Hello Steemians, participating in this week's beginners' course, and I hope you all are doing well. Prof @reminiscence01 explained trading cryptocurrencies and its general concept, and I will do the homework.
1: Explain the following stating its advantages and disadvantages:
Spot trading in cryptocurrency involves the purchase and sale of a crypto asset(e.g., BTC, ETH, STEEM) by a trader and holds it (either short term or long term) with hopes that it will rise in value. Spot traders purchase an asset and wait to grow in value to sell the asset in profit. The current price of an asset is called the spot price as the asset is delivered immediately.
An example of a spot trade can be explained using this analogy. For instance, BTC is trading at $56,300, a spot trader executes a buy order and immediately owns 1 BTC. The trader can decide to hold and sell the asset when BTC increases in value because selling at a price lower than $56,300 will result in a loss.
Advantages Of Spot Trading
Ownership of Assets: In spot trading, the trader collects ownership and authority over the asset, unlike in futures trading, where the traders only trade on the future movement of the asset value, and the bought asset is delivered instantly.
No Risk Of Liquidation: Spot traders do not risk their account being liquidated in a bear market. The traders only lose the asset's value and can wait for it to grow to make a profit still.
No Minimum Investment: There is no minimum investment on the spot market as the trader has complete control over the volume of their trades, either buying or selling.
Mitigated Risk: Risk and benefits are based on the current price of the asset and your entry price, meaning in the case of a bear market, the asset value loss is calculated from the price it was purchased.
Disadvantages Of Spot Trading
Takes A Long Time To Regain Loss: If a crypto asset is purchased at a high price, it might take a long time for the trader to e able to regain a loss and make a profit. For example, a spot trader who bought BTC at $64k in April has not recovered his loss.
No Profit In A Bearish Market: Spot traders only make a profit when the asset is in a bullish run higher than the entry price of the asset. Unlike in futures trading that a trader can make a profit from the bullish and bearish market
No Leverage: Spot trading does not offer leverage to its traders as such a trader with little capital can not make a big purchase compared to margin trading.
Margin trading is a type of trading that involves the purchase of an asset higher than the trader's capital borrowed from either the exchange broker. Profits and losses in margin trading are heightened as traders' accounts can be liquidated in place of a wrong trading decision.
Margin traders leverage their accounts by borrowing funds from third-party providers to increase their purchasing power. Thus, margin trading amplifies trading results as trades are made with a higher purchasing power than the trader's account capital. For example, a trader with $50 can purchase an asset worth $5000 with a leverage of 100x in margin trading.
Advantages Of Margin Trading
Leverage: Margin traders can leverage their capital or crypto asset and purchase bigger assets, this way, they stand a chance to make huge profits.
Wilder Range Of Asset Portfolio: Margin traders are allowed to diversify their assets even with little capital due to the leverage they enjoy.
Bidirectional Trade: The margin trader can place a buy and sell order on an asset in margin trading. This allows for-profit even when an asset value is in decline.
Disadvantages Of Margin Trading
** Liquidation**: Margin traders stand a chance to have their accounts liquidated if a trade goes wrong. Leverage provides an opportunity for the margin trader to make more profit, but it can also be catastrophic in the case of loss, leading to a liquidated account.
High Risk: The risk involved in margin trading is high as a wrong decision in trading might lead to huge losses and possible Liquidation
Future trading is a type of trading that allows traders to profit from both sides of an asset price action as they trade on the future price movement. Futures trading is an advanced type of trading not suitable for inexperienced traders.
In futures trading, future contracts are used for trading on the future price movement of an asset rather than having ownership of the asset. Similar to margin trading, futures trading also offer leverage to its traders to make trades on asset bigger than their capital.
Advantages Of Futures Trading
Bi-directional Trade: Futures traders can trade on both sides of an asset price movement (up and down). In futures trading, the traders trade on possible price actions in the future, creating the possibility of profits even in a bearish market.
Leverage: Futures trading also offers leverage to its traders, increasing the potential of higher profits.
Lesser Time To Make Profits: In spot trading, the trader has to wait for the price to increase to make a profit or recover funds. Meanwhile, in futures trading, the trader to not have ownership of the asset and would not have to wait to make profits.
Disadvantages Of Futures Trading
Requires Experience: New or inexperienced traders are not advised to trade on futures as it requires in-depth analysis to predict future price actions; unlike in spot trading, a trader can buy low and sell high.
High Risk: Many factors affect price actions, and some of these factors are unpredictable. This means even an experienced trader can get his prediction wrong. Also, there is a chance of huge losses because of leveraging.
Liquidation: Liquidation is present in futures trading as a wrong trading decision can lead to the trader's account getting liquidated.
2: a) Explain the different types of orders in trading.
b) How can a trader manage risk using an OCO order? (technical example needed).
There are different types of trading orders, namely,
This is a pending order issued by a trader on a trade to be initiated when the asset price gets to the set point. Traders placing a buy limit order will set the purchase price below the current market price and for a sell limit order the sale price will be set above the current market price.
Traders place limit orders at prices suitable for them or expect a pull-back of price during analysis. Traders who place limit orders are called market makers.
From the graphical illustration above, DOGEUSDT was in an uptrend and was approaching a resistance level. Price was at $0.2406, and the sell limit order was placed at $0.2424 as there was an anticipated reversal in price trend at that point.
