Complete Guide to Cryptocurrency Trading for Beginners

What is trading?

Trading is a fundamental economic concept involving the buying and selling of assets. These can be goods and services, for which the buyer pays compensation to the seller. In other cases, the transaction may involve the exchange of goods and services between the parties.

In the context of financial markets, the assets traded are called financial instruments. These can be stocks, bonds, currency pairs in the Forex market, options, futures, margin products, cryptocurrencies and many others. If these terms are new to you, don't worry: we'll explain them all in this article.

The term "trading" is commonly used to refer to short-term trading, where traders actively enter and exit positions over relatively short periods of time. However, this is a slightly misleading assumption. In fact, trading can refer to a wide range of different strategies, such as day trading, swing trading, trend trading and many others. But do not worry. We'll look at each of these in more detail later.

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What is an investment?

Investing is the allocation of resources (such as capital) with the intention of generating a profit. This may involve using the money to finance and launch a business or purchasing land with the aim of reselling it later at a higher price. In financial markets, this usually involves investing in financial instruments with the hope of selling them later at a higher price.

The expectation of a profit is at the heart of the concept of investing (also known as ROI). Unlike trading, investing generally takes a longer-term approach to wealth accumulation. An investor's objective is to build wealth over a long period (years, even decades). There are many ways to do this, but investors will generally use fundamental factors to find potentially attractive investment opportunities.

Due to the long-term nature of their approach, investors are generally not concerned with short-term price fluctuations. Therefore, they will generally remain relatively passive, without worrying too much about short-term losses.

What is the difference between trading and investing?

Traders and investors seek to generate profits in financial markets. Their methods of achieving this goal, however, are quite different.

Typically, investors look to generate a return over a longer period of time - think years or even decades. As investors have a longer time horizon, the returns they target for each investment tend to be greater as well.

Traders, on the other hand, try to take advantage of market volatility. They enter and exit positions more frequently, and may seek lower returns on each trade (since they often make multiple trades).

Which is better? What suits you best? It's up to you to decide. You can start learning about the markets and then learn by doing. Over time, you will be able to determine what best suits your financial goals, your personality and your trading profile.

Take a look at the latest bitcoin (BTC) quotes.

What is fundamental analysis (FA)?

Fundamental analysis is a method of evaluating the valuation of a financial asset. A fundamental analyst studies economic and financial factors to determine whether an asset's value is fair. These may include macroeconomic circumstances such as the state of the economy as a whole, sectoral conditions, or activity related to the asset (if applicable). The latter are often followed by leading and tracking macroeconomic indicators.

Once fundamental analysis is completed, analysts look to determine whether the asset is undervalued or overvalued. Investors can use this conclusion when making their investment decisions.

In the case of cryptocurrencies, fundamental analysis can also include an emerging field of data science that focuses on public blockchain data called on-chain metrics. These metrics can include the network hash rate, the list of largest holders, the number of addresses, transaction analysis, and many others. Using the abundance of data available on public blockchains, analysts can create complex technical indicators that measure certain aspects of the overall health of the network.

While fundamental analysis is widely used in the stock market or Forex, it is less suited to cryptocurrencies in their current state. This asset class is so new that there simply is no standardized, comprehensive framework for determining market valuations. Additionally, much of the market is driven by speculation and narrative. Thus, fundamental factors will generally have negligible effects on the price of a cryptocurrency. However, more precise ways of thinking about the valuation of cryptoassets may be developed once the market reaches maturity.

What is technical analysis (TA)?

Technical analysts work with a different approach. The key idea of ​​technical analysis is that past price movements can indicate how the market will behave in the future.

Technical analysts do not attempt to determine the intrinsic value of an asset. Instead, they look at past trading activity and attempt to identify opportunities based on that. This can include analyzing price action and volume, charting analyses, using technical indicators, and many other charting tools. The purpose of this analysis is to assess the strength or weakness of a given market.

That said, technical analysis is not just a tool for predicting the likelihood of future price movements. It can also be a useful tool for risk management. Because technical analysis provides a model for analyzing market structure, trade management is more defined and measurable. In this context, measuring risk is the first step to managing it. This is why some technical analysts may not be considered traders in the strict sense. They can use technical analysis only for risk management.

The practice of technical analysis can be applied to any financial market, and it is widely used by cryptocurrency traders. But does technical analysis work? As we mentioned earlier, the valuation of cryptocurrency markets is mainly due to speculation. This makes it an ideal playground for technical analysts, as they can thrive by considering technical factors alone.

Fundamental analysis or technical analysis - which is better?

It entirely depends on your trading strategy. In fact, why not use both? Most market analysis methods work best when combined with other methods or indicators. It therefore becomes possible to find more reliable investment opportunities more easily. Combining different trading strategies can also help you eliminate bias from your decision-making process.

This concept is sometimes called convergence. Convergence traders combine several strategies into one that exploits the advantages of all of these strategies. The idea is that the trading opportunities presented by the combination of these strategies may be of higher quality than those provided by a single strategy.

Do you want to get started with cryptocurrencies? Buy Bitcoin on Binance!

What are the drivers of financial markets?

The price of an asset is simply determined by the balance between supply and demand. In other words, it is determined by buyers and sellers. When supply meets demand, a market exists. But what other elements can determine the value of a financial asset?

As we have already discussed, there may be fundamental factors, such as the state of the economy. In addition, there may be technical factors such as the capitalization of a cryptocurrency. Additionally, there may be other factors to consider, such as market sentiment or news.

However, these are just the factors to consider. What actually determines the price of an asset at any given time is simply the balance between supply and demand.

What is a market trend?

A market trend is the general direction of an asset's price. In technical analysis, market trends are typically identified using price movements, trendlines, or even key moving averages.

In general, there are two main types of market trends: uptrends and downtrends. A bull market consists of a sustained uptrend, where prices continually rise. A bear market consists of a sustained downward trend, where prices continually decline. Additionally, we can also identify consolidating or "sideways" markets, where there is no clear directional trend.

Bitcoin has been in a bull market throughout its existence.

It should be noted that a market trend does not mean that the price is always moving in the direction of the trend. A prolonged bull market is accompanied by smaller bearish trends, and vice versa. This is simply the nature of market trends. It's a question of perspective, because it all depends on the period you are studying. Market trends over longer periods of time will always be more important than market trends over shorter periods of time.

One peculiar thing about market trends is that they can only be determined with absolute certainty in retrospect. You may have heard of the concept of hindsight bias, which refers to the tendency of people to convince themselves that they accurately predicted an event before it happened. As you can imagine, hindsight bias can have a big impact on the process of identifying market trends and trading decisions.

What is a market cycle?

You may have heard the expression “The market moves in cycles”. A cycle is a pattern or trend that appears at different times. In general, market cycles on higher time frames are more reliable than market cycles on lower time frames. But you can possibly find small market cycles on an hourly chart, just like you can when you look at decades of data.

Markets are cyclical in nature. Cycles can cause some asset classes to outperform others. In other segments of the same market cycle, these same asset classes may underperform other asset types due to different market conditions.

It should be noted that it is almost impossible to determine at any point where we currently are in a market cycle. This analysis can only be carried out with great precision after the conclusion of this part of the cycle. Market cycles also rarely have a proper beginning and end. It turns out that being in the present moment provides a very skewed perspective on financial markets.

If you want to learn more about market cycles, check out The Psychology of Market Cycles.

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Chapter 2 – Financial markets and trading tools

Summary

• What is a financial instrument?

• What is the spot market?

• What is margin trading?

• What is the derivatives market?

• What are futures contracts?

• What are perpetual futures contracts?

• What are options contracts?

• What is the foreign exchange market (Forex)?

• What are leveraged tokens?

What is a financial instrument?

Simply put, a financial instrument is a tradable asset. For example, this could be cash, precious metals (such as gold or silver), a document confirming ownership of something (such as a business or resource), a right to delivery or receipt of money, and many more. Financial instruments can be very complex, but the basic idea is that they can be traded.

