Without question, 2017 has been the year of bitcoin. Its explosion in popularity has created a global buzz among consumers, traders, and investors. Transaction speed, low fees, value increases, and other factors have persuaded people from around the world to make Bitcoin one of their primary modes of exchange.
As a result, large groups of traders have capitalized upon the boom in bitcoin trading in the spot, CFD, and futures markets. In an environment that is best described as “turbulent,” discipline and dedication are two indispensable prerequisites for success.
Here are five tips for turning the inherent volatility of Bitcoin trading in your favor:
Let’s look at each of these in greater detail.
The nature of Bitcoin makes it an outlier in comparison to other asset classes or currencies. There is no central bank or governing body to influence its valuation. News events can have unpredictable impacts, and other financial instruments exhibit sporadic correlations. In fact, Bitcoin pricing models are largely speculative, ignoring a great deal of traditional financial theory.
Understanding the basics of technical analysis is an absolute must before entering the Bitcoin markets. In many ways, price itself provides the only dependable clues pertaining to Bitcoin’s future value. The lack of relevant market fundamentals places an impetus upon analyzing pricing charts, applying indicators, and reading price action.
Trading is a marathon, not a sprint. One of the most important tasks facing Bitcoin market participants is establishing a schedule that is sustainable over the long haul. Putting in extraordinarily long hours on a daily basis leads to burnout and subpar performance.
The market hours for Bitcoin are long:
| Venue | Business Hours |
|---|---|
| Cash market | 24 hours a day, 7 days a week |
| CFD | 24 hours a day, 5 days a week |
| Futures | 23 hours a day, 5 days a week |
No one can trade effectively 24/7. The best practice is to adopt a manageable schedule by outlining the optimal times to trade and focus on those periods exclusively.
Bitcoin is unique in that typical news items do not have a predictable impact upon the markets. There are no scheduled GDP releases, WASDE or EIA inventory reports to boost participation and skew pricing.
However, unexpected news items are capable of greatly influencing Bitcoin price. Recent examples include:
| Date | Event | Bitcoin Value |
|---|---|---|
| 9/14/ 2017 | China announces ban on cryptocurrency exchanges | -9.3% |
| 10/10/2017 | Russia announces ban on Bitcoin exchanges | -12.5% |
| 11/1/2017 | CME Group announces Bitcoin futures launch | +3.8% |
| 11/21/2017 | Hack of virtual currency system Tether | -5.3% |
If you’re going to start trading Bitcoin, it’s a good idea to have access to a live news feed and keep an eye on it.
Any trades are educational examples only. They do not include commissions and fees.
Consistent volatility is an attribute of Bitcoin markets that is particularly attractive to active traders and investors. Valuations regularly fluctuate between 5 percent and 10 percent daily , creating opportunities for traders with an appetite for risk.
No matter if a trader is engaging the cash, CFD, or Bitcoin futures markets, using stop losses is a must when trading Bitcoin. The wide swings in pricing are certainly ripe for profit, but the potential for catastrophe does exist.
It’s absolutely imperative that you use a stop loss somewhere in the market — the exact placement will vary — to protect any open position.
It’s a cliché, but leverage is truly a double-edged sword: It boosts gains but magnifies losses. Too much leverage promotes reckless money management and will lead to blowing out your trading account. Too little can hinder performance because premium trades may not perform up to their capabilities. Ultimately, effectively managing leverage is a balancing act that a Bitcoin trader must conduct.
Bitcoin futures products may help you manage leverage because they place an extra emphasis on proper leveraging. The offerings of the CME Group and Chicago Futures Exchange (CFE) are priced at $25 and $10 per tick, respectively. To say the least, it can be capitally intensive to take multicontract positions.
A simple way to define position sizing is the 3 percent rule. Under its parameters, a maximum of 3 percent of the trading account may be assigned to a single trade. This ensures the proper alignment of risk to reward with respect to position sizing and stop loss location.