What is the right way to choose trading pairs while trading and investing in cryptocurrency?
General specificities and operating conditions of vary trading pairs significantly differ during cryptocurrency trading and investing in cryptocurrency, including dependency on trading strategy. Which trading pair is better for the beginner and what is worth to remember while choosing trading pair for someone who wants to buy bitcoins only with an investment purpose? All these issues you’ll find out from our article.
The majority of the beginners master the simplest trading strategy that is called “scalping-like strategy”. This trading strategy is based on a simple and pretty clear idea. If we use limit orders (follow the link for details
) and establish the bid price (for example, bitcoin bid price) a little higher than the currently best one this limit order will work out faster than other profitable ones (if it isn’t overbidden by your competitors). After successful bid a trader should try to sell bitcoins at the cost of buying that is lower a little bit than the best one.
To make the described strategy function more or less efficient, it is worth to know which trading pairs could be suitable for it. First of all, these pairs will include the ones with the great spread, higher than doubled commission, and moderate movement. So, if to consider a pair BTC/USD, the best bitcoin bid price would be equal to 4030 USD (as at 15 August 2017) and bitcoin ask price is 4010 USD (as at 15 August 2017) - the spread for this pair would be equal to (4030/4010) -1= 0.0049, that means 0,49% and this pair wouldn’t be suitable for aforementioned trading strategy.
For successful trading using this strategy, the spread should exceed at least doubled commission on tenths of a percentage. In order to figure out the possible amount of spread that is equal to, let's say, 0,8% in our sample, it’s enough to take the corresponding part from the smaller of two sums (4010 * (0.8/100) = 32.08 USD). A small number of people who want to buy at market price would like to trade in pairs with large spread.
A sound environment for “scalping-like” strategy would be possible in the situation (that is quite rare) when the best cryptocurrency bid price of one trading pair would be much more profitable than the same cryptocurrency price for another trading pair. Let’s explain everything using a concrete example. It can be possible to buy ETH immediately (at the current market price) with a price of 1 ETH for 293 USD, besides you can sell (at the current market price once again) your bought ETH for 0.0854 bitcoin and then - exchange gained bitcoins for US dollars at a rate of 3465 USD for BTC. In this case, if you create market order to buy 1 ETH for 239 USD, as a result, (taking into account all commissions) you can get 294.139 USD that means 0.38% more than initial sum. This trading strategy is called Exchange Arbitrage. There are three difficult issues in this strategy: first of all, it may pass quite along time while waiting for a favourable situation, secondary, the amount of assets at a good price could be quite limited, and thirdly - any of these “good” prices can “slip away” before you finish described trading cycle - in this case you risk to suffer losses.
After the beginners have got accustomed, they can pass towards volatility trading (based on rate movement) that is performed on the principle “to buy bitcoin when price is cheap, to sell bitcoin when price is high” (you can put any cryptocurrency instead of bitcoin). The concept problem of such trading type - is, certainly, the identifying of exact moments when somebody is going to acquire assets (when the price reached its maximum) and exit (the closer to the local peak - the better). Detailed description of such process pushes the boundaries of current material. Note, that for the initial experience concerning this topic it’s necessary to choose trading pairs, that are marked by volatility.
In order to acquire skills in this sphere trading sums are not very important, and till a beginner doesn’t get enough of experience (that could be proved by positive trading dynamics during one month, at least), it’s better to limit itself to minimal deposits in each certain pair. So, for example, EXMO exchange has set the limits (that complies with the sum of 0.2 USD) of minimum deal volume on the most number of pairs such as “altcoin-bitcoin” or “altcoin-fiat”. Pairs with “bitcoin-fiat” exchange acquired higher limits of minimum deal volume which exceeds 3 USD according to current bitcoin rate
Pay attention that while investments in cryptocurrency, its purchase using unpopular trading pairs could be not so profitable due to overvalued rate and small volumes on the top of the cup. Bitcoin-crane visitors also don’t like such pairs.
If you are doubt in your trading talents, the answer to the question that is put at the title of this article would be the following: chose the pair which minimum deal volume lower and trading dynamics is more suitable for you; start gradual learning process (including your own mistakes) without making significant deposits till you acquire some experience. You may choose two or three such pairs.
What is worth to remember
Under the theme it’s worth to note the fact that volatility of altcoin pairs (for example, DASH/BTC) is usually significantly higher, than the volatility of pairs that consist of bitcoin and fiat currency. That’s why general character of trading bitcoin pairs involves lower risks and lower income. It’s worth to remember that trading style on such unsimilar pairs may differ significantly.
It’s quite often that during many days and weeks the cryptocurrency demonstrates general increase (for example, bitcoin price has been almost continuously increasing during April and May of 2017). In this case, being patient a little bit, a trader can always be in the black, even if his entrance to the market was not successful enough (on one of the price spikes). Such easy money is quite deceptive: when the boom ends with recession and long price depression, it turns out that some beginners, who had considered themselves almost trading expertes, can not adapt to new difficult conditions and suffer losses that increase previous income (the most significant impact on pairs based on altcoins, for example, ETH/BTC). So, it’s better to estimate your trading skills on the assumption of several months during which crisis periods were accompanied with boom periods and price optimism. Having got positive dynamics, summarizing the results of such long periods, you can start deposit substantial funds.
Additional materials that may help you:
How to protect account and personal data on EXMO?
Cryptocurrency: Where to start? Pt.4 How to Ensure the Safety of Your Crypto Assets
Monero and Zcash - new level of the anonymity
TOP-5 facts about Ethereum
What are the pros and cons of investing into cryptocurrency
Why do miners choose exchanges to exchange cryptocurrency for fiat funds
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Your respectfully, EXMO team
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