Financial instruments are divided into categories by different classification methods. One of the classifications is based on whether they are cash or derivative instruments. As the name suggests, derivatives derive their value from something else (like a cryptocurrency). Financial instruments can also be classified as debt or equity based.

But where are the cryptocurrencies? We can look at them in many ways, and they can fit into more than one category. The simplest classification is that they are digital assets. However, the potential of cryptocurrencies lies in the creation of an entirely new financial and economic system.

In this sense, cryptocurrencies constitute a completely new category of digital assets. Additionally, as the ecosystem evolves, many new categories can be created that would not otherwise be possible. We can already see the first examples of this in the decentralized finance (DeFi) space.

What is the spot market?

The spot market is where financial instruments are traded for what is called “immediate delivery”. In this context, delivery simply means exchanging the financial instrument for cash. This may seem unnecessary, but some markets are not instantly settled in cash. For example, when we talk about futures markets, the assets are delivered at a later date (when the futures contract expires).

In simple terms, a spot market can be considered to be where transactions are carried out “in real time”. Because trades settle immediately, the current market price of an asset is often called the spot price.

So what does this mean in the context of cryptocurrency markets? What can you do on Binance Spot Market? You can trade cryptos with each other. So, if you want to trade BNB for BUSD, all you need to do is go to the BNB/BUSD spot or spot market! Likewise, if you want to exchange your BNB for BTC, you need to go to the BNB/BTC spot market. Once your orders are executed, your cryptos will be exchanged instantly. This is one of the easiest ways to trade cryptocurrencies.

What is margin trading?

Margin trading is a method of trading using funds borrowed from a third party. Indeed, margin trading amplifies results, both up and down. A margin account gives traders greater access to capital and eliminates some of the counterparty risk. How so ? Well, traders can trade the same position size while retaining less capital on the cryptocurrency exchange.

When talking about margin trading, you will often hear the terms margin and leverage. Margin refers to the amount of capital you put on the line (i.e. the amount you take out of your own pocket). Leverage is the factor with which you amplify your margin. So if you use 2x leverage, that means you are opening a position that is double your margin amount. If you use 4x leverage, you open a position that is four times your margin value, etc.

However, be careful with liquidation. The higher leverage you use, the closer the liquidation price is to your entry price. If you are liquidated, you risk losing all your margin. So keep in mind the high risks of margin trading before you start. The Binance Margin Trading Guide is an essential resource that you should consult before getting started.

Margin trading is widely used in stocks, commodities and Forex, as well as the Bitcoin and cryptocurrency markets. In a more traditional context, borrowed funds are provided by an investment broker. When it comes to cryptocurrencies, funds are usually lent by the exchange in exchange for a funding fee. In other cases, however, the borrowed funds may come directly from other traders on the platform. This usually results in a variable interest rate (financing charge), as the rate is determined by an open market.

So, we have briefly explained what margin trading is, but there is still more knowledge to learn. If you want to learn more, check out What is Margin Trading?.

What is the derivatives market?

Derivatives are financial assets that base their value on something else. This can be an underlying asset or a basket of assets. The most common types are stocks, bonds, commodities, stock indices or cryptocurrencies.

The derivative product itself is essentially a contract between several parties. Its price comes from that of the underlying asset, which serves as a reference. Regardless of the asset used as a reference point, the main concept is that the derivative derives its value from it. Common examples of derivatives include: futures contracts, options contracts and swaps.

By some estimates, the derivatives market is one of the largest markets in the world. Why that ? Well, derivatives can exist for virtually any financial product, even the derivatives themselves. Yes, derivatives can be created from derivatives. Then derivatives can be created from these derivatives, etc. Does this look like a rickety house of cards ready to collapse? Well, maybe that's not that far from the truth. Some argue that the derivatives market played a major role in the 2008 financial crisis.

What are futures contracts?

A futures contract is a type of derivative that allows traders to speculate on the future price of an asset. It involves an agreement between the parties to settle the transaction at a later date called the expiration date. As we have seen with derivatives, the underlying asset of such a contract can be any asset. Some common examples include: cryptocurrencies, commodities, stocks and bonds.

The expiration date of a futures contract is the last day that trading activity is possible for that specific contract. At the end of that day, the contract expires at the last price traded. The payment of the contract is determined in advance, and it can be in cash or physically delivered.

When physically delivered, the underlying asset of the contract is directly exchanged. For example, barrels of oil are delivered. When settled in cash, the underlying asset is not exchanged directly, but only the value it represents (in the form of cash or cryptocurrencies).

If you are interested in trading futures on Binance, be sure to check out The Ultimate Guide to Trading Futures on Binance.

What are perpetual futures contracts?

Futures products are a great way for traders to speculate on the price of an asset. However, what if they want to stay in their position even after the expiration date?

This is where perpetual futures come into play. The main difference between these and regular futures contracts is that they never expire. Thus, traders can speculate on the price of the underlying asset without having to worry about expiration.

However, this presents a problem of its own. What happens if the price of the perpetual futures contract is far removed from the price of the underlying asset? Since there is no expiration date, the perpetual futures market could exhibit significant and ongoing disparity with the spot market.

This is why perpetual futures implement funding fees paid between traders. Let's imagine that the perpetual futures market trades at a higher rate than the spot market. In this case, the funding rate will be positive, meaning that long positions (buyers) pay funding fees to short positions (sellers). This encourages buyers to sell, driving the contract price lower and closer to the spot price. Conversely, if the perpetual futures market trades lower than the spot market, the funding rate will be negative. This time, short positions pay long ones to incentivize the contract price to increase.

In summary, if funding is positive, long positions pay short positions. When the funding rate is negative, short positions pay long ones.

Perpetual futures contracts are very popular among Bitcoin and cryptocurrency traders. If you would like to learn more about perpetual futures, visit  What Are Perpetual Futures?.

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What are options contracts?

An options contract is a type of derivative that gives traders the right, but not the obligation, to buy or sell an asset in the future at a specific price. The main difference between a futures contract and an options contract is that traders are not obligated to settle option contracts.

When traders buy an options contract, they speculate on whether the price will move in a given direction.

There are two types of options contracts: call options and put options. A call option allows you to bet on an increase in price, while a put option allows you to bet on a decrease in price.

As with other derivative products, options contracts can be based on a wide variety of financial assets: stock indices, commodities, stocks, cryptocurrencies, etc.

Options contracts can enable very complex trading strategies and risk management methods, such as hedging. In the context of cryptocurrencies, options could be useful especially for miners who want to hedge their large cryptocurrency positions. This way, they are better protected against events that could have a negative impact on their funds.

If you want to learn more about options, see What is an option contract?. If you want to trade options on Binance, first read our options guide for iOS and Android.

What is the foreign exchange market (Forex)?

The foreign exchange market (Forex, FX) is where traders can exchange the currency of one country into another. In essence, the Forex market determines the exchange rates of currencies around the world.

We often think of currencies as “safe haven” assets. Even the term “stablecoin” should mean, in theory, that the asset is immune to volatility. However, while this is true to some extent, currencies can also experience significant market fluctuations. How is it possible ? The value of currencies is also determined by supply and demand. In addition, they may also be influenced by inflation or other market forces related to international trading and investments, as well as geopolitical factors.

How does the Forex market work? Currency pairs can be traded by investment banks, central banks, private companies, investment firms, hedge funds and retail Forex traders. The Forex market also allows global currency conversions for international trade settlements.

Forex traders typically use day trading strategies, such as leveraged scalping, to amplify their returns. We'll see how this works later in this article.

The Forex market is one of the main fundamental elements of the modern global economy as we know it. In fact, the Forex market is the largest and most liquid financial market in the world.

What are leveraged tokens?

Leveraged tokens are tradable assets that can allow you to multiply exposure to the price of a cryptocurrency without the usual requirements of managing a leveraged position. This means you don't have to worry about margin, collateral, financing and liquidation.

