The Complete Guide to Cryptocurrency Trading for Beginners
What is trade?
Trade is a fundamental concept in economics that involves the buying and selling of valuables. These may be goods and services for which the buyer pays the seller some compensation. In other cases, trade may involve the exchange of goods and services between parties to a transaction.
In the context of financial markets, tradable assets are referred to as financial instruments. These can be stocks, bonds, Forex currency pairs, options, futures, leveraged products, cryptocurrencies, and other instruments. If you are unfamiliar with some of the terms from this list, it's okay - we'll explain to them as we go along.
The term "trading" is commonly used to refer to short-term trading, where traders actively open and close positions over relatively short periods. However, this definition is somewhat misleading. Trading can refer to a wide range of different strategies such as day trading, swing trading, trend trading, etc. But don't worry. We will look at these strategies in more detail later.
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What is investing?
Investing is the investment of resources (for example, capital) with the expectation of making a profit. This includes using money to fund and start a business or buying land to resell at a higher price. In the context of financial markets, it usually means investing in financial instruments with the expectation of selling them later at a higher price.
A key concept in investing is the return on investment (also known as ROI ). Unlike trading, investing takes a longer-term approach to wealth accumulation. The goal of an investor is to accumulate wealth over a long period (years or even decades). There are many ways to do this, but usually, the search for potentially good investment opportunities starts with fundamental factors.
The long-term nature of the strategy allows investors not to worry about temporary price fluctuations. As a rule, they behave relatively passively and do not pay much attention to short-term losses.
Trading and investing - what's the difference?
Both traders and investors strive to make a profit in the financial markets. However, their methods of achieving this goal are different.
As a general rule, investors seek to make a profit over a longer period - remember that we talked about years and even decades. And because investors have a longer time horizon, their target return on each investment tends to be higher as well.
On the other hand, traders are trying to capitalize on market volatility. They open and close positions more often and allow lower returns on each trade (because they often open several at once).
What is the best strategy? Which one is more suitable for you? You decide. You can start by learning about the markets and then move on to practice. Over time, you will learn to determine which strategy is best for your financial goals, personality, and trading profile.
What is fundamental analysis (FA)?
Fundamental analysis is a method for assessing the value of a financial asset. A fundamental analyst examines economic and financial factors to determine if an asset's value is fair. Fundamental analysis looks at macroeconomic circumstances such as the state of the economy as a whole, industry conditions, and the business associated with the asset (if any). Often these circumstances are tracked with the help of leading and lagging indicators of macroeconomics.
Based on the results of fundamental analysis, the analyst must determine whether the asset is undervalued or overvalued. Investors can use the findings in making investment decisions.
In the case of cryptocurrencies, fundamental analysis can also be based on Data Science, which processes public blockchain data, called on-chain metrics. These metrics include network hash rate, holder rating, number of addresses, transaction analysis, and much more. Using the wealth of public blockchain data available, analysts can create sophisticated technical indicators that measure certain aspects of the overall health of the network.
Although widely used in the stock market or the forex market, fundamental analysis is less suitable for analyzing the cryptocurrency market in its current state. This asset class is so new that there is simply no standardized overarching basis for determining market valuation yet. Moreover, the movement of the market is predominantly influenced by speculation and narratives. Thus, fundamental factors have little impact on the prices of cryptocurrencies. However, as the market matures, more accurate ways of valuing crypto assets may be developed.
What is technical analysis (TA)?
Technical analysts take a different approach. The main idea behind technical analysis is that historical price action can indicate likely future market movements.
Technical analysts do not seek to find out the true value of an asset. Instead, they look at the historical trading activity and try to identify trading opportunities based on it. Technical analysis includes metrics such as price movement and volume, chart patterns, the use of technical indicators, and many other charting tools. The purpose of this analysis is to assess the strength or weakness of a given market.
With that said, technical analysis is not only a tool for predicting likely future price movements. It can also be a useful risk management framework. Because technical analysis provides a model for analyzing market structure, it makes trade management more specific and measurable. In this context, risk measurement is the first step towards risk management. This is why some technical analysts cannot be considered traders in the narrow sense. They may use technical analysis solely as a risk management tool.
The practice of technical analysis applies to any financial market and is widely used by cryptocurrency traders. But what is the secret of its effectiveness? As we said before, the valuation of cryptocurrency markets is subject to speculation. This makes them an ideal platform for technical analysts as they can only benefit from technical factors.
Fundamental analysis and technical analysis - which is better?
It completely depends on your trading strategy. Actually, why not use both methods? Most market analysis methods work best in combination with other methods or indicators. Thus, there is a greater chance of finding more reliable investment opportunities. Combining different trading strategies can also help eliminate bias in the decision-making process.
This approach is sometimes referred to as merging. Merger traders combine several strategies, taking advantage of the strengths of each. The idea is that trading opportunities provided by combined strategies can be stronger than opportunities provided by only one strategy.
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What influences financial markets?
The price of an asset is determined only by the balance of supply and demand. In other words, it is determined by buyers and sellers. Where supply meets demand, there is a market. But what else can increase the value of a financial asset?
We have already said that fundamental factors (for example, the state of the economy) can be the cause; technical factors (such as the market capitalization of the cryptocurrency); as well as other factors that should be taken into account (for example, market sentiment or recent news).
However, all these are just additional “variables”. In reality, the price of an asset at a particular moment is determined by the balance of supply and demand.
What is a market trend?
The trend is a general aspect of market movement. In technical analysis, market trends are identified using price action, trend line, or even major moving averages.
