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5 crypto trading mistakes to avoid as a newcomer

In Insights

Crypto trading can be rewarding, but if you're new to the space, you want to be careful to avoid some of the trappings that catch out other newcomers.

Choose your exchanges wisely

As a newcomer to the cryptocurrency market, it’s important to know which exchanges are reputable and which ones are... less so.

  • If an exchange has high (real) trading volume like Liquid, it usually means it has a high number of users. If the exchange has many users, it’s most likely a reliable place to trade.
  • Exchanges that have applied for government regulation and licenses are safer to use. Liquid, for example, was the first global cryptocurrency company to be licensed by the Japan Financial Services Agency.
  • Use your gut instinct. If an exchange looks questionable, it probably is.

Be careful with low-volume, high-volatility coins

The cryptocurrency market is young. If you come across a coin with “explosive gains", take a few moments to check the market cap, trading volume and fundamentals to get a better understanding behind the dynamics and support of the price increase.

Here’s an example of a cryptocurrency with low trading volume and high volatility.

According to CoinMarketCap, the price of SMLY (SmileyCoin) increased 639.89% in the past 24 hours. A new investor may think this coin could yield big gains, but look closer and you can see the drastic appreciation was only supported by 2,711 USD of trading volume.

In a situation like this, it’s highly likely the price rise was the result of a single person trying to get the attention of unsuspecting, inexperienced investors.

Don’t jump on pump & dumps

On some other exchanges you may come across what's known as a "pump & dump". You can spot these when you see a large price spike followed by a heavy sell-off.

These so-called pumps ca often be accompanied by frenzied postings on social media encouraging traders to buy the token in question. This kind of mass hysteria can further drive prices up, but when the price turns, it can come down very hard, very fast.

Rumors of positive news and developments can also fuel price increases. There's an old turn of phrase, “Buy the rumor, sell the news”, that refers to rumors pushing prices up before a correction after the news is confirmed.

If you plan to buy into speculation, spend some time looking into the validity of the rumors.

Always do your own research.

Don’t forget your stop loss

A stop loss is a tool that allows you to execute a market buy or sell at a specific price to keep trading losses within your risk profile.

Here are two trading examples, one without a stop loss, and the other with a stop loss in place:

No stop loss

  1. You buy 1 BTC at a price of 8,000 USD, expecting the price to go up.
  2. The price of BTC drops to 6,500 USD overnight.
  3. You wake up in the morning with a 1,500 USD loss.

With stop loss

  1. You buy 1 BTC at a price of 8,000 USD, expecting the price to go up.
  2. Your risk profile allows for 3% loss, so you set a stop loss sell order at 7,760 USD.
  3. The price of BTC drops to 6,500 USD overnight, and your stop loss sell order executed successfully at 7,760 USD.
  4. You wake up in the morning with a 240 USD loss instead of a 1,500 one.

Cryptocurrency exchanges like Liquid support stop loss orders.

Don’t trade blindly

You should never trade without understanding what all the colorful bars and lines on your charts mean. You can learn all about indicators here on the Liquid blog.

To get you started, here are a few commonly used trading indicators and techniques:

  • OHLC charts show the open, high, low, and closing prices for an asset.
  • RSI is a momentum indicator that can be used to determine if an asset is overbought or oversold.
  • MACD shows the relationship between two moving averages. It can be used to determine a possible trend change.
  • Volume refers to the total amount of asset traded over a period of time. It can be used to determine the strength of price trends.

Keep in mind that learning how to read a chart doesn't give you the ability to predict the future. What it does is enable you to trade in a way that results in more wins than losses.

Learning how to read charts is tough, but essential. Trading without indicators is like driving without a map. Go in well equipped.

Trade Crypto

This content is not financial advice and should not form the basis of any financial investment decisions nor be seen as a recommendation to buy or sell any good or product. Trading cryptocurrency is complex and comes with a high risk of losing money, particularly if you trade on leverage. You should carefully consider whether trading cryptocurrencies is right for you and take the time to learn how trading works and decide how much money you are prepared to lose.

WRITTEN BY

Liquid

Providing liquidity for the crypto economy.