Leveraged tokens are an innovative financial product that only exists thanks to the power of blockchain. Leveraged tokens were initially introduced by derivatives exchange FTX, but since then they have undergone various alternative implementations. However, the main idea behind them is still the same: tokenization of leveraged open positions. What does that mean ?

Leveraged tokens represent open positions on perpetual contracts in the form of tokens. You remember ? We have discussed how derivatives can be created from derivatives. Leveraged tokens are a perfect example, as they derive their value from the position of futures contracts, which are also derivatives.

Leveraged tokens are a great way to gain simple leveraged exposure to a cryptocurrency. If you want to trade them on Binance, check out A Guide to Getting Started with Binance Leveraged Tokens (BLVT).

If you would like to learn more about FTX Leveraged Tokens, check out the Guide to Getting Started with FTX Leveraged Tokens.

Chapter 3 – Trading and Investing Strategies

Summary

• 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 is asset allocation and diversification?

• What is the Dow Theory?

• What is Elliott Wave Theory?

• What is the Wyckoff method?

• What is “Buy and hold”?

• What is index investing?

• What is paper trading?

What is a trading strategy?

A trading strategy is simply a plan that you follow when executing trades. There is no single correct approach to trading. Each strategy therefore depends largely on the profile and preferences of the trader.

Whatever your approach to trading, establishing a plan is crucial: it sets clear goals and can prevent you from deviating from your plan in the face of emotion. In general, you need to decide what you are trading, how you are going to trade, and where you are going to enter and exit.

In the next chapter, we will discuss some examples of popular trading strategies.

What is portfolio management?

Portfolio management is concerned with creating and managing a range of investments. The portfolio itself is a collection of assets – it can contain anything from collectible stamps to real estate. If you trade exclusively in cryptocurrencies, then it will likely be a combination of Bitcoin and other digital currencies and tokens.

The first step is to think about your expectations for the portfolio. Are you looking for a basket of investments that will remain relatively protected from volatility, or something riskier that could earn you more in the short term?

Thinking about how you want to manage your portfolio is very beneficial. Some prefer a passive strategy - one where you leave your investments alone after setting them up. Others might take an active approach, where they continually buy and sell assets to generate profits.

What is risk management?

Risk management is essential to succeed in trading. This starts by identifying the types of risks you are likely to encounter:

• Market risk: the potential losses you could incur if the asset loses value.

• Liquidity risk: potential losses resulting from illiquid markets, where you cannot easily find buyers for your assets.

• Operational risk: potential losses that arise from operational failures. This could be human error, hardware/software failure, or intentionally fraudulent behavior by employees.

• Systemic risk: the potential losses caused by the failure of players in the industry you operate in, which affects all businesses in that industry. As was the case in 2008, the collapse of Lehman Brothers had a cascading effect on global financial systems.

As you can see, risk identification starts with the assets in your portfolio, but it must consider both internal and external factors to be effective. Then it is necessary to assess these risks. How often are you likely to encounter them? How severe are they?

By assessing risks and determining their potential impact on your portfolio, you can categorize them and develop appropriate strategies and responses. Systemic risk, for example, can be mitigated by diversifying into different investments, and market risk can be reduced by the use of stop-loss orders.

Don't forget to check out the articles Financial Risks Explained and Beginner's Guide to Understanding Risk Management.

What is Day Trading?

Day trading is a strategy that involves entering and exiting positions within the same day. The term comes from traditional markets, and refers to the fact that they are only open during specific periods of the day. Outside of these periods, day traders should not keep their positions open.

As you probably know, cryptocurrency markets are not subject to market closures. You can trade at any time. In the context of cryptocurrencies, day trading tends to refer to a style of trading where the trader enters and exits positions within 24 hours.

In day trading, you will often rely on technical analysis to determine which assets to trade. Since profits over a short period of time can be minimal, you can choose to trade a wide range of assets to try to maximize your returns. That said, some may use the same pair exclusively for years.

This style is obviously a very active trading strategy. It can be very profitable, but it carries significant risk. Therefore, day trading is generally better suited to experienced traders.

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What is swing trading?

In swing trading, you still try to take advantage of market trends, but the time horizon is longer: positions are usually held for between a few days and a few months.

Often your goal will be to identify an asset that appears undervalued and will likely increase in value. You buy this asset and then sell it when the price increases to generate a profit. You can also try to find overvalued assets that may lose value. Then you can sell some at a high price, hoping to buy them back at a lower price.

As with day trading, many swing traders use technical analysis. However, because their strategy takes a longer time frame, fundamental analysis can also be a valuable tool.

Swing trading is a strategy more suitable for beginners, in particular because it does not face the stress inherent in day trading. While the latter is characterized by rapid decision-making and significant screen time, swing trading allows you to trade more calmly.

What is position trading?

Position (or trend) trading is a long-term strategy. Traders purchase assets to hold for extended periods of time (usually measured in months). Their goal is to make a profit by selling these assets at a higher price in the future.

What distinguishes position trades from long-term swing trades is the reasoning behind placing the order. Position traders are interested in trends that can be observed over extended periods of time: they try to take advantage of the general direction of the market. In contrast, swing traders generally seek to predict “swings” in the market that are not necessarily related to the trend as a whole.

It is not uncommon for traders to favor fundamental analysis purely because their time preference allows them to watch fundamental events materialize. This does not mean, however, that technical analysis is not used. While position traders assume that the trend will continue, the use of technical indicators can alert them to the possibility of a trend reversal.

Just like swing trading, position trading is an ideal strategy for beginners. Once again, the long-term horizon gives them ample opportunity to think through their decisions.

What is scalping?

Of all the strategies discussed, scalping is the one that takes place over the smallest time periods. Scalpers attempt to trade small price fluctuations, often entering and exiting positions within minutes (or even seconds). In most cases, they will use technical analysis to attempt to predict price movements and exploit the spread and other inefficiencies to generate a profit. Due to the short time frame, scalping trades often yield a low profit percentage - usually less than 1%. But scalping is a numbers game, so small, repeated profits can add up over time.

Scalping is by no means a strategy for beginners. A thorough understanding of the markets, the platforms you trade on, and technical analysis is essential to success. That being said, for seasoned traders, identifying the right patterns and taking advantage of short-term fluctuations can be very profitable.

What is asset allocation and diversification?

Asset allocation and diversification are terms that tend to be used interchangeably. You may be familiar with the principles of the saying don't keep all your eggs in one basket. Keeping all your eggs in one basket creates a single point of risk, and so does your assets. Investing your life savings in a single asset exposes you to the same type of risk. If the asset in question was the stock of a particular company and that company imploded, you would lose your money in one fell swoop.

This is not only true for individual assets, but also for asset classes. In the event of a financial crisis, you expect any stocks you hold to lose value. This is because they are highly correlated, meaning they all tend to follow the same trend.

Good diversification is not enough to fill your portfolio with hundreds of different digital currencies. Imagine that governments around the world ban cryptocurrencies or that quantum computers break the asymmetric cryptography systems we use. Just one of these two events would have a considerable impact on all digital assets. Like stocks, they are a unique asset class.

Ideally, you want to spread your wealth across several asset classes. So if one performs poorly, it won't have an effect on the rest of your portfolio. Nobel Prize winner Harry Markowitz introduced this idea with Modern Portfolio Theory (MPT). In essence, the theory explains how to reduce the volatility and risk associated with investments in a portfolio by combining uncorrelated assets.

To learn more on the subject, consult Binance Academy's asset allocation and diversification article, or Binance Research's article, Exploring the Benefits of Diversification with Bitcoin.

What is the Dow Theory?

The Dow Theory is a financial model based on the ideas of Charles Dow. Dow founded the Wall Street Journal and helped create the first U.S. stock indexes, known as the Dow Jones Transportation Average (DJTA) and Dow Jones Industrial Average (DJIA).