There are two main trends in the market - up and down. A bull market means a steady uptrend where prices are constantly rising. A bear market means a continuous downward trend where prices are constantly falling.
There are also consolidating, or "lateral" markets without a directed trend.
Note that a market trend does not mean that the price always moves in the direction of the trend. In a protracted bull market, there can be short-term bearish trends and vice versa. This is the nature of market trends. You could say it's a matter of perspective, as it all depends on the time frame you're looking at. In the context of long time intervals, the market will always be more important than in the context of short ones.
The peculiarity of market trends is that they can be determined with absolute certainty only in hindsight. You may have heard of the concept of hindsight bias, where people tend to convince themselves that they accurately predicted an event before it happened. As you can imagine, retrospective bias can have a significant impact on determining market trends and making trading decisions.
What is a market cycle?
You may have heard the expression “the market is cyclical”. A cycle is a pattern or trend that occurs in different periods. Generally, market cycles at higher time frames are more reliable than those at lower ones. But even on an hourly chart, you can find small market cycles, just like looking at decades of data.
Markets are cyclical. Cycles can cause some asset classes to outperform others. At other stages of the same market cycle, the same asset classes may underperform other asset classes due to different market conditions.
It is worth noting that at any current moment it is impossible to understand at what stage of the market cycle we are. The analysis can be performed with high accuracy only after the completion of part of the cycle. Market cycles also rarely have a specific beginning and end, which means that being “here and now” in the context of financial markets is a highly biased point of view.
Financial Markets and Trading Instruments
Content
What is a financial instrument?
What is the spot market?
What is margin trading?
What is the derivatives market?
What are forward and futures contracts?
What are perpetual futures contracts?
What are the options?
What is the Forex market?
What are Binance Leveraged Tokens?
What is a financial instrument?
In simple terms, a financial instrument is a tradeable asset. For example, cash, precious metals (gold or silver), documents confirming the ownership of something (for example, a business or resource), the right to transfer or receive cash, and much more. Financial instruments can be complex, but their essence remains the same: whatever they are and whatever they mean, they can be traded.
Depending on the classification, different types of financial instruments are distinguished. One of the classifications is based on the definition of what kind of instruments they are: basic or derivative. As the name suggests, derivatives derive their value from something else (such as a cryptocurrency). Financial instruments may also be classified as either debt or equity.
But what are cryptocurrencies? We may perceive them in different ways, and they may fall into more than one category. It would be easiest to classify them as digital assets. However, the potential of cryptocurrencies lies in the formation of a completely new financial and economic system.
In this sense, cryptocurrencies form a fundamentally new category of digital assets. Moreover, as the ecosystem develops, many new categories may emerge that otherwise would never have emerged. The first such examples can be seen in the field of decentralized finance (Defi).
What is the spot market?
In the spot market, financial instruments are traded with so-called "instant delivery". Delivery in this context simply means the exchange of a financial instrument for money. This may seem like a minor difference, but in some markets, cash settlement is not instantaneous. For example, if we are talking about the futures market, assets are delivered on a certain date in the future (when the futures contract expires ).
Simply put, the spot market can be thought of as a kind of space where transactions are made "on the spot" ("on the spot"). Because trades are settled immediately, the current market price of an asset is often referred to as the spot price.
What does this mean in the context of the cryptocurrency market? What can you do in Binance Spot Market? You can exchange one coin for another. That is, if you want to exchange BNB for BUSD, then you simply go to the BNB/BUSD spot market and make a deal! Similarly, if you want to exchange BNB for BTC, then you go to the BNB/BTC spot market. As soon as your orders are filled, the coins will be immediately exchanged. And this is one of the easiest ways to trade cryptocurrencies.
What is margin trading?
Margin trading is a way of trading using borrowed funds from a third party. Margin trading increases the results - both positively and negatively. A margin account gives traders greater access to capital and eliminates some counterparty risk. How? The bottom line is that traders can trade with the same position size but hold less capital on a cryptocurrency exchange.
In conversations about margin trading, the terms “margin” and “leverage” often appear. Margin refers to the amount of capital you deposit (i.e. your resources). Leverage means the ratio by which you increase your margin. For example, if you are using 2x leverage, this means that you are opening a position twice the size of the margin. If you use 4x leverage, then the open position is four times the margin, and so on.
However, beware of liquidation. The more leverage you use, the closer the liquidation price is to the entry price. If you are liquidated, you will lose all margin. So, when you start trading on margin, be aware of the high risks associated with it. And before you get started, we strongly recommend that you read the Binance Margin Trading Guide.
Margin trading is widely used in stocks, commodities, and Forex trading, as well as in the bitcoin and cryptocurrencies markets. In more traditional settings, borrowed funds are provided by an investment broker. As for cryptocurrencies, funds are usually provided by the exchange, which charges a commission for financing. However, in some cases, borrowed funds may come directly from other traders on the platform. Typically, this method involves a variable interest rate (funding fee), since it is determined on the open market.
So, we briefly reviewed the concept of margin trading, but you can always expand your knowledge. If you are interested in learning more, read our article “What is Margin Trading?”
What is the derivatives market?
Derivatives (derivative financial instruments) are financial assets whose value is based on some other asset. It can be an underlying asset or a basket of assets. The most common underlying assets are stocks, bonds, commodities, market indices, or cryptocurrencies.
The derivative itself is a contract between several parties. It gets its price from the underlying asset, which is used as a source. Whatever asset is used as a benchmark, the basic idea is that the derived product derives its value from it. Common examples of derivatives are futures contracts, option contracts, and swaps.
