The Beginner’s Guide to Bitcoin Trading
Lots of people have entered the Bitcoin space because they’ve heard about the various ascents and declines in its value relative to other currencies like the Dollar and Euro. This post attempts to give a basic primer to newcomers who are looking to begin learning about Bitcoin trading.
Important Disclaimer: Bitcoin can be highly volatile and subject to significant price swings. You should trade Bitcoin at your own risk. Never trade more than you can afford or are willing to lose. This post is not investment advice nor should it be utilize it as such. You are the only one responsible for any money you may/may not gain and all the money that you may/may not lose, no one else is. By reading on you confirm that you are in 100% agreement with the above. All good? Ok, let’s roll.
Selecting a Trading Platform
There are several trading platforms available today where you can begin trading Bitcoin, such as Coinbase Exchange, Bitstamp, itBit or Bitfinex. For the purposes of this post, we are going to use Bitstamp. If you don’t have a Bitstamp account, you can sign-up here. When you create the account, you will need to provide some basic information to confirm your identity. This is standard practice across the Bitcoin space. Bitcoin companies have to comply with what are known as “KYC/AML” regulations, Know Your Customer and Anti-Money Laundering regulations. From there, you can fund your Bitstamp account with the amount of money you are wanting to begin trading Bitcoin with.
New Vocabulary Words
Alright, so your account is funded and you’re ready to trade some Bitcoin. Wait right there – before you begin trading any Bitcoin, it’s important to start to familiarize yourself with some basic trading terms you are no doubt going to be seeing at some point as you endeavor ahead.
Orders: Bitcoin trading platforms are comprised of buyers and sellers of Bitcoin. Buyers and Sellers meet each other and interact around what are known as Orders. These are buys and sells that have been submitted to the trading exchange by these aforementioned users (note: users aren’t just humans, they can be automated trading robots), buying and selling Bitcoin. Open orders are orders that have not been completed. It’s important to note that just because an order is “open” does not mean it will be completed (also known as “filled”). Lastly, just because an order is open does not mean that it will be completely filled. Sometimes, orders are “partially filled” at different prices. Closed orders on the other hand, are orders that have been completely filled.
Bid and Ask: Orders are composed of “Bid” or “Ask” prices. A bid price is the amount as which a buyer (again, not always human) wants to purchase Bitcoin at. An ask price, on the other hand, is the amount at which a seller wants to redeem Bitcoin at. Trading platforms, like Bitstamp, are platforms that match these buyers and sellers together to fill and complete open orders.
Reading The Chart
Many traders have their own style of buying and selling Bitcoin. Opinions about how you should orient your trading style are about as numerous as the amount of traders. That said, it is this post’s opinion that as a Beginner, your trading should always center around reading the chart. This is the chart displaying the trend of the Bitcoin price over various periods of time.
You, as a trader, can customize the date range for which you are viewing a chart. On Bitstamp, this can be done in the top-right corner of the chart. A good initial perspective to view a chart as a beginner is “1d” which means you want to see the price of Bitcoin on the chart, by day – one day at a time.
You no doubt at this point have probably noticed the weird looking bars that are red and green on the chart. These are called candlesticks. This is the most popular chart-type traders use. If you’d like to see other chart-types, simply select from the “Type” drop-down in the top-right corner of your chart. For the purposes of this post, we will continue with keeping the chart as is, as a candlestick chart.
First, recall in this post that we set the time range on our chart to 1 day. Therefore, each candlestick represents one day of Bitcoin price action. This is called a “tick”. Each day is one tick on the chart. A tick time span will change based on the time interval you are viewing a chart at. When you are looking at a chart you are also looking at a “ticker.”
Next, on each candlestick you will also see that there is a thin line (kind of like a “wick” in a candle). The top of the line represents the highest the Bitcoin price was on that day. Conversely, the bottom of the line represents the lowest the Bitcoin price was on that day.
Another characteristic you will notice on each candlestick is a vertical rectangle that is either solid or empty on the inside. The ones that are empty on the inside are green and the ones that are solid on the inside are red. On a green candlestick, the bottom of the rectangle indicates the price of Bitcoin at the beginning of the tick and the top of the rectangle indicates the price at the top of the tick – it is green and empty on the inside because the price went up on that tick. Conversely, in a red candlestick, the top of the rectangle indicates the price of Bitcoin at the beginning of the tick and the bottom of the rectangle indicates the price at the end of the tick – it is red and solid on the inside because the price went down on that tick.
Candlesticks are useful because they give you, the trader, a full and complete perspective of what happened with the Bitcoin price for each tick during the time frame you are analyzing.
Technical analysis is a technique traders employ, in which they analyze historical price movements to identify patterns that may indicate a future price pattern that can be used as part of a trading strategy. There are many different technical analysis techniques, in this post we will just highlight a few of the most popular ones.
On Bitstamp, in the Chart section of the Tradeview, you can choose “Select Tool” to in effect, “draw” on top of the chart you are viewing. We are going to focus on a basic tool for beginners, the “Line” tool.
Using the Line tool, let’s try to identify some trends. On any given day Bitcoin is going be in an “upward trend” or “downward trend” – we’ll use the Line tool to identify “trading ranges” and “price patterns” so that we can try to determine future price action.
Here is an example that we’ve drawn on the Bitstamp 1-Day Ticker, that started in Mid-April and ended right before the beginning of June:
To recreate this, make sure that the Bitstamp Chart is set to “1d” on the time frame, and zoom out on the chart so you can see “feb” to “jun” on the y-axis of the chart. The line tool can then be used to draw a line across the top of the candlesticks to establish the top of the trading range and upward trend. You can then draw a second line across the bottom of the candlesticks to establish the bottom of the trading range in this upward trend.