Although Dow Theory was never formalized by Dow himself, it can be seen as an aggregation of the market principles presented in his writings. Here are some of the key takeaways:

• It's all taken into account – Dow was a proponent of the efficient market hypothesis (EMH), the idea that markets reflect all available information about the price of their assets.

• Market Trends – Dow is often credited with the very notion of market trends, as we know them today, distinguishing between primary, secondary and tertiary trends.

• Phases of a Primary Trend - In primary trends, Dow identifies three phases: accumulation, public participation, and the excess and distribution phase.

• Inter-Index Correlation – Dow believed that a trend in one index could not be confirmed unless it was observable in another index.

• The importance of volume – a trend must also be confirmed by high trading volume.

• Trends are valid until reversed - if a trend is confirmed, it continues until a clear reversal occurs.

It is worth remembering that this is not an exact science: it is a theory, and it may not remain true. However, it is a theory that remains extremely influential, and many traders and investors consider it an integral part of their methodology.

To learn more, see An Introduction to Dow Theory.

What is Elliott Wave Theory?

Elliott Wave Theory (EWT) is a principle that posits that market movements follow the psychology of market participants. Although it is used in many technical analysis strategies, it is not a specific indicator or trading technique. Rather, it is a way to analyze market structure.

The Elliott Wave pattern can generally be identified by a series of eight waves, each of which is a motivational wave or a corrective wave. You would have five motivational waves that follow the general trend, and three corrective waves that go against the trend.

An Elliot wave cycle, with motivational waves (blue) and corrective waves (yellow).

The patterns also have a fractal property, meaning you can zoom in on a single wave to see another Elliot wave pattern. You can also zoom out to discover that the pattern you looked at is also a single wave of a larger cycle of Elliot waves.

The Elliott wave theory is far from unanimously accepted. Some argue that the methodology is too subjective because traders can identify waves in different ways without breaking the rules. Like Dow Theory, Elliott Wave Theory is not infallible and therefore should not be considered an exact science. That said, many traders have found great success by combining EWT with other technical analysis tools.

See the article Introduction to Elliott Wave Theory for more information on the subject.

What is the Wyckoff method?

The Wyckoff Method is a trading and investment strategy developed by Charles Wyckoff in the 1930s. His work is widely considered the cornerstone of modern technical analysis techniques in many financial markets.

Wyckoff proposed three basic laws: the law of supply and demand, the law of cause and effect, and the law of effort versus result. He also formulated the theory of composite man, which has significant overlap with the primary tendencies of Charles Dow. His work in this area is particularly valuable to cryptocurrency traders.

On a practical level, the Wyckoff method is a five-step approach to trading. It can be broken down as follows:

• Determine the trend: what is it today and how is it heading?

• Identify strong assets: are they moving with the market or in the opposite direction?

• Finding assets with sufficient potential: is there sufficient reason to take a position? Are the risks worth the potential return?

• Assess the likelihood of the move: Do things like Wyckoff's buy and sell tests indicate a possible move? What does the price and volume suggest? Is this asset ready to move?

• Program the position taking: how are the assets positioned in relation to the general market? When is the best time to take a position?

The Wyckoff method was introduced almost a century ago, but it remains very relevant to this day. The scope of Wyckoff's research was vast, and the above should therefore be considered only a very condensed overview. It is recommended to explore his work in more detail, as it provides essential knowledge in technical analysis. Start with The Wyckoff Method Explained.

What is “Buy and hold”?

The buy and hold strategy, unsurprisingly, involves buying and holding an asset. It is a long-term passive scenario where investors buy the asset and then hold it, regardless of market conditions. A good example of this in the crypto space is HODLing, which generally refers to investors who prefer to buy and hold for years instead of actively trading.

This can be a beneficial approach for those who prefer "passive" investing, as they don't need to worry about short-term fluctuations or capital gains taxes. On the other hand, it requires patience on the part of the investor and assumes that the asset will not end up completely worthless.

If you want to learn a simple way to apply this strategy to bitcoin, check out Dollar Cost Averaging Explained.

What is index investing?

Index investing can be considered a form of buy and hold. As the name suggests, the investor seeks to profit from the movement of assets within a specific index. It can do this by purchasing the assets themselves or by investing in an index fund.

Again, this is a passive strategy. Individuals can also benefit from diversification across multiple assets, without the stress of active trading.

What is paper trading?

Paper trading can apply any strategy, but it is always a simulation. This is something you can use as a beginner (or even as an experienced trader) to test your skills without putting your money on the line.

You may think, for example, that you have discovered a good strategy for anticipating drops in Bitcoin, and you want to try to take advantage of those drops before they happen. But before risking all your funds, you can opt for paper trading. This can be as simple as noting the price when you "open" your short position, and again when you close it. You can also use a kind of simulator that imitates the most popular trading interfaces.

The main advantage of paper trading is that you can test strategies without losing your money if things go wrong. You can thus get an idea of ​​how your positions would have evolved, without risk. Of course, you should know that paper trading only gives you a limited understanding of a real environment. It's hard to replicate the real emotions you feel when you risk your money. Paper trading without a simulator can also give you a false sense of costs and associated fees, unless you take them into account for specific platforms.

Binance offers several paper trading options. For example, the Binance Futures Testnet offers a full-fledged interface. If you create trading robots or programs yourself, you can access the spot testnet via the API.

Chapter 4 - The Basics of Technical Analysis

Summary

• What is a long position?

• What is a short position?

• What is the 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?

• What are makers and takers?

• What is the bid-ask spread?

• What is a candle chart?

• What is a candlestick pattern?

• What is a trend line?

• What are support and resistance?

What is a long position?

Going long means buying an asset with the hope that its value will increase. Long positions are often used in the context of derivatives or Forex, but they apply to any asset class or market type. Buying an asset in the spot market in the hope that its price will rise is also a long position.

Taking a long position in a financial product is the most common way to invest, especially for those just starting out. Long-term trading strategies such as buy and hold rely on the assumption that the value of the underlying asset will increase. In this sense, buy and hold is actually a long position for a long time.

However, being long does not necessarily mean that the trader expects to profit from an upward movement in price. Take leveraged tokens, for example. BTCDOWN is inversely correlated with the price of bitcoin. If the price of Bitcoin increases, the price of BTCDOWN decreases. If the price of bitcoin falls, the price of BTCDOWN increases. In this sense, taking a long position on BTCDOWN is equivalent to a downward movement in the price of bitcoin.

What is a short position?

A short position or short sale (SAV) means selling an asset with the intention of buying it back later at a lower price. Short selling is closely related to margin trading because it can be done with borrowed assets. However, it is also widely used in the derivatives market and can be done using a simple spot position. So how does VAD work?

When it comes to VAD spot markets, it's very simple. Let's say you already have Bitcoin and expect the price to fall. You sell your BTC for USD because you plan to buy it back later at a lower price. In this case, you are essentially entering a short position on Bitcoin, because you are selling much more expensive to buy cheaper. It's pretty simple. But what about the VAD on borrowed funds? Let's see how it works.

You borrow an asset that you believe will decrease in value, for example, a stock or cryptocurrency. You sell it immediately. If the trade goes your way and the price of the asset falls, you buy the same amount as the amount borrowed. You pay back the assets you borrowed (along with interest) and profit from the difference between the price you originally sold for and the price you bought back for.

How to make a VAD of Bitcoin with borrowed funds? Let's take an example: We put up the collateral required to borrow 1 BTC, then immediately sell it for $10,000. We now have $10,000. Let's say the price goes down to $8,000. We buy 1 BTC and repay our debt of 1 BTC along with our interest. Since we initially sold Bitcoins for $10,000 and bought them back at $8,000, our gain is $2,000 (interest payment and trading fees should be deducted from this amount).

What is the order book?

The order book is a list of currently open orders for an asset, organized by price. When you place an order that is not executed immediately, it is added to the order book. It will stay there until fulfilled by another order or canceled.

Order books differ depending on the platform, but they generally contain the same information. You will see the number of orders at specific price levels.

