From crypto miners using bitcoin mining server hosting to individuals trading cryptocurrencies, crypto makes thousands of people richer yearly. But not every crypto trader trades profitably. A solid understanding of trading principles can help you become a pro trader. In this article, you'll learn about spot trading, how to trade the spot market profitably and how to deal with trading risks.
Let's Take a Closer Look: What is Spot Trading?
You may be familiar with buying cryptocurrencies as a form of investment. However, crypto trading is very different from investing. It's more comprehensive, requires more strategy and is more active. So, what is spot trading?
Spot trading is a strategy where the trader aims to buy a cryptocurrency when its price is low and sell when it rises. The difference between the buy and sell price is called the spread, and the spread determines how much profit a trader makes.
The most crucial part of spot trading is knowing where to buy or sell a crypto coin. You need to understand how to use technical indicators to see the support levels (where the coin price is likely to bottom before trending upwards) and resistance levels (where the coin price will reach before falling back).
What is meaning of spot transaction?
When a trader buys a token in the spot market, they buy at the spot price hence the name, spot trading. The same goes for when a spot trader sells a token. Overall, a spot transaction is when a trader makes a buy or sell order on the spot market.
What is a Spot Market in Crypto?
From the definition of spot market, it's easily identifiable that it comprises buyers and sellers, including investors or traders. The spot market is the most prominent crypto market, larger than the futures and options market. It has the most number of cryptocurrencies and has the highest trading pairs. Investors use this market to buy and hold coins long-term, and spot traders open and close their traders here.
What is spot market composed of?
The spot market comprises three major parts, the buyers, sellers and the order book. You'll find the order book on the spot exchange, and it details the number of orders by all buyers and sellers at a particular price. You'll also see the bid and ask prices. The bid price is the highest price buyers are ready to buy a crypto coin, while the ask price is the lowest price a seller is willing to sell a coin.
Most crypto spot markets have specific colors to indicate when a coin is decreasing or increasing in price. In addition, these colors are also used to signify buy or sell orders. For example, red represents when a coin price is falling and sell orders, while green represents rising coin prices and buy orders.
Crypto exchanges have different trading fees for their spot market meaning you pay different trading commissions for trading the same coin on various exchanges. Therefore, you should choose crypto exchanges with the lowest trading fees to maximize profits.
Types of Spot Trading Market
There are different markets for spot trading meaning you'll find crypto coins on both centralized and decentralized exchanges.
A centralized exchange is a crypto exchange where users use a custodial wallet, meaning the exchange has your private keys. A decentralized exchange on other hand is a crypto exchange where users hold a non-custodial wallet, meaning you're in charge of your private keys and control all aspects of your account.
So, what is spot trading in crypto based on? Trading the spot market is based on current market prices, with the overall transaction process differing with the type of spot market.
There are three types of spot markets:
- Over-the-counter spot market: where you buy or sell to an individual outside of an exchange. This tends to be costlier than buying from online exchanges.
- Peer-to-peer market: where you buy or sell from individuals on a P2P platform. Here, you'll find many options to choose a seller with the best rates.
- Market exchanges: This includes centralized and decentralized exchanges. Here you can choose which suits you best depending on how much control you want over your assets.
What Is A Spot Exchange?
Now, we'll delve into how to trade in crypto on spot exchanges. A spot exchange is a platform where traders can buy or sell crypto coins at the asset's current price. Unlike in the futures exchange, where traders do not own the assets they trade, spot traders are given virtual assets and have full ownership over them.
Spot trading on an exchange is simple but requires a good knowledge of technical analysis. As mentioned earlier, you need to find a crypto chart's support and resistance levels before opening or closing a trade. The 15 min, 1hr, 4hr and 1-day charts are the most important charts you must learn to read as a spot trader.
Some indicators on the chart that'll help you know when the market has bottomed or peaked include the Bollinger bands, Relative Strength Index and the moving averages. Learn how to use these indicators before starting your spot trading journey.
Pros and Cons of Crypto Spot Trading
Now that we've explained the crypto trading basics for spot markets let's look at the pros and cons of spot trading.
