If you are looking to start trading cryptocurrency, there are three different kinds of trading you should be aware of: day, margin, and arbitrage trading. Each approach has advantages and disadvantages, so the more you learn about them the better your chances of earning more from your trading experience. Cryptocurrencies tend to be volatile, and having profound knowledge about trading will certainly place you in a better position.
Day trading, as the name suggests, is buying and selling assets within a single trading day. This is the type of trading associated with the stock market and is often the first thing that comes to mind when beginners think about trading. While many people manage to make a decent profit from day trading, even if you have a deep understanding of how the cryptocurrency market works it is still a high-risk activity.
First and foremost, you need initial capital. If you risk assets you are not comfortable using, day trading becomes quite challenging, as emotion and anxiety will likely lead you to make hasty decisions. With cryptocurrency in particular, you should keep a cool head. The volatility of Bitcoin and other digital assets means it isn’t uncommon for traders to lose thousands of dollars in a single day. But a week later, you could earn those thousands of dollars back. There will be ups and downs, so remaining level-headed is important.
One thing that helps when it comes to day trading is setting a reasonable goal. Figure out what level of profit you want to make in a given month and work towards that goal, to keep you from going overboard. The act of day trading involves performing a lot of research and trying to identify patterns.
When you margin trade, you borrow from a broker and the broker gives you extra money to finance the trade. This is called leveraging your bets. Margin trading is riskier than regular day trading because you have to put up collateral. Essentially, it is a loan and you have to pay interest on it as you do with most loans.
The advantage is that you will have a chance to trade a higher value of cryptocurrency than you would otherwise. If the trade works in your favor, you can have substantial gains, but if it goes wrong you could suffer high losses. Another disadvantage is that it tends to have a lot more restrictions and limitations. While the restrictions are for your benefit, they can still be an inconvenience.
If you know the odds are not in your favor, it is usually better to avoid margin trading. However, if you know that odds are in your favor, it can be the best approach, but you should still do what you can to reduce the risk. For instance, if you are just starting out, make sure the leverage is small.
Arbitrage is an approach to trading that involves buying an asset in one market and selling it on another market for a profit. Typically, the buying and selling happen nearly simultaneously, as many markets have a gap in prices. Although not devoid of risk, arbitrage trading is a lot less risky than margin trading.
Location is one thing that can create a price imbalance: the price of Bitcoin at a given point in time might be different in Russia than it is in Japan. Depending on where you are, supply and demand might differ. Trading across countries, however, can be quite a challenge. Each country has its own set of regulations, which can be hard to keep track of.
But even within a given country, the price of a cryptocurrency often differs from one exchange to the next. Arbitrage trading allows you to reduce some of the risks of cryptocurrency trading by taking advantage of these discrepancies.