a Trading Journal.

Psychological discipline begins with being honest with yourself about what you're trying to accomplish and how you're going to do it - a Trading Journal can help with this. As a complete rookie, your chances of becoming wealthy overnight are slim to none, comparable to winning the lottery. As a result, set reasonable goals for yourself.

Would you learn to drive a car by watching a few online courses and then hitting the highway？ Trading, like learning to drive a car, is a risky endeavor that demands careful planning.

A successful trader will be content with a return that is more than what they could otherwise get from their capital - the opportunity cost, also known as the discount rate.

They aren't seeking to hit a home run with every transaction, and many of their trades will lose money. That is something you must be able to comprehend and accept.

You aren't made out for trading if you are uncomfortable making losing transactions and are driven by a desire to recover losses as soon as possible (or any other form of gambling).

It's also critical to distinguish between luck and skill. If you can't convince yourself that you weren't just lucky, being on the right side of a trade doesn't indicate you've cracked it.

It's all too simple to rationalize a trade and ascribe success to your strategy raer than luck.

If you put enough monkeys in front of a typewriter long enough, one of them will generate the Bitcoin Whitepaper. This does not imply that they are Satoshi Nakamoto. The phenomenon is known as Survivorship Bias, and it also applies to trading. It's one of a slew of cognitive biases that can stymie good decision-making and lead to failure.

There are various types of traders, as we'll see later in the section; the important distinction is the amount of time you have to devote to adequate study. Your trading frequency should be proportional to the amount of time you have to devote to analysis.

If that bucket of cold water didn't deter you, the next article will explain how bitcoin prices are determined.