- Spot trading is simple and is a good place for newbies to begin their crypto trading journey.
- It's less risky compared to other types of crypto trading as there's no liquidation risk.
- You can find all cryptocurrencies on the spot market; this is not so for the futures and options market.
- If you buy a coin that doesn't perform based on your expectations, you might suffer a loss when closing the grade.
- You can be at risk of being unable to trade your coin for another if the currency you're holding has no liquidity.
So, what is spot trading unique proposition? It's simple, less risky, and you can make good profits with a smart trading strategy.
Steps to Trading Spot Markets
Aside from knowing how crypto trading works, you need a step-by-step guide on how to trade cryptocurrency and make profit. We'll begin with a spot market example so you can know where to carry out your trades.
- Pick a spot market to trade
Binance is an example of spot market. Crypto exchanges like Binance are centralized, while Pancakeswap and Uniswap are decentralized. Most times, centralized exchanges have lower fees and are more flexible.
- Create a trading account and log in
You might be required to provide personal information like your legal name, address and phone number, depending on the type of exchange you're signing up on. After completing your registration, you'll get access to trade on the exchange.
- Fund your account
Before you begin trading, add funds to your account. Then, you can use your local currency to purchase popular coins like Bitcoin directly. Alternatively, you can buy stable coins like USDT or USDC and use them to buy altcoins like Polygon (MATIC), Ripple (XRP) and Ethereum (ETH).
- Find a trading opportunity
You need to be able to identify profitable trading opportunities. What is spot trade basics? These include knowing when to buy or sell a cryptocurrency. For example, if BTC is trading within a range of $21 to $30k. You can go long and buy when it's at $21k, then wait until it reaches $30k before you sell your coins. When you close the trade, you'll earn profits from the price increase.
- Set your stops/limits and place your trade
The above example is just one part of what could happen; the second possibility is that instead of Bitcoin rising to $30k as you thought it would. Instead, it can dip to $19k; you're at a loss then. The best way to avoid more loss than necessary is by setting a stop loss on your trade. What is a spot stop loss? You set this sell order to avoid losing a significant amount of your capital should your trade fail to bring profits and end in loss.
- Monitor and close your position
Ensure you keep tabs on the crypto price movements and close your positions when due. Sometimes, your trade may not go as planned; you can decide to close it and restrategize.
Is Crypto Spot Trading Profitable?
Comparing the profitability of spot trading and futures trading gives widely different results. The difference between spot market and future market lies in the profitability and features.
Futures markets allow traders to use leverage to increase their profit potential but spot markets do not. However, there's a catch; the higher the leverage used, the higher the risk of getting liquidated and losing all your capital.
Spot trading is very profitable, with less risk of losing your assets. However, you must learn how to trade the markets effectively; demo trading is a good place to start.
What is meaning of spot transaction for demo traders?
Spot transactions for demo traders are not real transactions. You don't have to fund your demo account with real cash before you can trade. You already have access to virtual demo assets. So, what is spot in Binance demo trading like? Binance has a mock trading feature that allows traders to practice and home their trading skills. The interface is like the real spot market, and the coin prices are in sync with normal market prices.
What Are the Risks of Spot Trading?
Like any other type of financial market trading, some risks are attached to spot trading. These include spot transaction risks, market risks, economic risks, exchange risks etc. What is a spot transaction risks? A spot transaction risk entails all the exposures your trading capital has. For example, if you buy a token with little liquidity, you might find it difficult to swap it for a stablecoin or find a buyer to sell it to. This is rare in centralized exchanges.
The more common ones include the probability of buying at a different price than your order price. For example, if you place a buy order to purchase Bitcoin at $25000, because of market volatility, your buy order may become filled at $25080. The rapid price fluctuations can shift your buy price higher than expected.
So, what is meaning of spot transaction risk management? This includes strategies to minimize the effects of market volatility. The best method is the dollar cost averaging technique, where you set buy orders at different prices. This helps you reduce risk and buy the crypto coin at a good average price.