During the Bitcoin boom of 2017, everyone thought it was easy to buy and sell cryptocurrencies. In fairness it was, simply because the value of almost every coin was surging like never before. Inevitably, that attracted millions of investors who, for the most part, didn’t know what they were doing. Even though many crypto prospectors didn’t know anything about online trading, they made hay while the sun was shining. Unfortunately, when the surge stopped and storm clouds gathered, the inexperienced were the first to get wet.
Even though Bitcoin et al may be different from traditional tradable assets, the fundamentals of how to buy and sell are the same. What we’re saying is that you need to know the basics of online trading if you want to enter the cryptocurrency markets. With that in mind, we’ve put together a quick glossary of trading terms you should know. To inform this discussion, we’ll take ideas from the forex trading world and blend them with cryptocurrency ideas.
Now, you might be asking, what is forex trading and why are we referencing it? In simple terms, forex trading is where you speculate on the value of a currency changing in relation to another. Given that cryptos are a form of digital currency, it makes sense to use forex as an anchor point for the rest of this discussion. So here are three trading terms you need to master:
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Asset: an asset is the thing you’re looking to buy or sell, i.e. trade. An asset never has a fixed value and it is through these shifts in value that you will determine your profits or losses.
Leverage: According to online broker IG, leverage allows you to enter a market position without having to commit the full amount of capital. In other words, a broker will multiply your investment by a certain number so that you can trade at a market level. Leverage is useful in this regard but it can also magnify small price movements which can lead to large losses.
Learning from this concept, we can think about the idea of crypto trading and the impact of swings. Basically, you need to invest at a suitable level. Leverage allows you to hold a larger market position than you would otherwise be able to get. However, it can expose you to bigger risks. The lesson here is not to overstretch yourself. Yes, pushing to your financial limit can make the highs higher. However, it will also make the lows a lot lower.
Pips: Perhaps the most important concept you should take from forex trading is pips. Currency values are measured on a microscopic scale. In practice, this means traders typically focus on the movements of the fourth decimal place of a currency e.g. $1.3465. In that example, the movement of the “5” will determine a trader’s profit or loss.
Yes, other digits can move. However, because forex trading is often conducted on a daily basis, the process is granular. In other words, you’re looking at small changes by the minute. Because major currencies don’t have major value shifts over short periods of time, focusing on pips is necessary. What you can learn from this as a crypto trader is that small movements matter.
During the Bitcoin boom, everyone was thinking in dollar amounts, i.e. was the price going to move from $1,000 to $2,000 in a month. That may have been the case then, but it won’t always be the case. Indeed, even today, incremental changes are becoming more important. Therefore, as a trader, you need to think about micro-movements rather than large jumps. In fact, this is going to become more important as the markets mature. When cryptos solidify their mainstream status, volatility will drop.
This means profits and losses will be based on pips rather than whole amounts. Learning to think like a forex trader in this regard could be one of the best ways to get ahead of the game and improve your success rate in the crypto markets.
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