According to some estimates, the derivatives market is one of the largest. Why? Derivatives can exist for almost any financial product, even for the derivatives themselves. Yes, derivatives can be created from derivatives. Then, based on these derivatives, others can be created - and so on. Reminds me of a very unstable house of cards, doesn't it? And it's not that far from the truth. It is believed that the derivatives market played a major role in the 2008 financial crisis.
What are forward and futures contracts?
A futures contract is a type of derivative product that allows traders to speculate on the future price of an asset. This refers to the agreement between the parties on the transaction at a later date, called the date of expiration (expiration). As with derivatives, the underlying asset for such a contract can be an asset. The most common examples are cryptocurrencies, commodities, stocks, and bonds.
The expiration date of a futures contract is the last day a particular contract is traded. At the end of that day, the contract expires at the last traded price. The type of performance under the contract is determined in advance and can be either settlement or delivery.
In physical delivery, the underlying asset of the contract is exchanged directly. For example, barrels of oil is delivered. In cash settlement, the underlying asset is not directly exchanged, only the perceived value (in the form of money or crypto currency ) is exchanged.
If you want to trade futures on Binance, be sure to check out the Advanced Guide to Trading on Binance Futures.
What are perpetual futures contracts?
Futures products are a convenient way for traders to speculate on the price of an asset. But what if they want to hold the position even after the futures expire?
For this, perpetual futures contracts have been created. The main difference between them and regular futures contracts is that they do not have an expiration date. Thus, traders can speculate on the price of the underlying asset without worrying about expiration.
However, this creates another problem. What if the price of a perpetual futures contract becomes very far from the price of the underlying asset? Since there is no expiration date, there may be a permanent discrepancy between the price in the perpetual futures market and the price in the spot market.
This is why there is a financing fee for perpetual futures contracts between traders. Let's imagine that the enduring futures market is trading more than the spot market. In this case, the funding rate is positive, meaning long positions (buyers) pay a funding fee to short positions (sellers). This motivates buyers to sell, which causes the price of the contract to fall closer to the spot price. Conversely, if the perpetual futures market is trading lower than the spot market, the funding rate is negative. In this case, short positions are paid by long positions to stimulate the price of the contract to rise.
In summary, with positive funding, longs pay shorts. If funding is negative, shorts pay longs.
Perpetual futures contracts are very popular among traders of bitcoin and other cryptocurrencies. If you want to learn more about perpetual futures contracts, please read the article "What are perpetual futures contracts?".
What are the options?
An option contract is one of the derivative financial instruments that give traders the right (but not the obligation) to buy or sell an asset at a certain price in the future. The main difference between a futures contract and an options contract is that options contracts do not have to be settled.
When traders buy an option contract, they are speculating on price changes.
There are two types of alternative agreements: call and put options. A call bets a price increase, while a put bets a price decrease.
As with other derivatives, options contracts can be based on a variety of financial assets: market indices, commodities, stocks, cryptocurrencies, etc.
Options contracts can include very complex trading strategies and risk management techniques such as hedging. In the context of cryptocurrencies, options can be especially useful for miners looking to hedge their significant crypto holdings. Thus, they are better protected from events that may negatively affect the value of their funds.
If you want to learn more about option contracts, read the article What are options contracts? If you want to trade options on Binance, be sure to read our iOS and Android Options Guide first.
What is the Forex market?
In the foreign exchange market (Forex, FX), traders can exchange the currency of one country for the currency of another. In essence, the Forex market determines the exchange rates for the entire world.
We often think of currencies as a "safe zone" among assets. Even the term " stable eco in " means that in theory the asset is protected from volatility in some way. Partly it is. However, currencies can also experience significant fluctuations in the market. Why? The value of a currency is also determined by supply and demand. In addition, they may be affected by inflation or other market forces associated with global trade and investment, as well as geopolitical factors.
How does the Forex market work? Currency pairs can be traded by investment banks, central banks, commercial companies, investment firms, hedge funds, and retail Forex traders. The Forex market also allows you to convert global currency for international trade settlements.
To increase their profits, Forex traders usually use day trading strategies such as scalping with leverage. What this means, we will consider here a little later.
The Forex market is one of the main building blocks of the modern world economy as we know it. The Forex market is the largest and most liquid financial market in the world.
What are Binance Leveraged Tokens?
Leveraged tokens are tradable assets that provide multiplier-increased exposure to cryptocurrencies without the normal requirements of managing such a position. This means you don't have to worry about margin, collateral, funding, and liquidation.
Leveraged tokens are an innovative financial product that exists only thanks to the power of the blockchain. Initially, leveraged tokens were introduced by the FTX derivatives exchange, then various alternative implementations have appeared. However, the basic idea remains the same: leveraged open position tokenization. What does it mean?
Leveraged tokens are open perpetual futures positions in tokenized form. Remember we talked about how derivatives can be created from derivatives? Leveraged tokens are a prime example of complex derivatives as they derive their value from futures positions, which are also derivatives.
Leveraged tokens are a great way to access more cryptocurrencies. If you're looking to trade leveraged tokens on Binance, check out the Binance Leveraged Token (BLVT) Beginner's Guide.
If you want to learn more about Leveraged FTX Tokens, check out the Beginner's Guide to Leveraged FTX Tokens.
Trading and Investing Strategies
Content
What is a trading strategy?
What is Portfolio Management?
What is risk management?
What is day trading?
What is swing trading?
What is position trading?
What is scalping?
What are diversification and asset allocation?
What is Dow Theory?
