Crypto Trading Terms
The guide about crypto trading terms in front of you aims to show you just how terms are important. We go through crypto trading terms like margin & leverage trading, long & short positions, swaps, futures, CFD, software, crypto trading bots, and automated trading terms. Trading without knowing these terms will cause limitations, missunderstandings and losses. Related articles are crypto trading instruments and crypto trading tools.
Why is it Important to Read Trading Terms
We are sure that you want to make a profit from trading in the crypto market. To do that, you need to be familiar with trading terms. Otherwise, you might deal with losses or miss an opportunity for additional earnings. It would be a shame not to make more profit just because you are not familiar with the terms that the community uses.
Just like any market, crypto trading has terms that are specific to it. It might be the first time you read a specific phrase and you have no idea what it means. If you are eager to find out, just keep reading!
Margin and Leverage Trading
Beginners often mix these terms because they refer to the same thing. Normal trades come with 1:1 leverage, but margin trading enables allows you to increase it. Let us assume that you want to open a margin position that will have 3X leverage. If your assets record a 10% increase, you will generate a 30% yield due to your leverage. BitMex is a good example of what leverage looks like, thus the screenshot below.
Lending market is the crucial reason that the margin trading even exists. The trader gets the opportunity to invest more coins they got from the lender. On the other hand, lenders take an interest and benefit from the loan itself. In some cases, you can see the exchange itself playing the lender role.
Margin trading increases potential profit, but it can also lead to big losses. That is why it is vital to control your greed and manage the risks. Be aware that you can lose the entire sum you invested. It is a good idea to set a profit target and a stop limit for losses.
You also need to calculate the costs of opening a margin position. You will need to pay a fee for the exchange and the interest for the coins you borrowed.
Go Long vs Go Short
Unlike what some might think, these terms have nothing to do with sports. In crypto world, they are related to trading. There is a significant difference between going long and going short. We encounter the former type of trade more often. In fact, you probably already tried it and you are not even aware that you did.
In a long trade, a trader wants to make a profit from a market that is rising. Here is an example. You purchased 1 BTC for $6,000 and you are waiting for the price to rise to sell it. Once the price goes up to $6,500, you can execute the trade and make a $500 profit. Bitfinex’s “How it Works” is practically a standard representative of how trade agreement looks like, as shown below.
On the other hand, short trade gives you an opportunity to profit from a market that is falling. Margin trading is an excellent example of this. You borrow an amount from a broker. The next step is to wait for the price to fall and buy the currency back at a lower rate. If you go short, you have the option of profiting from a falling market. However, keep in mind that you face a significant risk. It might be a good idea to set a stop limit to control your losses.
Swaps, Futures, CFDs
A regular crypto swap involves any trade of two cryptocurrencies or a trade from crypto to fiat and vice versa. However, atomic swaps are a new feature that appeared recently. They allow swapping one crypto coin for another without including a trusted third-party, such as a digital exchange. Atomic swaps are still not popular enough, but they might revolutionize Bitcoin trading and altcoin trading in the future.
OKCoin was the first one to offer crypto futures contracts. Signing an agreement like this means that you accept to buy or sell a currency (financial instrument or commodity) at a predetermined time and at the specified price. If you are a buyer, you oblige to go through with the purchase on the selected date. If you are a seller, you must accept the offer under the previously agreed conditions.
Contracts for Difference (or CFD) is a specific contract in which you do not claim ownership over an asset. Instead, you and the party that owns that asset make a deal. You agree to settle the difference between the value at the time you sign the contract and the moment you conclude the trade. When it comes to possible profit and losses, it is nothing different than other investment opportunities. If the asset price goes up, you yield an income, but if it goes down, you record a loss.
Software, bots and automated trading
Crypto-related software involves any tools that users consider helpful for swapping cryptocurrencies. This includes software for managing your portfolios and synchronizing them in a single place. There are also tools for technical analysis that show charts and price fluctuations over a specific period.
Automated trading is trading performed on your behalf by a computer program. You first need to generate a set of orders based on your desired investment strategy. The software will monitor the market and execute trades in accordance with them.
Crypto trading bots is another name used for the tool that performs automated trading. You can choose between free and premium crypto bots. Paid versions offer more options for setting the bots to perform the tasks just the way you want them to.
The crucial advantage of using trading bots and automated trading is that you do not have to be online to trade. Regardless of where you are, the program will try to increase your profit. However, you can never trust a computer tool 100%. That is why you should be ready for potential losses and use the stop limit to control them.
In this crypto trading terms article, we touched upon the importance of limitations set on functions for trading. Cryptocurrencies have several platforms that provide tools such as margin trading and CFDs. These instruments come with their own set of limitations, which are sometimes not clearly shown while you trade. To avoid unpleasant experiences, we do urge you to read terms for each function and marketplace.