When it comes to crypto exchanges and online trading, orders from the order book are matched by a system called the trading engine. This system is what guarantees the execution of transactions: we could consider it as the brain of the exchange. This system, as well as the order book, is at the heart of the concept of electronic exchange.

What is order book depth?

Order book depth (or market depth) refers to a visualization of currently open orders in the order book. It typically places buy orders on one side, and sell orders on the other, and displays them cumulatively on a chart.

Order book depth of the BTC/USDT pair on Binance.

More generally, order book depth can also refer to the amount of liquidity that the order book can absorb. The “deeper” the market, the more liquidity there is in the order book. In this sense, a market containing more liquidity can absorb larger orders without causing a considerable effect on the price of the asset. However, if the market is illiquid, large orders can have a significant impact on the price.

What is a Market order?

A market order is an order to buy or sell at the best market price currently available. It is essentially the fastest way to enter or exit a market.

When you define a market order, it's like saying, "I'd like to execute this order right now at the best price I can get."

Your market order will continue to execute orders from the order book until the entire order is filled. This is why traders with a lot of liquidity (whales) can have a significant impact on price when using market orders. A large-volume market order can effectively siphon liquidity from the order book. How so ? Let's review this process when we talk about sliding.

Want to know more ? See the What is a market order? section.

What is slippage in trading?

If there's one concept you need to know about market orders, it's slippage. When we say that market orders are executed at the best available price, it means that they continue to execute orders from the order book until the entire order is executed.

But what if there isn't enough liquidity around the desired price to fill a large market order? There may be a large difference between the price at which you expect your order to be executed and the actual price. This difference is called slippage.

Let's say you want to open a long position worth 10 BTC on an altcoin. However, this altcoin has a relatively low capitalization and trades in a low liquidity market. Your market order will continue to execute orders from the order book until the entire order is filled. In a liquid market, you will be able to execute your 10 BTC order without having a significant impact on the price. But, in this case, the lack of liquidity means that there may not be enough sell orders in the order book for the current price range.

So, by the time the entire order of 10 BTC is executed, you may find that the average price paid was much higher than expected. In other words, the absence of sell orders caused your market order to move up the order book, corresponding to orders significantly more expensive than the initial price.

Be aware of slippage when trading altcoins, as 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 a specific or lower price. This price is called the limit price. Buy limit orders execute at the limit price or lower, while sell limit orders execute at the limit price or higher.

When you set a limit order, it's like saying, "I'd like to execute this order at this specific price or a lower price."

Using a limit order allows you to have greater control over your entry or exit into a given market. In fact, it guarantees that your order will never be executed at a price lower than the price you want. However, this also results in a disadvantage. The market may never reach your price, leaving your order unfilled. In many cases, this can mean losing a potential opportunity.

The decision to use a limit order or a market order can vary depending on the trader. Some traders may only use one or the other, while others will use both, depending on the circumstances. The important thing is to understand how they work, so you can decide for yourself.

Want to know more ? See the What is a limit order? section.

What is a Stop-loss order?

Now that we know what market orders and limit orders are, let's talk about stop-loss orders. A stop-loss order is a type of limit or market order that is only activated when a certain price is reached. This price is called the stop price.

The purpose of a stop-loss order is primarily to limit losses. Every trade must have an invalidation point, that is, a price level that you must define in advance. This is the level where you admit that your initial idea was bad, meaning you need to exit the market to avoid further losses. This invalidation point is therefore the level where you would generally place your stop-loss order.

How does a stop-loss order work? As we mentioned, the stop-loss can be both a limit order or a market order. This is why its variations can also be called stop-limit or stop-market. It should be understood that the stop-loss is only activated when a certain price is reached (the stop price). When the stop price is reached, it activates either a market order or a limit order. You essentially set the stop price as the trigger for your market or limit order.

However, there is one thing you should keep in mind. We know that limit orders can only be executed at the limit price or better, but never at a lower price. If you use a stop-limit order as a stop-loss and the market crashes violently, it can move away from your limit price instantly, leaving your order unfilled. In other words, the stop price would trigger your stop-limit order, but the limit order would remain unfilled due to the sharp drop in price. This is why stop-market orders are considered safer than stop-limit orders. They ensure that, even in extreme market conditions, you will be guaranteed to exit the market when your invalidation point is reached.

Want to know more ? See the What is a stop-limit order? section.

Do you want to get started with cryptocurrencies? Buy Bitcoin on Binance!

What are makers and takers?

You become a maker when you place an order that is not immediately executed, but is added to the order book. Since your order adds liquidity to the order book, you are a liquidity “maker”.

Limit orders generally execute like maker orders, but not in all cases. For example, suppose you place a buy limit order whose limit price is significantly higher than the current market price. Since you say your order can be executed at the limit price or better, your order will be executed at the market price (since it is lower than your limit price).

You become a taker when you place an order that is immediately executed. Your order is not added to the order book, but is immediately associated with an existing order in the order book. Since you are taking liquidity from the order book, you are a taker. Market orders will always be taker orders, because you are executing your order at the best market price currently available.

Some exchanges adopt a tiered fee model to incentivize traders to provide liquidity. After all, it is in their interest to attract high-volume traders to their exchange: liquidity attracts liquidity. In these systems, makers tend to pay lower fees than takers, because they are the ones who add liquidity to the exchange. In some cases, they may even offer fee rebates to makers. You can view your current fee level on Binance on this page.

If you want to know more, see the What are Makers and Takers? section.

What is the bid-ask spread?

The spread is the difference between the highest buy order (ask) and the lowest sell order (bid) for a given market. It is essentially the spread between the highest price where a seller is willing to sell and the lowest price where a buyer is willing to buy.

The spread is a way of measuring the liquidity of a market. The lower the spread, the more liquid the market. The spread can also be considered a measure of supply and demand for a given asset. In this sense, supply is represented by the sell side while demand is represented by the buy side.

When you place a market buy order, it will be executed at the lowest available ask price. Conversely, when you place a sell market order, it fills the highest available demand.

What is a candle chart?

A candlestick chart is a graphical representation of the price of an asset for a specific period of time. It is made up of candlesticks (or candles), each representing the same time interval. For example, a 1-hour chart shows candlesticks that each represent a 1-hour period. A 1-day chart shows candlesticks that each represent a period of one day, and so on.

Bitcoin daily chart. Each candlestick represents one trading day.

A candlestick is made up of four data points: the open, high, low, and close (also called OHLC values). The open and close are the first and last price recorded for the given time period, while the low and high are the lowest and highest price recorded, respectively.

Candlestick charts are one of the most important tools for analyzing financial data. Candlesticks date back to the 17th century in Japan, but were refined in the early 20th century by trading pioneers such as Charles Dow.

Analyzing candlestick charts is one of the most common ways to examine the Bitcoin market using technical analysis. Do you want to learn how to read candlestick charts? Check out the Beginner's Guide to Candlestick Charts.

What is a candlestick pattern?

Technical analysis relies heavily on the assumption that past price movements can indicate future price action. So how can candlesticks be useful in this context? The idea is to identify candle chart patterns and develop trade ideas based on them.

Candlestick charts help traders analyze market structure and determine whether we are in a bull or bear market environment. 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 that typically have more intense trading activity.

Candlestick patterns are also a great way to manage risk because they can represent known trading setups. How so ? Candlestick patterns can define clear price targets and invalidation points. This allows traders to set very precise and controlled trade setups. As such, candlestick patterns are widely used by Forex and cryptocurrency traders.

Some of the most common candlestick patterns include flags, triangles, wedges, hammers, stars, and Doji formations. If you want to learn how to read them, check out 12 Popular Candlestick Patterns Used in Technical Analysis and the Beginner's Guide to Classic Chart Patterns.

What is a trend line?

Trendlines are a widely used tool among traders and technical analysts. These are lines that connect certain data points on a graph. This data is usually the price, but not in all cases. Some traders can also draw trend lines on technical indicators and oscillators.