What is Elliot Wave Theory?
What is the Wyckoff Method?
What is the buy and hold strategy?
What is investing?
What is demo trading?
What is a trading strategy?
A trading strategy is just a plan that you follow when making trades. There is no single correct approach to trading, so each strategy will largely depend on the profile and preferences of the trader.
Regardless of your approach to trading, developing a plan is critical. It defines clear goals and keeps you on track by giving in to your emotions. When making a plan, you must decide what you are going to trade, how you will do it, and at what points you will enter and exit.
What is Portfolio Management?
Portfolio management involves the formation of a set of investments and their management. The portfolio itself is a group of assets - everything from Beanie Babies to real estate. If you trade exclusively in cryptocurrencies, then your portfolio probably includes bitcoin and other digital coins and tokens in some proportion.
Your first step is to define portfolio expectations. Are you interested in a basket of investments that are relatively immune to volatility, or something riskier that can bring higher returns in the short term?
It is helpful to think about how you want to manage your portfolio. Someone can choose a passive strategy - to distribute investments among assets and not touch them anymore. Others will take an active approach, in which it is necessary to constantly buy and sell assets to make a profit.
What is risk management?
Risk management is paramount to trading success. It starts by identifying the types of risks you may face.
Market risk: the loss you may incur if an asset loses value.
Liquidity risk: Potential losses arising from illiquid markets where it can be difficult to find buyers for certain assets.
Operational risk: Potential losses arising from operational disruptions. They may be due to human error, hardware/software failure, or intentional fraud on the part of employees.
Systemic risk: Potential losses caused by the failures of players in the industry you are investing in, which affects all companies in that sector. For example, in 2008 the collapse of Lehman Brothers caused a cascade effect in the world's financial systems.
As you can see, risk identification begins with a review of the assets in your portfolio. But for it to be effective, it is necessary to take into account both internal and external factors. Then these risks should be assessed. How often do you encounter them? How serious are they?
By weighing the risks and understanding their possible impact on your portfolio, you can rank them and develop appropriate strategies and responses. For example, systemic risk can be mitigated by diversifying into different assets, and market risk can be reduced through stop losses.
Be sure to check out our Financial Risk and Beginner's Guide to Risk Management.
What is day trading?
Day trading, or day trading, is a strategy that involves entering and exiting positions within one day. The term originated in traditional markets given that they are only open for a certain period during the day. There should be no open positions outside of these periods.
Cryptocurrency markets, as you probably know, are always open. You can trade around the clock every day of the year. Therefore, in the context of cryptocurrencies, day trading means a style of trading in which a trader enters positions and closes them within 24 hours.
Technical analysis is often used to determine which assets to trade in day trading. Because profits over such a short period are usually minimal, you can trade a wider range of assets to try and increase it. However, some may trade exclusively in the same pair for years.
This method is a very active trading strategy. It can be highly profitable, but it also comes with significant risk. Thus, day trading is suitable mainly for experienced traders.
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What is swing trading?
With swing trading, you are also trying to profit from market trends, but the time horizon is longer: positions are usually held from a couple of days to a couple of months.
Your goal is to find an asset that looks undervalued and could appreciate. Then you could buy this asset, and then, when its price rises, sell it for a profit. Or you can try to find overvalued assets that should fall in value. Then you can sell some of them at a high price with the expectation that you can buy them again at a low price.
Like day traders, many swing traders turn to technical analysis. But since their strategy covers a longer period, fundamental analysis can also be relevant.
Swing trading is considered to be a more beginner-friendly strategy. It is far less stressful than highly dynamic day trading. If the latter is characterized by quick decision-making and the need to constantly monitor the situation in the market, you can take your time in swing trading.
What is position trading?
Positional (or trend) trading is a long-term strategy. Traders buy assets and hold them for a long period (on the order of several months). Their goal is to profit from the future sale of assets at a higher price.
Positional trades differ from long-term swing trades in the rationale for their placement. Position traders are interested in long-term trends: they are trying to profit from the general direction of the market. On the other hand, swing traders seek to predict “swings” in the market that do not necessarily correlate with the broader trend.
It is not surprising that position traders prefer fundamental analysis simply because their time horizon allows them to follow long-term processes. This does not mean that technical analysis is not used at all. While position traders act with the expectation of a continuation of the trend, the use of technical indicators can alert them to the possibility of a reversal.
Like swing trading, position trading is an ideal strategy for beginners. Again, a longer time horizon leaves more room to think about your decisions.
What is scalping?
Of all the strategies under consideration, scalping operates with the smallest time intervals. Scalpers try to catch small price fluctuations by often entering and exiting positions within minutes (or even seconds). In most cases, they use technical analysis to predict price movements, monitor bid-ask spreads and other weaknesses to make a profit. Due to the short time frames, scalping trades usually give a small percentage of profit: less than 1%. But scalping is a numbers game, so recurring small gains can add up over time.
Scalping is not a strategy for beginners. To be successful, you need to have a deep understanding of the markets, the platforms you trade on, and technical analysis. However, for traders who know exactly what they are doing, identifying the right patterns and taking advantage of short-term swings can be very lucrative.
What are diversification and asset allocation?
The terms "allocation" and "diversification" are usually used interchangeably. You probably know the expression "don't put all your eggs in one basket". Keeping all your eggs in one basket creates a single point of failure—and that includes your assets. Investing all your savings in one asset exposes you to a similar risk. If you invested in the stocks of one particular company and that company went bankrupt, you would lose all your funds in one moment.
