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5. How to trade Bitcoin ?

Understanding Bitcoin Trading Terms

Let’s continue to break down some of the confusing terms and statistics you’ll encounter on most of Bitcoin and crypto exchanges:

Trading Platforms vs. Brokers vs. Marketplaces

Bitcoin trading platform are online sites where buyers and sellers are automatically matched. Note that a trading platform is different from a Bitcoin broker, such as Coinmama. Unlike trading platforms, brokers sell you Bitcoin directly and usually for a higher fee. A trading platform is also different from a marketplace such as LocalBitcoins, where buyers and sellers communicate directly with each other, in order to complete a trade.

The Order Book

The complete list of buy orders and sell orders are listed in the market’s order book, which can be viewed on the trading platform. The buy orders are called bids, since people are bidding on the prices to buy Bitcoin. The sell orders are called asks, since they show the asking price that the sellers request.

Bitcoin Price

Whenever people refer to Bitcoin’s “price”, they are actually referring to the price of the last trade conducted on a specific trading platform. This important distinction occurs because, unlike US dollars for example, there is no single, global Bitcoin price that everyone follows. For instance, Bitcoin’s price in certain countries can be different from its price in the US, since the major exchanges in these countries include different trades. Note: Next to the price, you will sometimes also see the terms high and low. These terms refer to the highest and lowest Bitcoin prices in the last 24 hours.

Volume

Volume stands for the number of overall Bitcoins that have been traded in a given timeframe. Volume is used by traders to identify how significant a trend is; significant trends are usually accompanied by large trading volumes, while weak trends are accompanied by low volumes. For example, a healthy upward trend will be accompanied by high volumes when the price rises and low volumes when the price declines. If you are witnessing a sudden change of direction in the price, experts recommend checking how significant the trading volume is, in order to determine if it’s just a minor correction or the beginning of an opposite trend.

Market (or Instant) Order

This type of order can be set on a trading platform and it will be instantly fulfilled at any possible price. You only set the amount of Bitcoins you wish to buy or sell and order the exchange to execute it immediately. The trading platform then matches sellers or buyers to meet your order, respectfully. Once the order is placed, there is a good chance that your order will not be matched by a single buyer or seller, but rather by multiple people, at different prices. For example, let’s say you put a market order to buy five Bitcoins. The trading platform is now looking for the cheapest sellers available. The order will be completed once it accumulates enough sellers to hand over five Bitcoins. Depending on sellers availability, you might end up buying three Bitcoins at one price, and the other two at a higher price. In other words, in a market order, you don’t stop buying or selling Bitcoins until the amount requested is reached. With market orders, you may end up paying more or selling for less than you intended, so be careful.

Limit Order

It allows you to buy or sell Bitcoin at a specific price that you decide on. In other words, the order may not be entirely fulfilled, since there won’t be enough buyers or sellers to meet your requirements. Let’s say that you place a limit order to buy five Bitcoins at $10,000 per coin. Then you could end up only owning 4 Bitcoins because there were no other sellers willing to sell you the final Bitcoin at $10,000. The remaining order for 1 Bitcoin will stay there until the price hits $10,000 again, and the order will then be fulfilled.

Reading Price Charts

Now that you’re familiar with the main trading terms, it’s time for a short intro into reading price graphs.

Japanese Candlesticks

A very widely used type of price graph, Japanese candlesticks are based on an ancient Japanese method of technical analysis, used in trading rice in 1600’s. Each “candle” represents the opening, lowest, highest, and closing prices of the given time period. Due to that, Japanese Candlesticks are sometimes referred to as OHLC graph (Open, High, Low, Close). Depending on whether the candle is green or red, you can tell if the closing price of the timeframe was higher or lower than the opening price. If a candle is green, it means that the opening price was lower than the closing price, so the price went up overall during this timeframe. On the other hand, if the candle is red, it means that the opening price was higher than the closing price, so the price went down.

Trading Candlesticks

In the image above, the opening price of the green candle is the wide-bottom part of the candle, the closing price in the wide-top part on the candle, and the highest and lowest trades within this timeframe on both ends of the candle. When we’re in a bull market, most of the candlesticks will usually be green. If it’s a bear market, most of the candlesticks will be red.