The main idea behind drawing trendlines is to visualize certain aspects of price action. Thus, traders can identify the overall trend and structure of the market.

Bitcoin price touching a trendline several times, which indicates an upward trend.

Some traders may use trendlines only to better understand market structure. Others can use them to create actionable trading ideas based on how trend lines interact with price.

Trendlines can be applied to a chart with virtually any time horizon. However, as with any other market analysis tool, trend lines on higher time horizons tend to be more reliable than trend lines on lower time horizons.

Another aspect to consider here is the strength of a trendline. According to the conventional definition of a trend line, it must touch price at least two or three times to become valid. Generally, the more the price has touched (tested) a trend line, the more reliable it can be considered.

If you want to learn more about how to draw trend lines, check out Trend Lines Explained.

What are support and resistance?

Support and resistance are one of the most basic concepts related to trading and technical analysis.

Support refers to a level where the price forms a “floor”. In other words, a support level is a level of significant demand, where buyers come in and increase the price.

Resistance refers to a level where the price forms a “ceiling”. A resistance level is a level of significant supply, where sellers enter and reduce the price.

The support level (red) is tested and broken, thus turning into resistance.

Now you know that support and resistance are important demand and supply levels, respectively. However, many other factors can come into play when thinking about support and resistance.

Technical indicators, such as trendlines, moving averages, Bollinger bands, Ichimoku clouds, and Fibonacci retracements can also suggest potential support and resistance levels. In fact, even aspects of human psychology are used. This is why traders and investors can incorporate very different supports and resistances into their individual trading strategy.

Do you want to know how to take advantage of support and resistance levels on a chart? Check out Support and Resistance Basics Explained.

Chapter 5 – Technical Analysis Indicators

Summary

• What is a technical analysis indicator?

• Comparison of leading indicators and trailing indicators

• What is an inertial indicator?

• What is trading volume?

• What is Relative Strength Index (RSI)?

• What is a moving average (MA)?

• What is Moving Average Divergence-Convergence (MACD)?

• What is the Fibonacci retracement tool?

• What is Stochastic RSI (StochRSI)?

• What are Bollinger Bands (BB)?

• What is volume weighted average price (VWAP)?

• What is Parabolic SAR?

• What is an Ichimoku cloud?

What is a technical analysis indicator?

Technical indicators calculate metrics related to a financial instrument. This calculation can be based on price, volume, blockchain data, open positions, social indicators or even another indicator.

As we have already discussed, technical analysts base their methods on the assumption that historical price patterns can predict future price movements. So, traders who use technical analysis can use a set of technical indicators to identify potential entry and exit points on a chart.

Technical indicators can be classified using several methods. This may include whether they indicate future trends (leading indicators), confirm a pattern already in progress (following indicators), or clarify real-time events (coincident indicators).

Another categorization can focus on the way in which these indicators present information. In this sense, there are overlay indicators that overlay data on the price, and there are oscillators that oscillate between a minimum value and a maximum value.

There are also types of indicators that aim to measure a specific aspect of the market, such as inertia indicators. As their name suggests, they aim to measure and display market inertia.

So, what is the best technical analysis indicator? There is no simple answer to this question. Traders can use many different types of technical indicators, and their choice is largely based on their individual trading strategy. However, to be able to make that choice, they first needed to know more about them, and that's what we're going to do in this chapter.

Comparison of leading indicators and trailing indicators

As we have seen, different indicators have distinct qualities and should be used for specific purposes. Leading indicators point to future events. Trailing indicators are used to confirm something that has already happened. So when should you use them?

Leading indicators are generally useful for short- and medium-term analysis. They are used when analysts anticipate a trend and look for statistical tools to support their hypothesis. When it comes to the economy, leading indicators can be particularly useful in predicting periods of recession.

When it comes to trading and technical analysis, leading indicators can also be used for their predictive qualities. However, no special indicator can predict the future, so these predictions should always be taken with caution.

Trailing indicators are used to confirm events and trends that have already occurred or are already underway. This may seem redundant, but it can be very useful. Tracking indicators can highlight aspects of the market that would otherwise remain hidden. As such, tracking indicators are typically applied to long-term chart analysis.

Want to know more ? See Leading and trailing indicators explained.

What is an inertial indicator?

Inertial indicators aim to measure and present market inertia. What is market inertia? Simply put, it is the measure of the speed of price changes. Inertia indicators aim to measure the rate at which prices rise or fall. Therefore, they are typically used for short-term analysis by traders looking to profit from spikes in high volatility.

The goal of an inertia trader is to enter trades when inertia is high, and exit when market inertia begins to decline. In general, if volatility is low, the price tends to stay within a small range. As tension builds, the price often fluctuates sharply, moving out of range. This is where inertia traders come into play.

Once the move is complete and traders exit their position, they switch to higher inertia assets and start again. Thus, inertia indicators are often used by day traders, scalpers and short-term trend traders who are looking for quick profit opportunities.

What is trading volume?

Trading volume can be considered an essential indicator. It shows the number of individual units traded for an asset over a defined period of time. It actually shows how much of an asset has been traded over a period of time.

Some consider trading volume to be the most important technical indicator. “Volume precedes price” is a famous saying in the trading world. It suggests that large trading volume can be a leading indicator before a significant price movement (regardless of direction).

By using volume in trading, traders can measure the strength of the underlying trend. If high volatility is accompanied by high trading volume, this can be seen as validation of the move. This makes sense, as high trading activity should correspond to high volume, since many traders and investors are active at that particular price level. However, if volatility is not accompanied by high volume, the underlying trend can be considered weak.

Price levels with historically high volume can also provide a good potential entry or exit point for traders. As history tends to repeat itself, these levels may be where increased trading activity is more likely to occur. Ideally, support and resistance levels should also be accompanied by an increase in volume, thus confirming the strength of the level.

What is Relative Strength Index (RSI)?

The relative strength index (RSI) is an indicator that indicates whether an asset is overbought or oversold. This is an inertia oscillator that shows how often price changes take place. This oscillator varies between 0 and 100, and the data is usually displayed on a line chart.

The RSI indicator applied to a Bitcoin chart.

What is the idea behind measuring market inertia? If inertia increases while the price is rising, the upward trend can be considered strong. Conversely, if inertia decreases in an upward trend, it can be considered weak. In this case, a trend reversal could occur.

Let's see how the traditional interpretation of the RSI works. When the RSI value is below 30, the asset can be considered oversold. On the other hand, it can be considered overbought when it is above 70.

However, RSI readings should be taken with some skepticism. The RSI can reach extreme values ​​in extraordinary market conditions, and even after that, the market trend can still continue for some time.

The RSI is one of the easiest technical indicators to understand, making it one of the best for beginner traders. If you want to know more, check out What is the RSI Indicator?.

What is a moving average (MA)?

Moving averages smooth out price action and make it easier to spot market trends. As they are based on past price data, they lack predictive qualities. Therefore, moving averages are considered tracking indicators.

Moving averages come in different types: the two most common are the simple moving average (SMA or MA) and the exponential moving average (EMA). What makes them different?

The simple moving average is calculated by taking price data from the previous n periods and producing an average. For example, the 10-day SMA takes the average price of the last 10 days and plots the results on a chart.

200-week moving average based on Bitcoin price.

The exponential moving average is a little more complex. It uses a different formula that gives more weight to more recent price data. Therefore, the EMA reacts more quickly to recent events, while the SMA may take longer to catch up.

As we mentioned, moving averages are tracking indicators. The longer the period, the greater the lag. Therefore, a 200-day moving average will react more slowly to price action than a 100-day moving average.

Moving averages can help you easily identify market trends. If you want to learn more about them, check out Moving Averages Explained.

What is Moving Average Divergence-Convergence (MACD)?

The MACD is an oscillator that uses two moving averages to show the momentum of a market. Since it tracks price action that has already occurred, it is a trailing indicator.