Note that this is true not only for individual assets but also for asset classes. In the event of a financial crisis, be prepared for the fact that all your shares will lose value. This is because they are highly correlated in the sense that they tend to follow the same trend.
Good diversification is not just filling a portfolio with hundreds of different digital currencies. Suppose world governments ban cryptocurrencies or quantum computers destroy the public key cryptography schemes used in cryptocurrencies. Any of these events will have a major impact on all digital assets. They, like stocks, constitute a single asset class.
Ideally, the investment should be spread across several classes. This way, if there is a problem with any asset, it will not affect the rest of your portfolio. Nobel Prize winner Harry Markowitz introduced this idea in the form of Modern Portfolio Theory (MPT, or Modern Portfolio Theory). The theory justifies the need to reduce the volatility and risk associated with investing in a portfolio by using non-correlated assets.
If you are interested in this topic, please read the Binance Academy article "Asset Allocation and Diversification" and the Binance Research article "Exploring the Benefits of Diversification with Bitcoin".
What is Dow Theory?
Dow Theory is financial principles modeled after the ideas of Charles Dow. Dow founded the Wall Street Journal and helped create the first US stock indices, also known as the Dow Jones Transportation Average (DJTA) and Dow Jones Industrial Average (DJIA).
Although Dow himself never formalized the theory, it can be seen as a set of market principles presented in his writings. Here are some key takeaways:
Everything is reflected in the price. Dow was a supporter of the Efficient Market Hypothesis (EMH) - the idea that markets reflect all available information about the price of assets.
There are market trends. The Dow is often credited with the concept of market trends as we know them today, distinguishing between primary, secondary, and tertiary trends.
There are three phases of the primary trend. In primary trends, Dow identified the accumulation phase, the participation phase, and the revaluation and distribution phase.
Cross-index correlation. Dow believed that a trend within one index could not be confirmed if it was not observed in another index.
Volume matters. The trend is also confirmed by a large trading volume.
Trends are valid until the reversal. If the trend is confirmed, it continues until the point of a clear reversal.
Of course, one should make a reservation that this is not an exact science, but a theory that may not correspond to reality. Nevertheless, this theory does not lose its influence, and many traders and investors consider it an integral part of their methodology.
If you want to know more, read the article "Introduction to Dow Theory".
What is Elliot Wave Theory?
Elliot Wave Theory (EWT) is the principle that market movements follow the psychology of market participants. Although the theory is used in many technical analysis strategies, it is not an indicator or a specific trading technique. Rather, it is a way of analyzing the structure of the market.
An Elliott wave pattern is usually defined as a series of eight waves, each of which is either impulse or corrective. Five of these waves are impulsive, that is, following the general trend, and three are corrective, that is, moving against the trend.
Patterns also have a fractal property - you can zoom in on one wave and see another Elliot pattern on a smaller scale. Conversely, you may zoom out and find that the pattern you are exploring is also one wave of a larger Elliot wave cycle.
The Elliot Wave Theory has received mixed reviews. Some argue that the methodology is too subjective because traders can identify waves in a variety of ways within the rules. Like Dow Theory, Elliott Wave Theory is not reliable, so it should not be considered an exact science. However, many traders have had great success using EWT in combination with other technical analysis tools.
If you want to know more, read the article "Introduction to Elliot Wave Theory".
What is the Wyckoff Method?
The Wyckoff Method is a massive trading and investment strategy developed by Charles Wyckoff in the 1930s. His work is considered a cornerstone in the development of modern methods of technical analysis in many financial markets.
Wyckoff proposed three fundamental laws: the law of supply and demand, the law of cause and effect, and the law of effort and result. He also formulated the "composite man" theory, which has much in common with Charles Dow's primary trend phases. His activities in this area are especially valuable for cryptocurrency traders.
From a practical standpoint, the Wyckoff Method is a five-step approach to trading. It can be divided into the following steps:
definition of a trend: what it is and where it is moving;
determining the strength of an asset: whether it moves with the market or in the opposite direction;
identifying an asset with growth potential: are there enough reasons to enter a position and is the risk worth the potential return;
assessment of the likelihood of growth: do analysis indicators indicate a possible movement - for example, Wyckoff tests to buy and sell an asset; what is the volume of supply and demand; is the asset ready to move;
determining the time of entry: what is the position of the asset about the general market; what is the best time to enter a position.
The Wyckoff method appeared almost a century ago but remains relevant today. The scope of Wyckoff's research is exceptionally large, so the above abstract should be viewed as a very condensed overview. We recommend that you study his works in more depth, as they are a source of extremely important knowledge in the field of technical analysis. You can start with the article "The Wyckoff Method".
What is the buy and hold strategy?
The "buy and hold" strategy, as the name implies, involves buying and holding an asset. This is a long-term passive strategy whereby investors buy an asset and then keep it regardless of market conditions. A good example in the crypto space is holding, practiced by those investors who prefer to buy and hold for years rather than actively trading.
This strategy can be beneficial for those who choose to invest independently as they don't have to worry about short-term fluctuations or capital gains taxes. On the other hand, it requires patience from the investor and holds on. on the assumption that the asset will not depreciate.
If you want to learn about an easy way to apply this strategy to Bitcoin, read the article “What is Dollar Cost Averaging (DCA)?”.
What is investing?
Index investing can be seen as a variant of the buy-and-hold strategy. As the name implies, an investor seeks to profit from the movement of assets within a certain index. This is done through the self-purchase of assets or by investing in an index fund.
Again, this is a passive strategy. Individuals can also benefit from diversifying across multiple assets without the stress of heavy trading.
