When looking to trade bitcoin there is an alternative to using exchanges to own and store the currency. Instead, you can trade on bitcoin price movements via CFD trading. You take a position on the price of the bitcoin market to rise or fall, based on our 'buy' and 'sell' prices.
Follow our 'step-by-step guide to trading bitcoin' below to find out more.
Bitcoin has guided the direction of most cryptocurrencies in the crypto market. It's the go-to cryptocurrency that many can name, but few properly understand. Known to be volatile, traders can experience massive shifts in price when trading bitcoin, which contributes to both its appeal and risk.
This article is aimed at people who wish to learn how to trade bitcoin. Following this step-by-step guide will help you to make informed decisions in the bitcoin market. To understand how bitcoin works, read this article to learn more about the digital currency that steers this market.
Methods of trading bitcoin
Trading bitcoin is split into two major categories. The first involves buying bitcoins on an exchange, in the hope of selling them at a later date for a profit. This process relies heavily on bitcoin exchanges' matching servers, which can be unreliable. The second bitcoin trading method is based on the speculation of price movements without actually owning the currency. This method is practised via CFD trading account.
Exchanges that hold your bitcoin store large amounts of bitcoin and other cryptocurrencies, making them prime targets for cyber theft. Hacking and theft from cryptocurrency exchanges is a common practice; on average a major exchange was hacked every other month in 2018. Some notable cyber thefts in 2018 include $534,800,000 stolen from Coincheck in January that year, and $195,000,000 from BitGrail in February1. So there is clearly a risk in holding bitcoins on an exchange.
Cryptocurrencies operate within an infrastructure characterized by fewer regulations compared to conventional financial markets. This gives rise to a number of scams, and a lower degree of trust among investors. Also, due to its unregulated nature, there is very little support from other parties. This support can be needed as bitcoin's matching servers on some exchanges are unreliable, which could result in a trade execution that is not accurate, as it is not updated promptly.
Bitcoin trading strategies
What is the right bitcoin trading strategy for you? It largely comes down to your level of experience, free time, capital invested and daily discipline. Everyone has different goals when trading bitcoin and some people will re-structure their responsibilities around trading, whereas others will want trading to work around their responsibilities.
If you plan on investing in or trading bitcoin, you are likely to utilise one of the following methods.
Day-trading bitcoin refers to the buying and selling of bitcoin in the same trading day. The strategy involves placement of long and short trades in an attempt to capitalise on the speculation of price movements. A day trader will close all of their positions at the end of the trading day, ensuring no positions are open overnight.
Day trading is perhaps the best option for traders who are looking to build a career trading markets. It can be very technical, takes a lot of time and has a steep learning curve. However, for those who are very dedicated, and have the focus to regularly analyse charts, this may be for you.
Swing trading is about buying and selling bitcoin based on market movements and holding on to that position until the trend slows down or you witness a trend reversal. Unlike day trading, positions can be held from a couple of days to a few weeks.
The swing trader commonly utilises technical analysis and rarely analyses a market's fundamental data. Utilising technical signals such as Fibonacci retracement and moving average convergence divergence (MACDs), a swing trader makes their profit from capitalising on trends the moment they form.
Swing traders generally experience more risk in comparison to day traders, as the positions they hold are open for longer periods than day traders. However, this trading method often requires less time commitment as trades typically last for several weeks.
Scalping bitcoin is a trading strategy that involves placing frequent trades over extremely short periods, sometimes just minutes long. Scalping traders attempt to capitalise on small market movements.
When scalping bitcoin, you should always have a clear exit strategy, as one trading loss could counteract any small gains you have made. With discipline, scalping bitcoin can be a lower risk trading strategy. This is because spreading your capital over a large number of small trades diversifies your capital risk.
1. Devise your bitcoin trading strategy: Undertake research to help you determine how you're going to trade on bitcoin. This will help outline your position sizing and entry/exit strategies in your trading plan. Not sure which strategy suits you? Choose based on your free time, amount of capital invested, level of experience and discipline.
2. Build your trading strategy plan: After you have chosen your bitcoin trading strategy you can take it a step further and start defining your trading plan. A trading plan can help you make decisions based on objective information you have delineated before entering a trade. This helps you make consistent decisions from your plan with the aim of not entering or exiting a trade too early or late.
3. Research the markets: When trading bitcoin or any other financial instrument, you should try to be aware of any news concerning the security and macroeconomics of the market, industry and/or country. This awareness can support the forecasting of future trends and offer insight into the causes of an instrument's price movement. Our news and analysis section may help you to stay on top of developments in the bitcoin market and surrounding influences.
4. Trade and monitor: Next, you can place a bitcoin trade that's underpinned by your market research and trading plan. You'll want to input your position sizing and add risk-management options, like stop-loss and take-profit orders. These trading conditions can play a pivotal role in successful risk management.
Source: CMC Markets UK