Five Tips for Successful Bitcoin Trading

Essential information you should know before placing your very first trade

This post is aimed at those with very little skill of financial markets.

Bitcoin has encouraged many to take an interest in finance and permits effortless access to financial exchanges. Consequently a large number of people are attempting to trade Bitcoin, without any prior trading practice.

At BTC.sx we sometimes see traders make ordinary mistakes that could be avoided with a basic understanding about trading and investing.

Let’s take a look at the five most common mistakes fresh traders make and how to avoid them:

1. Do not invest more than you can afford to lose

Any financial investment can produce losses, rather than comes back. With a very speculative investment, such as Bitcoin, there is a high chance that you can see very large gains or losses. By trading Bitcoin, there is also further scope to lose money from poor decision-making.

One should invest such an amount that they feel comfy with losing fully — be ready for the worst eventuality. There are two reasons for this.

Firstly, successful investors diversify their portfolio. Allocating too many funds to an asset class increases risk exposure. This makes it tighter for gains in other assets to cover losses in another asset.

You cannot lose more than you put in, so don’t put in more than you can afford to lose and you’ll be all right, even in the most negative case. -Rpietila, Bitcoin and commodity investor

Secondly, investing more than one can afford to lose reduces an investor’s capability to make good decisions. In particular, there is a risk of ‘panic selling’ when the market declines slightly. Instead of holding via a market dip, one who is over-invested may scare and sell-off their holdings for a low price — attempting to cut their losses. This tends to lead to losing more money when the market recovers and the trader buys back at a higher price.

Two. Set goals for each trade

Setting goals helps traders remain level-headed during periods of extreme volatility. This is very significant for Bitcoin trading. When placing a trade, determine what price to take profits or cut losses in advance.

The benefit of this is that it is lighter to prevent trading decisions based purely on emotions. For example, a trader with no target price may make a profitable trade, become greedy, and then fail to realize their profits while the market is still on their side.

This chart shows the typical emotions an investor may go through and how they make it firmer to ‘buy low and sell high’.

The use of goals / price targets can prevent traders becoming greedy when experiencing euphoria and despondent after a market crash.

Trio. Learn how to read charts

Albeit technical analysis is a difficult skill to develop, fresh traders at a minimum should know the basics of chart reading to identify market trends.

The most widely used Bitcoin charting device is Bitcoin Wisdom. Despite looking staggering at very first, it is actually very intuitive. Here are the basics a fresh trader should understand:

Candlesticks — these are the rectangles and lines that resemble a candlestick form. They are used to demonstrate what the price has done within a chosen time interval, which in this example will be one day.

Take a look at the candlestick highlighted by the blue box. There are several lumps of information we can gather from this single candlestick:

Opening price — this is the part of the rectangle that is horizontal to the candlestick to the left. On this day, the price opened at approximately $400 (which was the closing price of the day before).

Closing price — this is the part of the rectangle that is horizontal to the candlestick to the right. On this day, the price closed at approximately $378 (which was the opening price of the day after).

Price direction — as the closing price is less than the opening price, the price of Bitcoin fell, therefore the candlestick is crimson.

Highest price — the highest point of the stick shows that, during this day, the price reached approximately $407.

Lowest price — the lowest point of the stick shows that, during this day, the price fell to approximately $368.

Trading range — the difference inbetween the highest price and the lowest price shows the range that the price was trading in.

Order book — this is a list of the prices and quantities traders are willing to buy and sell Bitcoin.

The ‘asks’ (sell orders) are listed in the top half, and the ‘bids’ (buy orders) are the listed in bottom half. The difference inbetween the lowest ask ($361.95) and highest bid ($360.95) is known as the ‘spread’.

The 2nd section with the scroll bar shows live trades, which can be used to see what is happening in the market right now.

Lastly, Bitcoin Wisdom projects how the price may stir based on the order book. This can be indicated by the green and crimson lines at the end of the chart.

How can a trader use this information? It permits short-term support and resistance levels to be identified quickly.

For example, if there is an order to sell Five,000 Bitcoin at $362, the price will have a lot of resistance at this level. This is because buyers will fullfil the cheapest sell order available to them and, given Five,000 Bitcoin is a yam-sized quantity, this will be sufficient to please buyers for a few days. It is only when this order has been fulfilled, there is potential for the price to budge above $362.

It is worth watching the live trades and bids / asks being fulfilled to get a feel for how an exchange works. Keep in mind that a buyer will want to buy at the cheapest price for their desired quantity. So they will buy as much Bitcoin as possible at the cheapest price, and then the next cheapest price if the original ask contains an insufficient quantity of Bitcoin. It is this screenplay that increases Bitcoin’s price — or decreases Bitcoin’s price in an opposite screenplay.

Logarithmic scales — using just linear scales makes it difficult to track Bitcoin’s price over a longtime span. This is because linear scales have with Y Axis values of equidistant. This linear Y Axis is lightly twisted by extreme values, which Bitcoin’s price is famous for recording.

In contrast, logarithmic scales have a Y Axis that switches values according orders of magnitude. This prevents chart distortion and can expose hidden trends in Bitcoin’s price. Observe the difference below:

Logarithmic Bitcoin chart:

Related video:

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