The MACD is made up of two lines: the MACD line and the signal line. How to calculate them? You get the MACD line by subtracting the 26 EMA from the 12 EMA. Pretty simple, right? Then you place it on the 9 EMA of the MACD line (the signal line). Additionally, many charting tools also display a histogram that illustrates the distance between the MACD line and the signal line.

The MACD indicator applied to a Bitcoin chart.

Traders can use MACD by observing the relationship between the MACD line and the signal line. A crossover between the two lines is usually a notable event when it comes to the MACD. If the MACD line crosses the signal line, this can be interpreted as a bullish signal. On the other hand, if the MACD line crosses below the signal, this can be interpreted as a bearish signal.

The MACD is one of the most popular technical indicators for measuring market inertia. If you want to know more, check out The MACD Indicator Explained.

Do you want to get started with cryptocurrencies? Buy Bitcoin on Binance!

What is the Fibonacci retracement tool?

Fibonacci Retracements (or Fib Retracement) is a popular indicator based on a string of numbers called a Fibonacci sequence. These numbers were identified in the 13th century by an Italian mathematician called Leonardo Fibonacci.

Fibonacci numbers are now part of many technical analysis indicators, and Fibonacci Retracements is one of the most popular. It uses ratios derived from Fibonacci percentage numbers. These percentages are then plotted on a chart and traders can use them to identify potential support and resistance levels.

These Fibonacci ratios are as follows:

• 0 %

• 23,6 %

• 38,2 %

• 61,8 %

• 78,6 %

• 100 %

Even though 50% is not technically a Fibonacci ratio, many traders also consider it when using the tool. Additionally, Fibonacci ratios outside of the 0-100% range can also be used. Some of the most common are 161.8%, 261.8%, and 423.6%.

Fibonacci levels on a Bitcoin chart.

So how can traders use Fibonacci retracement levels? The main idea behind plotting percentages on a graph is to find areas of interest. Typically, traders choose two significant price points on a chart, and set the Fibonacci Retracements tool values ​​0 and 100 at those points. The range between these points can highlight potential entry and exit points, and help determine stop-loss placement.

The Fibonacci Retracements tool is a versatile indicator that can be used in a wide range of trading strategies. If you want to learn more, check out  A Guide to Mastering Fibonacci Retracements.

What is Stochastic RSI (StochRSI)?

Stochastic RSI, or StochRSI, is a derivative of the RSI. Like the RSI, its main purpose is to determine whether an asset is overbought or oversold. However, unlike RSI, StochRSI is not generated from price data, but from RSI values. On most charting tools, StochRSI values ​​are between 0 and 1 (or 0 and 100).

StochRSI tends to be most useful when it is near the upper or lower extremes of its range. However, due to its greater speed and sensitivity, it can produce a large number of false signals which can be difficult to interpret.

The traditional interpretation of the StochRSI is similar to that of the RSI. When it is above 0.8, the asset can be considered overbought. When it is below 0.2, the asset can be considered oversold. However, it is worth mentioning that these signals should not be considered as direct signals to enter or exit a position. While this information gives us one side of the story, there may be others. This is why most technical analysis tools are most effective when combined with other market analysis techniques.

Would you like to know more about StochRSI? Check out Stochastic RSI Explained.

What are Bollinger Bands (BB)?

Named after John Bollinger, Bollinger Bands measure market volatility and are often used to spot overbought and oversold conditions. This indicator is made up of three lines, or “bands”: an SMA (the middle band), an upper band, and a lower band. These bands are then placed on a chart, along with the price movements. The idea is that as volatility increases or decreases, the distance between these channels will change, expanding and contracting.

Bollinger bands on a Bitcoin chart.

Let's review the general interpretation of Bollinger Bands. The closer the price is to the upper band, the closer the asset may be to overbought conditions. Likewise, the closer it is to the lower band, the closer the asset may be to oversold conditions.

One of the things to note is that the price is usually contained within the channel range, but it can sometimes break out from the top or bottom. Does this mean it is an immediate buy or sell signal? No. It simply tells us that the market is moving away from the mid-SMA band, thus reaching extreme conditions.

Traders can also use Bollinger Bands to try to predict a market squeeze, also known as a Bollinger Band squeeze. This refers to a period of low volatility: the channels get really close to each other and “squeeze” the price into a small range. As “pressure” builds up in this small range, the market eventually moves out of it, leading to a period of increased volatility. As the market can move up or down, the squeeze strategy is considered neutral (neither bearish nor bullish). It can therefore be interesting to combine it with other trading tools, such as supports and resistances.

Do you want to master Bollinger Bands? Check out Bollinger Bands Explained.

What is volume weighted average price (VWAP)?

As we have already discussed, many traders consider trading volume to be the most important indicator, so are there any indicators based on volume?

Volume weighted average price, or VWAP, combines the power of volume with price movement. More concretely, it is the average price of an asset for a given period, weighted by volume. This makes it more useful than just calculating the average price because it also takes into account the price levels that saw the most trading volume.

How Do Traders Use VWAP? Well, VWAP is generally used as a benchmark for the current market outlook. In this sense, when the market is above the VWAP line, it can be considered bullish. At the same time, if the market is below the VWAP line, it can be considered bearish. Have you noticed that this is similar to interpreting moving averages? VWAP can indeed be compared to moving averages, at least in the way it is used. As we have seen, the main difference is that VWAP also takes into account trading volume.

Additionally, VWAP can also be used to identify areas of higher liquidity. Many traders use price breaking above or below the VWAP line as a trading signal. However, they generally integrate other indicators into their strategy in order to reduce risks.

Want to learn more about how you can use VWAP? See Volume-Weighted Average Price (VWAP) Explained.

What is Parabolic SAR?

The Parabolic SAR helps determine the direction of the trend and potential reversals. The acronym “SAR” stands for Stop and Reverse. It refers to the point where a long position should be closed and a short position opened, and vice versa.

The Parabolic SAR appears as a series of points on a chart, either above or below the price. Generally, if the points are below the price, it means the price is in an upward trend. On the other hand, if the points are above the price, it means that the price is in a downward trend. A trend reversal occurs when points move back to the other side of price.

The Parabolic SAR on a Bitcoin chart.

Parabolic SAR can provide information about the direction of the market trend. It is also used to identify trend reversal points. Some traders may also use the Parabolic SAR indicator as a basis for their trailing stop-loss orders. This type of special order moves with the market and allows traders to protect their gains during a strong uptrend.

Parabolic SAR is most useful during strong market trends. During periods of consolidation, it can provide a lot of false signals of potential reversals. Do you want to learn how to use the Parabolic SAR indicator? Check out A Brief Guide to the Parabolic SAR Indicator.

What is an Ichimoku cloud?

The Ichimoku Cloud is an AT indicator that combines many indicators into a single chart. Among the indicators we have discussed, Ichimoku is definitely one of the most complicated. At first glance, it can be difficult to understand its formulas and operating mechanisms. But in practice, the Ichimoku cloud is not as difficult to use as it seems, and many traders use it because it can produce very distinct and well-defined trading signals.

As we mentioned, the Ichimoku Cloud is not just one indicator, it is a collection of indicators. This is a bundle of indicators that provides information on market inertia, support and resistance levels, and trend direction. It does this by calculating five averages and plotting them on a graph. It also draws a “cloud” from these averages, which can indicate potential areas of support and resistance.

While the averages play an important role, the cloud itself is the key element of the indicator. In general, if the price is above the cloud, the market can be considered bullish. Conversely, if the price is below the cloud, it can be considered a downtrend.

The Ichimoku cloud on a Bitcoin chart, acting as support, then resistance.

The Ichimoku Cloud can also reinforce other trading signals.

The Ichimoku cloud is difficult to master, but once you understand how it works, it can produce excellent results. See The Ichimoku Cloud Explained section to learn more.

Chapter 6 – Cryptocurrency Trading Tips

Summary

• How can I start trading cryptocurrencies?

• How to trade cryptocurrencies on Binance?

• What is a trading journal, and should I use one?