What is demo trading?
Paper trading can be carried out following any strategy, the bottom line is that the trader only imitates the purchase and sale of assets. This is especially useful for beginners (as well as experienced traders) to test their skills without risking money.
For example, you may have decided that you have discovered a good strategy for timing Bitcoin's decline, and you now want to try and profit from those declines before they happen. Before risking all your funds, you can test your strategy through paper trading. This can be as simple as writing down the price when you "open" your short and when you close your position. In addition, you can use simulators that mimic popular trading interfaces.
The main advantage of paper trading is that you can test strategies without losing money if something goes wrong. This is the ability to emulate actions with zero risk. Of course, you need to understand that paper trading gives you only a limited understanding of the real environment. It is difficult to reproduce the real emotions you experience when it comes to money. Paper trading without a real simulator can also be misleading about the costs and commissions associated with trading if you do not account for them for specific platforms.
Binance offers a variety of fiat trading options. For example, the Binance Futures test net provides a complete interface. If you create trading bots or programs, you can access the test net of the spot exchange through the API.
Fundamentals of Technical Analysis
Content
What is a long position?
What is shorting?
What is an order book?
What is order book depth?
What is a market order?
What is slippage in trading?
What is a limit order?
What is a stop-loss order?
Who are makers and takers?
What is a bid-ask spread?
What are candlestick charts?
What are candlestick charts?
What is a trend line?
What are support and resistance?
What is a long position?
A long position (or simply long) means buying an asset in anticipation of its price rising. Long positions are often used in the context of derivatives or Forex, but the concept applies to almost any asset class or market type. Buying an asset in the spot market in the hope that its price will rise can also be attributed to opening a long position.
A long position in a financial product is the most common way to invest, especially for beginners. Long-term trading strategies such as buying and holding are based on the assumption that the underlying asset will appreciate. In this sense, using a buy-and-hold strategy is simply a long position over a long period.
However, long did not necessarily mean that a trader expects to benefit from an upward price movement. Let’s take leveraged tokens as an example. BTCDOWN is inversely proportional to the price of bitcoin. If the price of bitcoin goes up, then the price of BTCDOWN goes down. If the price of bitcoin goes down, then the price of BTCDOWN goes up. In this sense, opening a long position on BTCDOWN is tantamount to lowering the price of bitcoin.
What is shorting?
A short position (or short) means selling an asset to buy it back later at a lower price. Shorting is closely related to margin trading, as it can operate with borrowed assets.
However, it is also widely used in the derivatives market and can be realized with a simple spot position. So how does shorting work?
As for shorting in the spot markets, it is quite simple. Let's say you have bitcoin and you expect its price to go down. You sell BTC for USD, expecting to buy it later at a lower price. In this case, when you sell high and plan to buy back low, you enter a short Bitcoin position. Simple enough. But how does debt shorting work? Let's consider.
You borrow an asset that you think will decline in value, such as stocks or cryptocurrencies. You immediately sell it. If the market moves in your favor and the price of the asset goes down, you buy back the same amount of the asset that you borrowed. You repay the loan (with interest) and make a profit from the difference between the price at which you originally sold and the price at which you bought again.
What does shorting bitcoin with leveraged funds look like? Let's consider such an example. We provide the necessary collateral to borrow 1 BTC and then immediately sell it for $10,000. We received $10,000. Let's say the price drops to $8,000. We buy 1 BTC and pay off the debt of 1 BTC with interest. Since we originally sold Bitcoin for $10,000 and are now repurchased for $8,000, our profit is $2,000 (minus interest payments and trading fees).
What is an order book?
An order book (order book, stock glass) is a set of current open transactions for an asset, sorted by price. If you post an order that is not filled immediately, it is added to the order book. It will stay there until filled with another order or canceled.
The order books on each platform are different but generally contain roughly the same information. They display the number of orders at certain price levels.
Concerning cryptocurrency exchanges and online trading, orders in an order book are matched by a system called a matching engine. This system ensures the execution of transactions. Think of it as a kind of brain of the exchange. Along with the order book, this system forms the basis of the concept of electronic exchange.
What is order book depth?
Orderbook Depth (or Market Depth) refers to the visualization of currently open orders in an order book. The chart shows a set of buy orders and a set of sell orders from different sides.
More generally, order book depth refers to the amount of liquidity that an order book can realize. The "deeper" the market, the more liquidity in the order book. In this regard, a market with more liquidity can close larger orders without significantly affecting the price. But if the market is illiquid, large orders can significantly affect the price.
What is a market order?
A market order is an order to buy or sell at the best market price currently available. This is the fastest way to enter and exit the market.
When you open a market order, you are essentially saying, “I want to fill this order right now at the best price I can get. ”
Your market order will fill orders from the order book until it is filled. This is why large traders (or whales ) when using market orders can have a significant impact on the price. A large market order can effectively drain liquidity from the order book. How does it work? Let's take a look at this when discussing slippage.
What is slippage in trading?
It is important to be aware of slippage when using market orders. When we say that market orders fill at the best available price, this means that they fill orders from the order book until the entire order is filled.
But what if there is not enough liquidity at the desired price to fill a large market order? In this case, there may be a large difference between your expected strike price and the actual price. The difference between them is called slippage.
Let's say you want to go long 10 BTC on an altcoin. However, this altcoin has a relatively small market capitalization and trades in a market with low liquidity. If you use a market order, it will continue to fill orders from the order book until the entire order is filled for 10 BTC. In a liquid market, you will be able to fill an order for 10 BTC without significantly affecting the price. In this case, the lack of liquidity means that the order book may not have enough sell orders in the current price range.
