The cryptocurrency market is known for its volatility, with prices often fluctuating dramatically. In just the past month, Bitcoin saw an 11% increase in value, and the UNI/USD pair surged by a whopping 47%. While these shifts offer opportunities for profit, they also come with significant risks.
In this article, we’ll guide beginner traders on how to navigate this dynamic market and capitalize on cryptocurrency trading.
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Trading Cryptocurrency Through a Broker
There are various ways to profit from cryptocurrencies. You can open wallets for different coins and, tracking changes in their rates, try to make a profit by exchanging one for another. Some investors simply hold onto coins in anticipation of long-term, explosive growth. When trading through AMarkets, the process is similar to trading other instruments, such as traditional currencies. You analyze charts, consider fundamental factors and technical analysis, and decide whether to open long or short positions.
The advantage of trading with a broker is that you don’t need to manage multiple wallets for different cryptocurrencies. Additionally, trading with leverage can amplify your potential gains, a concept we’ll explore later in this article. Opting for a broker is ideal for those who plan to trade regularly, especially on daily charts.
Choosing the Right Cryptocurrency
With numerous coins available for trading, it’s essential to select the right ones. AMarkets provides access to nearly 30 different cryptocurrencies, but beginners should focus on the main players: Bitcoin and Ethereum. These cryptocurrencies have significant trading volume, making their prices less susceptible to individual market influences. Moreover, they are well-documented and widely discussed, making it easier to find reliable analysis and educational resources.
Leverage Trading — Pros and Cons
Once you have chosen the appropriate financial instrument and thoroughly studied the market, it’s time to open your first trade. Here, you’ll notice that you can buy cryptocurrency for an amount significantly exceeding your balance. This is possible because the broker provides leverage—borrowed funds that can be used to make transactions. Let’s take a closer look at how leverage works.
Before opening a trade, you need to fund your trading account. These funds serve as “margin,” and the broker, using its own liquidity sources, extends a sort of credit line to you. This credit line allows you to control larger positions in the market than you could with your own capital alone. At AMarkets, leverage ranges from 1:2 to 1:100, depending on the chosen cryptocurrency and the amount of your own funds (margin). For example, with $100 in your account, you can open a trade for up to $10,000 in cryptocurrency.
Using leverage allows you to amplify your potential earnings. However, it also increases your risk exposure proportionally. Therefore, when trading cryptocurrencies, it is crucial to focus on risk management to protect your investments.
Risk Management Rules
- Diversify Your Investments: Avoid putting all your funds into one asset. Even in calm market conditions, cryptocurrencies remain highly volatile. As a beginner, limit your investment in cryptocurrencies to 20-25% of your total funds. Use the rest for trading more stable instruments, such as traditional currency pairs.
- Spread Your Risk: Never use the entire 20-25% allocation for a single trade. Instead, invest no more than 3-5% of the total amount allocated for cryptocurrencies in any one trade. This strategy ensures that even if some trades go wrong, your losses will not be catastrophic.
- Conduct Thorough Market Analysis: Both technical and fundamental analysis are essential in cryptocurrency trading, just as they are with other financial instruments. Study market movements and read extensively about your chosen instruments. Open trades only when you are confident in your analysis. Confidence in trading comes from being able to answer the question: “Why?”
- Test Strategies on a Demo Account: If you identify a promising pattern or develop a strategy, test it on a demo account with the same amount you plan to trade. Conduct several tests, and if the results are satisfactory, you can then transition to live trading.
- Use Stop-Loss and Take-Profit Orders: Use stop-loss and take-profit orders for effective risk management. These are crucial tools that help you lock in profits or limit losses if the market moves against you. We recommend using stop-loss and take-profit orders with every trade. They not only manage market risks but also protect you from unforeseen events, such as sudden internet or power outages.
Cryptocurrency trading has the potential to be more profitable than trading other instruments due to its high volatility and the use of leverage. However, it also carries significant risks. Calm trading, competent risk management, and thorough analysis of your chosen financial instruments can help you mitigate these risks and capitalize on the opportunities in cryptocurrency trading to increase your income.