Some traders will disagree, but as a general rule, to establish a trend line, you should look for the tops and bottoms of 3 candlestick wicks touching your line, with no more than one candlestick wick poking through the line. The points at which the candlestick wicks are touching the top trend line are places where traders refer to Bitcoin finding “resistance” – where Bitcoin’s price seems to be peaking and pivoting back down as it trends. Now, go ahead and look for the bottoms of 3 candlestick wicks to establish your bottom trend line (again, with no more than one wick poking through the line). The points at which the candlestick wicks are touching the bottom trend line are places where traders refer to Bitcoin finding “support” – where Bitcoin’s price seems to be bottoming out and pivoting back up as it trends.
You should now have established a trading range on your chart, where you can see the price of Bitcoin going up and down in a clearly defined range. The trading strategy most beginning traders will employ here, is to buy Bitcoin at the bottom of the trading range, and sell Bitcoin at the top of the trading range and wait for it to bottom out in the range again before buying back in.
Note on the right side of the chart we’ve created, that in June, the wick violates our trend line, and then the very next day the entire candle falls out of our trading range. This is called a “sell indicator” – that Bitcoin is not going to come back into our trading range and we should consider staying in cash (not trading) until we can identify what the new trend is, a downward trend, for example. Conversely, if Bitcoin had passed through our top trend line and done the opposite of what we observed in the chart, this would have been called a “breakout” – a sign that we should hold until we observe the price pivot out of the breakout and start to head back down (usually confirmed within 1-2 ticks, assuming we’re still looking at this 1d chart).
Downward trends are just like upward trends except they reflect a falling price action over time instead of a rising price action like in the above example. You can still trade within a downward trend because just like in an upward trend, we can look to buy as Bitcoin within the trading range as it finds its support, and sell when it finds its resistance, even though over time the price may be falling (each subsequent resistant point being lower than the previous one over time).
When establishing trend lines it’s important to note that we might not always have symmetrical trend lines. For example, observe the following chart:
This is called a descending triangle. It means that the price trend is falling over time and entering a narrower and narrower trading range as it goes.
The goal in technical analysis for a beginner trader should always be to identify support and resistance levels so that ranges can be established. In this particular example it would probably be best to wait to see if the price breaks out or collapses (like it ends up doing), before opening a position. There are also several common price patterns that should also be sought after that can also be used to work towards determining future price action. These are:
- Double Top Pattern
- Triple Top Pattern
- Double Bottom Pattern
- Triple Bottom Pattern
- Head and Shoulders Pattern
- Inverse Head and Shoulders Pattern
We won’t cover these patterns in this post, but here’s a great article that does. Beginning traders should look for these patterns in their technical analysis.
Wow, all this talk so far and no trading. Don’t worry, we’re getting there – if you’ve read this far, you already know more than a lot of people that have bought Bitcoin over the past year, or ever, for that matter. That said, we’re almost done with this post.
When you buy Bitcoin, you can say that you are “opening a position at ‘X’ price.” As long as you are holding Bitcoin, you can say that you have a “position.” Once you sell your Bitcoin, you can say that you have “closed your position at ‘Y’ price.” X & Y, of course, being the prices you bought in and sold at.
Now, assuming you’ve funded your account and you’re ready to trade, There are a few rules we go by that we would like to share with you in case helpful:
- Never buy Bitcoin at Instant/Market, always use Limit Orders. Limit Orders tell the trading platform to only fill an order as long as Bitcoin is above a certain price. Even if you want to buy at the current market price, look it up, and use that as your limit. This protects you from having your order filled in the middle of any unexpected freak price swing which could result in you losing money.
- Immediately set Stop Orders after creating Limit Orders. Stop Orders tell the trading platform to automatically sell your Bitcoin if the price of it falls below a certain amount. We usually calculate our sell price to be approx. 3% below the price we are buying Bitcoin at. This means, that as soon as Bitcoin falls below our sell price our position will automatically try to close itself. This is super-important because it helps protect from catastrophic price swings to minimize our losses.
- Never Dollar Cost Average Down. Some people when they lose money on Bitcoin, will immediately as a knee-jerk reaction, buy more at the lower price to lower their breakeven point. This is bad bad bad. Bad. We have never observed this to be a winning strategy over time.
- Don’t Trade the News, Use Technical Analysis.
These are four of the five most important rules we look to.
The final rule deserves its own section.
Always keep track of your gains and losses over time. One of the best way to do this is to use LibraTax for Individuals. You might have noticed the word “Tax” in the name, but this won’t be the primary use case for what we’re signing up for at the moment. This is because you can use LibraTax import your trading activity from almost any major trading platform or exchange to have quick snapshots of your gains and losses over time. You can also use it anonymously and it’s free to sign-up.
Additionally, you can keep keep notes for each transaction that help you chronicle your strategy over time. It’s always good to regularly review your trades to identify positive patterns in your technical analysis that led to gains, as well as to identify incorrect assertions or charting mistakes as well. Some traders also notate their emotion/mood at the time trades were entered as well.
While this beginner’s guide is by no means comprehensive, we hope it has been helpful in determining what path you would like to take next in your upcoming trading adventures. If you’d like to connect with other Bitcoin traders to ask questions and learn more, consider checking out the Whale Club – it’s a great place to start.
May the winds of upward trends always be at your back! 🙂