A Primer On Trading BTC/USD
If you ask yourself which cryptocurrency is THE original one, then you may find the answer in Bitcoin. It was, after all, the first cryptocurrency – where it all began. In fact, before Bitcoin, most of us had never heard of terms like blockchain or decentralized finance. It was a whitepaper by Satoshi Nakamoto in late 2008 that changed everything for investors, traders, and even governments. Various institutions around the world have used the concept of blockchain in a variety of applications ever since Bitcoin exploded onto the scene.
Bitcoin (symbol: BTC) continues to be the cryptocurrency with the largest market capitalization. Over the years, it has gone through a lot of ups and downs. That kind of behavior is not a bad thing for traders. Even buy-and-hold investors who entered bitcoin early have gained. Just look up crazy stories of a few hundred dollars invested in the early days of Bitcoin turning into more than a million dollars.
In this article, we will take a closer look at how to trade BTC against USD. We will explore trading styles and indicators that you can deploy while trading BTC. Importantly, we will also touch upon some ways in which you can manage the risk of trading a highly volatile instrument like BTC.
Develop a deeper understanding of BTC
Before you trade anything, you would like to know more about the instrument to be traded and what are the key drivers of its price. This understanding is important to help you develop a view of an instrument’s likely future price movement. The supply of Bitcoin is capped at 21 million coins and the underlying assumption among Bitcoin bulls is that the demand for Bitcoin will go up while supply will not, causing prices to rise. So, factors affecting the demand for Bitcoin need to be studied carefully.
Keeping track of bitcoin news is the most direct way of getting your ears to the ground. Bitcoin tends to get influenced a lot by the news, positive or negative events, and liquidity. If a government announces negative steps toward cryptocurrencies or bans their trading, then prices can turn volatile very quickly. Similarly, any hacking incident or security breaches at well-known crypto exchanges can significantly impact BTC prices.
BTC (and cryptos in general) are also impacted by the fiat economy. Decisions of central bankers, inflation, liquidity, and flows into risk assets are all factors that affect the prices of cryptocurrencies. So, an informed trader needs to keep tabs on general developments and events outside of the crypto world as well.
Figure out your time horizon
Once you develop a deeper understanding of where BTC is headed, you can then think about the time horizon of your trade. Are you someone who is confident in estimating BTC’s price movement over a day or two, or are you someone who can read where BTC is headed during the next month or quarter? Also, does your trading plan call for taking frequent trades for small profits, or are you only going to trade a few times a year for large profit-per-trade numbers? More importantly, how much are you willing to lose if a trade does not go in your favor? Usually, a larger profit-per-trade setup comes with a large potential loss level. Some self-reflection and a clear trading plan will give you a better idea of how long you want to be in a trade. This is the reason why we at Cerus Markets encourage all our traders to have a trading plan with profit targets and defined risk levels.
Strategies for Trading BTC Against USD
Trading BTC against USD can be done through a CFD (contract for difference). The BTCUSD pair denotes how many dollars are needed to buy one BTC. In the BTCUSD pair, BTC is the base currency while USD is the quote currency.
Depending on the time horizon and risk-reward metrics of your trading plan, you can trade the BTCUSD pair intraday, positionally, or swing. In the case of intraday, you would open and hold the BTCUSD position for 24 hours or less. You would most likely use a short timeframe chart like a 5-minute chart or trade based on some development that will likely affect the price of BTC for a very short period of time.
(5 min intraday chart showing a downtrend, source: Cerus Markets)
If you are good at finding support and resistance levels or a channel within which the price of BTC has been ranging, then you can go long at support (from where prices may bounce up) and go short at resistance (from where prices may reverse and fall back to the bottom of the channel). This type of trading is called swing trading and it can last a few days or weeks. A 15-minute chart or a daily chart can work well here. However, channels can be formed even for a day in which case a 5-minute chart can also be used.
(daily chart for BTC showing a channel with support resistance, source: Cerus Markets)
You can trade positionally if you think that the price of BTC is in an uptrend or downtrend. Simply establish a view and then go long or short and stick to the position till your thesis is violated. Using the principle of higher highs and higher lows (or lower highs and lower lows for downtrends) can work when a trend is in play.
(Long-term monthly chart since 2014, source: Cerus Markets)
For all of the trading styles mentioned above, traders can use a range of indicators to develop buy and sell signals. Cerus Markets offers indicators like moving averages, relative strength index, Fibonacci retracement and extension levels, Bollinger bands, etc to help traders formulate strategies.
Crypto CFDs are leveraged products. They amplify profits and losses. So, when things go right, you make outsized returns but when things don’t go as planned, you can make significant losses. Sometimes, the loss can be large enough to wipe out your entire capital. To avoid such an adverse scenario, it is important to have some risk management rules in place. Firstly, it is important to define the maximum loss that you are willing to take on each trade. This loss could be a certain percentage of your capital. Based on what you decide, always enter a stop loss level when you initiate a trade.
Secondly, take advantage of Cerus Markets’ alerts feature that lets you set up price alerts. So, if you are away from your screen or in a meeting, you can get an alert on your device and take action to limit your losses.
Lastly, Cerus Markets offers CFDs with a leverage ratio as high as 100:1. However, you can choose to limit that ratio (and therefore limit your risk) by taking only a small position. You can also deploy uncorrelated strategies so that the price movement in one direction does not affect multiple trading positions adversely all at once.
At Cerus Markets, we are dedicated to educating traders about approaches and strategies to trade cryptocurrency pairs like BTC/USD. We encourage you to open an account if you think that you are ready to trade BTC/USD. We currently also have a 100% welcome bonus offer for new sign-ups.