These are buy or sell orders placed at market current price. Unlike the limit orders that are pending for price to get to a predetermined price, market orders are executed immediately depending on the asset liquidity. For example, if the current price of BTC is at $60,954 and a market order is placed, BTC will be bought or sold at the current price being $60,954.
Stop Limit Order
A stop-limit order is a pending order placed on an asset to be traded at a particular point. The stop-limit order is similar to the limit order in that it is a pending order placed at a predetermined price for trade to be executed. The stop-limit order is placed on an asset hoping that it will continue in that trend once its price gets to a set point. An illustration is given below.
From the graphical illustration above, ADAUSDT was on a downtrend movement, and the current price was $2.202. Therefore, a stop-limit order was placed below the current price at $2.188, hoping that it would continue on its downtrend movement if the price got to that point.
One Cancel The Other (OCO) Order
This type of trading order involves the entering of 2 pending orders on a trading asset to mitigate risk. Usually used when a trader is not sure of their analysis. A limit order and a stop-limit order are placed on an asset. If one of the orders gets triggered, the other is canceled.
For example, BTC is in an uptrend movement and approaching a resistance level at $62,350. Using an OCO order, stop-limit order is placed at $62,360, and a limit order is set at $62,350. If the resistance holds, the limit order will be triggered, and the stop-limit order will be canceled, but if the resistance is broken, the stop-limit order will be activated, and the limit order canceled.
Exit orders are placed at set points when the price gets to the trade position closed or exited. There are two types of exit orders stop-loss and take-profit. Stop-loss is an exit order placed to curtail the level of potential loss in a trade. Meanwhile, take-profit is a point set in the market when an asset price in profit gets to the trade is closed to prevent a drawback and loss of gained profit.
Managing Risk Using OCO Orders
Good risk management practice is necessary for crypto trading, and any activity done in trading that helps mitigate risk is part of risk management. For example, as explained earlier, the OCO order is a type of trading order that involves entering 2 orders (stop limit order and limit order) on a trade to help cushion the risk of a trading decision. OCO orders are used when a trader is not confident enough in the outcome of a trade.
For better understanding, an illustration is shown below.
From the image above, ETHUSDT price was in an uptrend heading to a resistance level at $3,917. A trader not sure if the price will break the resistance level or not will use an OCO order, as shown below
A limit order and a stop-limit order were placed, such that if the price reverse at the resistance, a limit order is placed, and if the price breaks the resistance and gets to $3,920, a stop-limit order is triggered. Thus, the execution of one order cancels the order.
Here the OCO has mitigated risk as either way price moves, and the risk is averted.
3: Open a limit order on any crypto asset with a minimum of 5USDT and explain the steps followed. (Screenshots needed from any cryptocurrency exchange).
I will be using Binance to show the steps involved in entering a limit order.
1.The first step is to visit the Binance platform. I will be using my mobile binance app.
2.On the binance homepage, click on Trades and search for the crypto pair of choice. I will be using BNB/USDT.
3.After selecting the crypto pair of choice (BNBUSDT), I set Limit as the preferred order type.
4.BNBUSDT was trading at $467.5, I placed a buy limit order at a price set at $463. So a buy limit order to buy 10.6 USDT worth of BNB when the price gets to $463 was executed.
4: Using a demo account of any trading platform, carry out a technical analysis using any indicator and open a buy/sell position on any crypto asset. The following are expected.
i)Why you chose the crypto asset
ii)Why you chose the indicator and how it suits your trading style.
iii)Indicate the exit orders. (Screenshots required).
Market Order Using Demo Account
I will be using the paper trading demo account of tradingview for this illustration.
BNB was my asset of choice, ranked number 3 by coinmarketcap BNB is a strong performing crypto asset. BNB is the native coin of the binance blockchain. Binance is the largest centralized exchange platform globally, and its blockchain supports the development of smart contract projects. I have been following the asset for a while, and I have done fundamental and technical analysis.
One of my favorite indicators is that it helps confirm trends and predict trend reversals by calculating the previous highs and lows in a given period. The vortex indicator makes use of 2 lines named the VI+ line (blue line) and the VI- line (red line). These lines cross each other at intervals to give trade signals.
With a default setting of 14 periods, the vortex indicator gives trading signals when crossovers occur. If the blue line rallies up and crosses the red line, it is a buy signal, and when the blue line falls and crosses below the red line, it is a sell signal. The distance between both lines indicates trend strength.
On the BNBUSDT chart, the price was on a ranging trend and trading at $466. The vortex indicator gave a sell signal when the red line (VI-) rallied above the blue line.
A sell order was executed immediately, and the trade is in profit as of this writing. The exit order was placed strategically as the stop-loss was placed at the previous high, and the take-profit was placed at the last low, as seen below.
There are different types of trading present in cryptocurrencies. Spot, Futures, and Margin trading are the types of trading, and each of them has its benefits and drawbacks. Spot trading is the type of trading recommended for newbies, and Futures trading is best suited for experienced traders.
When trading, various orders are used to execute a trade, namely, market, Limit, stop-limit, and OCO orders. The market order is placed by a trader who makes a trade using the current market price. The other types of orders are pending orders, though they differ from each other.
Thanks, Prof @reminiscence01