• How do I calculate my trading position size?

• Which online trading software to use?

• Should I join a paid trading group?

• What is a pump and dump (P&D) group?

• Should I participate in cryptocurrency airdrops?

How can I start trading cryptocurrencies?

If you have decided to start trading, here are some things to consider.

First of all, you will of course need capital to trade. If you have no savings and start trading with money you cannot lose, it can have a detrimental impact on your life. Trading is not an easy exercise, an overwhelming majority of beginner traders lose money. You should expect that the money you set aside for trading could evaporate quickly and that you may never recover your losses. This is why it is recommended to start with smaller quantities to begin with.

You will also need to think about your overall trading strategy. There are many opportunities to make money in the financial markets. Depending on how much time and effort you can dedicate to this project, you can choose from many different strategies to achieve your financial goals.

One more thing, many traders are most successful when trading is not their primary source of income. In this way, the emotional burden is easier to bear than if their daily survival depended on it. Eliminating emotions is an essential characteristic of successful traders, and it's much harder to do when a person's livelihood is on the line. So, especially when you're just starting out, you may want to consider trading or trading. investment as a secondary activity. And remember to start with small amounts with the goal of learning and practicing. It may also be beneficial to consider ways to generate passive income with cryptocurrencies.

If you want to learn more about simple mistakes to avoid when it comes to trading and technical analysis, check out 7 Common Mistakes in Technical Analysis (TA).

How to trade cryptocurrencies on Binance?

So you have decided to enter the world of cryptocurrency trading. What should you do ?

First, you need to convert from fiat currency to cryptocurrency. The easiest way to do this is to go to the Buy Cryptocurrencies page on Binance, where you will have a multitude of options. You can buy cryptocurrencies using debit and credit cards, using your bank account on the P2P exchange, or through third-party solutions such as Simplex, Paxful or Koinax. Once you're done, you'll be part of the new financial system!

Now that you have access to your cryptocurrencies, the potential options are multiple. You can immediately go to the Binance spot exchange and trade cryptos. If you already have trading experience, you can also check out the Binance margin or Binance Futures platforms. There are also passive income opportunities including staking, lending your assets in Binance Savings, joining the Binance pool, and more.

So far, it's all part of what's called a centralized exchange, like Binance. These are exchanges where you deposit your crypto and carry out your financial activities within the exchange's internal systems. However, thanks to the magic of blockchain technology, there are other options called decentralized exchanges (DEX). On these sites, your funds never leave your own cryptocurrency wallet, so you have full custody of them at all times. You can also connect your physical wallet and trade directly from it.

Centralized exchanges are dominant in the cryptocurrency space. But many traders and blockchain enthusiasts believe that a significant portion of cryptocurrency trading volume will occur on DEXs in the future. Head over to Binance DEX and see for yourself!

What is a trading journal, and should I use one?

A trading journal is a documentation of your trading activities. Should you fill one out? Probably ! You can use a simple Excel spreadsheet or subscribe to a specialized service.

Particularly when it comes to active trading, some traders consider tracking their activity in a trading journal, essential to becoming profitable. After all, if you don't document your trading activities, how will you identify your strengths and weaknesses? Without a trading journal, you would not have a clear view of your performance.

Keep in mind that biases can play a major role in your trading decisions, and a trading journal can help mitigate some of them. How ? Well, you can't argue with the data! Trade performance depends on numbers, and if you make mistakes, it will be reflected in your performance. By meticulously keeping a trading journal, you can also identify the best performing strategies.

How do I calculate my trading position size?

One of the most important aspects of trading is risk management. In fact, some traders say it's the most important thing. This is why it is essential to calculate your position sizes using a standardized formula. Here's how to do the math.

First, you need to determine how much of your portfolio you are willing to risk on individual trades. Let's say it's 1%. Does this mean you take positions with 1% of your account? No, this means that if your stop-loss is reached, you will not lose more than 1% of your portfolio.

This may seem too low, but it is to ensure that a few inevitable losing trades do not empty your portfolio. So, once you have this set, you need to determine where to place your stop-loss. You do this for each trade, depending on the specifics of the trade. Let's say you have determined that you are going to place your stop-loss 5% below your initial entry level. This means that if the stop-loss is triggered and you exit your position 5% below the entry level, you should lose exactly 1% of your portfolio.

Let's say our wallet size is 1000 USDT. We risk 1% on each transaction. Our stop-loss is 5% of our entry. What position size should we use?

1000 * 0,01 / 0,05 = 200

If we only want to lose 10 USDT, or 1% of our account, we need to take a position of 200 USDT.

This process may seem a bit lengthy at first, but it is essential to properly managing risk. Good news, we have dedicated an entire article to this subject: How to calculate the size of a position in trading.

Which online trading software to use?

Chart analysis is an integral part of a technical analyst's trading toolkit. But what is the best way to use it? Binance has integrated TradingView charts, allowing you to perform your analysis directly on the platform, both on the web interface and in the mobile app. You can also create a TradingView account and view all Binance markets through their platform.

There are many other online charting software providers on the market, each offering different benefits. Typically, though, you'll need to pay a monthly subscription fee. Crypto-friendly ones include Coinigy, TradingLite, Exocharts, and Tensorcharts.

Should I join a paid trading group?

Probably not. There is a lot of free information out there about trading, so why not take advantage of it? It's also helpful to practice trading yourself, so you can learn from your mistakes and find the strategy and trading style that suits you best.

Participating in a paid group can be a valuable learning tool, but be careful of scams and misleading advertising. After all, it is very easy to distort trading performance to attract subscribers to a paid service.

It is also worth thinking about why a profitable trader might want to start a paying group. Of course, a side income is always welcome, but why do it for a high fee if they're already doing so well?

That said, some profitable traders run high-quality paid communities, with additional services such as special market insights. Just be very careful who you give your money to, as the majority of high-paying groups take advantage of newbie traders.

What is a pump and dump (P&D) group?

A “pump and dump” is a scheme that involves artificially increasing the price of an asset using false information. When the price has increased significantly (“pumped”), the authors sell (“dump”) their funds purchased at a low price at a much higher price.

Typical pump and dump pricing pattern.

Pump and dumps are common in cryptocurrency markets, especially in bull markets. During this period, many inexperienced investors enter the market, and they are easier to deceive. This type of fraud is most common with small-cap cryptocurrencies, as their prices are generally easier to manipulate due to the low liquidity of these markets.

Pump and dumps are often orchestrated by private “pump and dump groups” who promise easy profits to their members (usually in exchange for a paid subscription). However, what usually happens is that these new members are deceived by a much smaller group who took a stand earlier.

In traditional markets, this activity is prohibited and is subject to heavy fines.

Do you want to get started with cryptocurrencies? Buy Bitcoin on Binance!

Should I participate in cryptocurrency airdrops?

Maybe, but be very careful! Airdrops are a new way to distribute cryptocurrencies to a wide audience. An airdrop can be a great way to ensure that a cryptocurrency is not centralized in the hands of just a few holders. A diverse set of holders is essential for a healthy, decentralized network.

However, nothing is free. Well sometimes yes, but it's very rare! Generally, though, what happens is that the Airdrop promoters will try to take advantage of you, or they will want something in return.

What will they ask? One of the most common “assets” requested in exchange for an airdrop is your personal information. Do you think your personal data is worth $10-50 worth of a highly speculative cryptocurrency? It's your choice, but there may be better ways to make ends meet, without endangering your privacy and personal data. This is why you should exercise great caution when considering signing up for airdrops.

To conclude

We've covered a lot, haven't we? Getting started in cryptocurrency trading can be a daunting task, as there are so many concepts to learn. We hope this guide has helped you get acquainted with cryptocurrency trading.

Be careful, there is always more to learn! This is why we created a question-and-answer platform specific to cryptocurrencies: the Ask Academy. If you have any other questions about cryptocurrency trading, blockchain technology, cryptography or other related topics, feel free to post one, the community will be happy to answer them! See you soon.