How To Trade On The Cryptocurrency Exchange
Before starting trading on a cryptocurrency exchange, you need to choose the most suitable one for your goals. A reliable cryptocurrency exchange should have a good reputation, be safe, regulated, and also have high liquidity in different markets. Even if the exchange is recommended by many people and well-known, you still need to check whether it suits you.
For example, you need to make sure that the exchange is available in your country, supports certain payment options or fiat currencies if you need them. Also, it’s important to check whether the specific set of cryptocurrencies that interest you the most is available on crypto exchange and that it supports trading instruments you are interested in.
Sometimes it’s difficult to find the crypto exchange that meets all the necessary requirements. But given the number of them, you can easily choose the one that is the closest to your expectations. If you decide between several exchanges, then you should also pay attention to the commissions for trading, deposit, and withdrawal, especially if you are going to trade for a long time.
Finally, you need to decide how exactly you are going to trade. Spot and margin trading is the most common on cryptocurrency exchanges. And we’ll take a closer look at them.
The spot market is where the assets are traded for immediate delivery. It means that you will receive the asset immediately after your order execution. Spot trading allows you to quickly exchange one asset for another.
In the crypto market, spot trading can be roughly divided into crypto-to-fiat and crypto-to-crypto. As the name suggests, crypto-to-fiat means the exchange of cryptocurrency for fiat and vice versa. In the case of crypto-to-crypto, only cryptocurrencies are involved in trading. For example, Stellar Lumens to USD is a crypto-to-fiat trading pair while BTC/USDT is crypto-to-crypto. Some cryptocurrency exchanges don’t support fiat currencies and can be fully crypto-to-crypto. Therefore, if you want to trade in a pair with fiat currencies, then you need to select the exchange on which they are supported.
Spot trading on a cryptocurrency exchange takes place between the users themselves. Thus, all orders that you place are executed by opposite orders of other users. All orders are placed in the order book where they can be easily viewed.
Market and limit orders are commonly used on cryptocurrency exchanges. A market order is executed instantly and at the best available price in the order book. A market order cannot be canceled. When placing a limit order, you specify in advance the price at which you want to buy or sell an asset. However, this order may not be executed instantly. In this case, you need to wait until a similar opposite order appears in the order book or until the price reaches the specified level.
A limit order can be canceled before it has been executed. Besides, don’t forget that partial execution of a limit order may take place if the current orders in the order book are insufficient to fully fill your limit order. Executed part of the limit order cannot be canceled.
The leverage is a core of margin trading. Leverage allows you to borrow the asset for your trade to increase the potential profit. To borrow the asset, you need collateral that is used to cover your position.
With leverage, you can multiply the asset’s amount under your control and potential profit. But at the same time, you can lose more funds if you open the position and the price goes in the opposite direction. Here is an example for a better understanding of how margin trading works.
Let’s say you have $1000 that you want to use in margin trading on BTC. You expect that the BTC price will go up but you don’t think that $1000 is enough to benefit from the potential bitcoin rally. That is why you decide to use leverage. In our example, we will use 5x leverage. It means that the amount of funds that you can use for trading has increased from $1000 to $5000. The initial $1000 is used as collateral.
Imagine that you were right and the bitcoin price surged by 10% in a day. Considering that you had $5,000 under your control at the moment, the profit would be $500, not the $100 that you would have received if you had not used the leverage.
Now imagine that the price has dropped by 10%. In that case, you would have lost $500 (with 5x leverage), not $100 (no leverage). These $500 would be paid from $1000 collateral.
When trading with leverage, it is important to monitor your equity in order to be sure that the position will not be liquidated. Besides, don’t forget to set up protection orders such as stop loss and take profit, especially if you are trading with a specific strategy. Protection orders help control the trading process and set the levels to close a position when the price will reach it.
All the calculations in our example were made without taking trading commissions into account. Also, the trader may pay a commission for holding the position for a few days, it’s called a rollover fee.
If you are a beginner, then it’s better to start with spot trading to form a better understanding of how the trading process looks like. Then if you feel confident and understand the main trading terms, you can try yourself in margin trading. Try to control your emotions while trading and do not buy/sell some asset if someone recommended you to do that. Always make your own research before making important decisions because it’s your money on the table, not someone else’s.