Thus, by the time the entire 10 BTC order is filled, you may find that the average price is much higher than expected. In other words, not enough sell orders resulted in your market order being matched with orders that were bidding significantly higher than the initial price.
Always be aware of slippage when trading altcoins - some trading pairs may not have enough liquidity to fill your market orders.
What is a limit order?
A limit order is an order to buy or sell an asset at or above a certain price. This price is called the limit price. Buy limit orders fill at or below the limit price, and sell limit orders at or above the limit price.
When you open a limit order, you are essentially saying, “I want to fill an order at a specific price or higher, but not lower. ”
Using a limit order allows you to have more control over entry and exit points for a particular market. It guarantees that your order will never be filled at a price worse than what you want. However, there is also a downside. The market may never reach your price, leaving the order unfilled. In many cases, this means losing a trading opportunity.
The choice in favor of a limit or market order is individual for each trader. Some traders may use only one or only the other, while others will use both, depending on the circumstances. So that you can make the right decision for yourself at the right time, you need to understand how they work.
What is a stop-loss order?
How does a stop-loss order work? We have already said that stop loss can be both limited and market. This is why varieties include stop limit and stop market orders. The key feature is that the stop loss is activated only when the pre-set price (the stop price) is reached. When the stop price is reached, the order becomes a market or limit order. That is, you set a stop price as a trigger for posting a market or limit order.
But one thing should be remembered. Limit orders are executed only if the current price of the asset is equal to or higher than the limit price. At a lower price, execution does not occur. If you use a stop-limit order as a stop-loss order, then if the market falls sharply, the price can break through the set limit price in an instant, leaving your order unfilled. In other words, the stop price of the order will hit, but it will remain unfilled due to a sharp price drop. This is why stop market orders are considered safer than stop-limit orders. They guarantee that even in extreme market conditions you will sell your assets and close the position as soon as the set price point is reached.
Want to know more? Read the article “What is a stop-limit order?”
Thinking about how to get started with cryptocurrencies? Buy Bitcoin on Binance!
Who are makers and takers?
You become a maker when you post an order that is not immediately filled and added to the order book. Since your order increases the liquidity in the order book, you are the liquidity "creator" (maker).
Limit orders are usually executed as maker orders, but not always. Suppose you place a buy limit order with a limit price that is significantly higher than the current market price. Because the order can be filled at or above the limit price, your order will be filled at the market price (because it is below the limit price you set).
When placing an order with immediate execution, you become a taker. Your order is not added to the order book but is immediately matched against an existing order from the order book. Since you are taking liquidity from the order book, you become a taker. Market orders are always referred to as taker orders because your order is filled at the best market price currently available.
Some exchanges use a tiered fee model to incentivize traders to provide liquidity. Attracting traders with high volumes is one of the most important interests of any exchange. Liquidity breeds more liquidity. In such systems, makers tend to pay fewer fees than takers, since it is the makers who add liquidity to the exchange. In some cases, exchanges may offer maker fee discounts. You can check your current fee level on Binance on this page.
If you are interested in learning more, read our article “Who are makers and takers?”
What is a bid-ask spread?
The spread between the buy and sell price is the difference between the highest buy order price ( bid ) and the lowest sell order price ( offer ) for a given market. It is the gap between the highest price a user is willing to sell at and the lowest price a buyer is willing to buy at.
The spread between buyers and sellers is a way of measuring the liquidity of a market. The smaller the spread between the buy and sell price, the more liquid the market. The bid-ask spread can also be viewed as a measure of supply and demand for a given asset.
When a market buy order is placed, it will be filled at the lowest available sell price. Conversely, when a market order to sell is placed, it will be filled at the highest available buy price.
What are candlestick charts?
A candlestick chart is a graphical representation of the price of an asset in a given timeframe. It consists of candles, each of which represents a certain period. For example, if you select a one-hour timeframe, the chart will display candles, each representing one hour. On a one-day chart, candles mean one day, and so on.
A candlestick consists of four points: open, high, low, and close (these values are also called OHLC). Open and close are the first and last recorded prices within the selected timeframe, while the minimum and maximum are the lowest and highest registered prices, respectively.
Candlestick charts are one of the most important financial data analysis tools. Candles originated in 17th century Japan but were refined in the early 20th century by market trading pioneers such as Charles Dow.
Candlestick chart analysis is one of the most common ways to study the bitcoin market through technical analysis. Want to learn how to read candlestick charts? Check out the article Candlestick Chart. Beginner's Guide".
What are candlestick charts?
Technical analysis is largely based on the assumption that previous price movements can help predict future price movements. So how do you use candlesticks for technical analysis? The task is to identify patterns on candlestick charts and develop trading strategies based on them.
Candlestick charts help traders analyze the market structure and distinguish between bullish and bearish stages of the market. They can also be used to identify areas of interest on a chart, such as support or resistance levels or potential reversal points. These are the places on the chart where you can usually see increased trading activity.
Candlestick patterns are also a great way to manage risk as they provide specific trading setups. How does it work? Candlestick patterns can define clear price targets and points of invalidity. This allows traders to set very precise and controlled trade setups. That is why candlestick patterns are widely used by Forex traders and in the cryptocurrency industry.
The most common candlestick patterns include flags, triangles, wedges, hammers, stars, and do stars. If you want to learn how to understand charts, check out the following Binance Academy articles: "12 Popular Candlestick Patterns Used in Technical Analysis" and "A Beginner's Guide to Classic Chart Patterns".