Bull and Bear Markets

These terms are used to indicate the general trend of the graph, whether it’s going up or down. They are named after these animals because of the ways they attack their opponents. A bull thrusts its horns up into the air, while a bear swipes its paws downward. So these animals are metaphors for the movement of a market: if the trend is up, it’s a bull market. But if the trend is down, it’s a bear market.

Resistance and Support Levels

Often, when looking at market graphs such as OHCL it may seem as though Bitcoin’s price cannot break through certain highs or lows. For example, you can witness Bitcoin’s price go up to $10,000 and then  appear to hit a virtual “ceiling” and get stuck at that price for some time without breaking through it. In this scenario, $10,000 is the resistance level – a high price point Bitcoin is struggling to beat. The resistance level is the outcome of many sell orders being executed at this price point. That’s why the price fails to break through at that specific point. Support levels, in a sense, are the mirror image of resistance levels. They look like a “floor” Bitcoin’s price doesn’t seem to go below when the price drops . A support level will be accompanied by a lot of buy orders set at the level’s price. The high demand of a buyer at the support level cushions the downtrend. Historically, the more frequently the price has been unable to move beyond the support or resistance levels, the stronger these levels are considered. Interestingly, both resistance and support levels are usually set around round numbers e.g. 10,000, 15,000 etc. The reason for that is that many inexperienced traders tend to execute buy or sell orders at round price points, thus making them act as strong price barriers. Psychology also contributes a lot to support and resistance levels. For example, until 2017, it seemed expensive to pay $1,000 per Bitcoin, so there was a strong resistance level at $1,000. Once that level was breached, a new psychological resistance level was created: $10,000.

Common Trading Mistakes

Great, you made it this far, and by now you should have enough know-how to go out and get some field experience. However, it’s important to remember that trading is a risky business and that mistakes cost money. Let’s go over the most common mistakes that people make when they start trading—in the hopes that you’ll be able to avoid them.

Mistake #1 – Risking More than You Can Afford to Lose

The biggest mistake you can make is to risk more money than you can afford to lose. Take a look at the amount you feel comfortable with. Here’s the worst-case scenario: you’ll end up losing it all. If you find yourself trading above that amount, stop. You’re doing it wrong. Trading is a very risky business. If you invest more money than you’re comfortable with, it will affect how you trade, and it may cause you to make bad decisions.

Mistake #2 – Not Having a Plan

Another mistake people make when starting out with trading is not having an action plan that’s clear enough. In other words, they don’t know why they’re entering a specific trade, and more importantly, when they should exit that trade. So clear profit goals and stop-losses should be decided before starting the trade.

Mistake #3- Leaving Money on an Exchange

This is the most basic ground-rule for any crypto trader: NEVER leave your money on an exchange that you’re not currently trading with. If your money is sitting on the exchange, it means that you don’t have any control over it. If the exchange gets hacked, goes offline, or goes out of business, you may end up losing that money. Whenever you have money that isn’t needed in the short term for trading on an exchange, make sure to move it into your own Bitcoin wallet or bank account for safekeeping. There are useful tools that allows you to track your portfolio and make sure this doesn’t happen to you. Read here our full review to learn what are the best crypto portfolio tracker apps out there.

Mistake #4 – Giving into Fear or Greed

Two basic emotions tend to control the actions of many traders: fear and greed. Fear can appear in the form of prematurely closing your trade, because you read a disturbing news article, heard a rumor from a friend, or got scared by a sudden dip in the price (that may soon be corrected). The other major emotion, greed, is actually also based on fear: the fear of missing out. When you hear people telling you about the next big thing, or when market prices rise sharply, you don’t want to miss out on all the action. So you may get into a trade too soon, or even delay closing an open trade. Remember that in most cases, our emotions rule us. So never say, “This won’t happen to me.” Be aware of your natural tendency towards fear and greed, and make sure to stick to the plan that was laid before you started the trade.

Mistake #5 – Not Learning the Lesson

Regardless of whether or not you made a successful trade, there’s always a lesson to be learned. No one manages to only make profitable trades, and no one gets to the point of making money without losing some money on the way. The important thing isn’t necessarily whether or not you made money. Rather, it’s whether you managed to gain some new insight into how to trade better next time.

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