What is a trend line?
Trendlines are a tool widely used by both traders and technical analysts. These are lines that connect specific data points on a chart. This is usually price data, but not always. Some traders may also use trendlines for technical indicators and oscillators.
The main purpose of trendlines is to visualize certain aspects of price action. In this way, traders can determine the general trend and structure of the market.
Some traders use trendlines solely to better understand the structure of the market. Some use them to create effective trading strategies based on how trendlines interact with a price.
Trendlines can be applied to a chart on any timeframe. However, as with any other market analysis tool, trend lines on higher time frames are usually more reliable than those on lower ones.
Another important aspect is the strength of the trend line. According to the traditional definition, a trend line must touch price at least two or three times to become valid. As a rule, the more times the price has touched ( tested ) the trend line, the more reliable it is considered.
If you want to learn more about how to draw trendlines, read the Trendlines article.
What are support and resistance?
Support and resistance are some of the most basic concepts related to trading and technical analysis.
Support means the level at which the price breaks the floor. In other words, a support level is an area of significant demand that buyers enter and push the price up.
Resistance means the level at which the price reaches the "ceiling". A resistance level is an area of significant supply that sellers enter and push the price down.
You now know that support and resistance are levels of excess demand and supply, respectively. However, many other factors come into play when calculating support and resistance.
The potential value of support and resistance levels can also be indicated by technical indicators such as trendlines, moving averages, Bollinger bands, Ichimoku clouds, and Fibonacci retracement. Even aspects of human psychology are used. This is why traders and investors incorporate support and resistance into their trading strategies in different ways.
Would you like to learn how to draw support and resistance levels on a chart? Read the article "Introduction to Support and Resistance Levels".
Technical Analysis Indicators
What is an indicator in technical analysis?
Technical indicators calculate metrics related to financial instruments. This calculation can be based on price, volume, series data, open interest, social metrics, or even other indicators.
As we said earlier, technical analysts base their methods on the assumption that historical price patterns can determine future price movements. Thus, traders using technical analysis can use a set of technical indicators on a chart to identify potential entry and exit points.
Technical indicators can be classified in several ways. Some indicators point to future trends ( leading indicators ), confirm an already existing pattern ( lagging indicators ), or refine events in real-time ( coinciding indicators ).
Other classifications characterize indicators in terms of the presentation of information. According to this classification, there are trend indicators that overlay data on the price, and there are oscillators that fluctuate between the minimum and maximum value.
There are also specific types of indicators that aim to measure a particular aspect of the market, such as momentum indicators. As the name suggests, they aim to measure and display market dynamics.
Which of the existing technical analysis indicators is the best? There is no easy answer to this question. Traders can use a variety of technical indicators and their choice depends largely on their trading strategy. However, to make this choice, they must first know. This will be the subject of the next chapter.
Leading and lagging indicators
As we have said, different indicators have different qualities and should be used for specific purposes. Leading indicators indicate future events. Lagging indicators are used to confirm what has already happened. How should they be used?
Leading indicators are usually useful for short to medium-term analysis. They are applied when analysts assume a trend and are looking for statistical tools to confirm their hypothesis. When it comes to the economy, leading indicators can be especially useful for predicting periods of recession.
As far as trading and technical analysis are concerned, leading indicators can also be used for forecasting. However, no specific indicator can predict the future, so such forecasts should always be treated with a grain of salt.
Lagging indicators are used to confirm events and trends that have already happened or are happening. They may seem redundant, but they can also be very helpful. Lagging indicators draw attention to certain aspects of the market that would otherwise remain hidden. Thus, lagging indicators are usually used to analyze long-term charts.
Want to know more? Read the article "Leading and lagging indicators".
What is a momentum indicator?
Momentum indicators measure and display market momentum. What is market momentum? In simple terms, it is a measure of the rate of price change. Momentum indicators aim to measure the rate at which prices rise or fall. They are typically used in the short-term analysis by traders looking to profit from high volatility spikes.
The goal of a momentum trader is to enter trades when momentum is high and exit when market momentum begins to fade. If the volatility is low, the price is usually locked in a small range. As tension builds, the price often makes a strong impulsive move, eventually breaking out of the range. This is what momentum traders use.
After the movie is over and traders get out of their positions, they switch to another asset with high momentum and try to play the same pattern. As such, momentum indicators are widely used by day traders, scalpers, and short-term traders looking for fast trading opportunities.
What is trading volume?
A typical indicator is trading volume. It shows the number of orders traded in a pair with an asset over a certain period. In other words, it shows how much of the asset changed hands during the measured time.
Some consider trading volume to be the most important technical indicator. “Volume precedes price” is a well-known phrase in the trading world. It is understood that a large trading volume is a leading indicator indicating a large price movement (regardless of direction).
Using the trading volume indicator, traders measure the strength of the main trend. If high volatility is accompanied by high trading volume, this can be considered a confirmation of the move. And here it makes sense: high trading activity means significant volume since many traders and investors are active at a particular price level. If the volatility is not accompanied by a large trading volume, the main trend can be considered weak.
Price levels with historically high volume can also be a good potential entry or exit point for traders. As history tends to repeat itself, there may be increased trading activity at these levels. Ideally, support and resistance levels should also be accompanied by an increase in volume, confirming the strength of the level.
What is the Relative Strength Index (RSI)?
The Relative Strength Index (RSI) is an indicator that shows whether an asset is overbought or oversold. This is a momentum oscillator that shows the rate of price change. It is given a range of 0 to 100 and is usually displayed as a line on a graph.
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