Ethereum Trading Guide For Beginners
Satoshi’s Nakamoto’s vision of Bitcoin was an ingenious method of bringing financial freedom to the public through digital currency. However, it is the Ethereum network that brought in the blockchain revolution by allowing different platforms to launch their services by leveraging the decentralised technology. Ethereum has its own Ether (ETH) tokens, normally referred to by the platform’s name and Ethereum trading is very popular.
As the second-largest blockchain network by market capitalisation, Ethereum boasts the most widespread use of the technology. You can trade Ethereum for profits as the cryptocurrency has its ups and downs just like any other.
Table of Contents
3 Reasons to Trade Ethereum Now!
2nd Largest Cryptocurrency
As the second-largest cryptocurrency in the world, there is a huge demand for ETH tokens and it holds a significant market share. Another aspect is that no matter how many ERC20 compatible tokens are launched, their platforms ultimately rely on the Ethereum network to function, ensuring that it is always in demand.
DeFi and NFT
The largest ecosystem of Ethereum is also host to the leading DeFi and NFT based projects. Decentralised Finance has changed how people invest and earn, giving profit yields that puts the best of traditional investments to shame. Non Fungible Tokens allow people to monetise their digital art, music and just about anything, bringing in huge demand for ETH.
The beta phase of the next iteration of the Ethereum blockchain technology is already in the works. Among many different changes that it will bring, the two most important are a cap on the total ETH limit and shifting from the energy-intensive Proof of Work to Proof of Stake. This supply shock and the eco-friendly nature will boost its demand.
Ethereum Trading vs. Investing
If you are interested in making money from Ethereum, you can invest heavily in different mining rigs and solve mathematical problems to earn the block rewards. A cheaper, yet better alternative would be to simply invest in Ethereum or trade in the ETH coins. As a cryptocurrency, the Ethereum coin is a volatile asset and you can use this to your advantage to capture the differences in price over time to generate profits.
Investing is one method, where you will buy ETH coins and hold on to them, waiting for the right time when the Ethereum price rises to where you are comfortable with the value held and then sell off the tokens. Depending on what kind of crypto exchange you are using (centralised, decentralised or P2P), you will need to learn about cryptocurrency wallets, how to operate them, the public key and private keys and much more which you may find a bit too much to handle.
In that case, you can always go for Ethereum trading. Trading doesn’t deal directly with ETH buying and selling but uses agreements between the trader and the platform for some complex value-driven contracts that use Ethereum price as a base. As such, the contracts are called derivatives since they derive their value from Etherum’s price. Along with this, the contracts are based on traditional trading rules and offer a much more convenient and familiar environment for traders. This means no wallets, no alien-looking terminologies or other complexities associated with cryptocurrencies.
Using derivatives is advantageous in another manner, where the contracts can use different rules for the maths behind it and allow the traders to make profits in unique ways. Contract for Differences (CFDs) are complex instruments that rely on the Ethereum price movements. CFDs are used by traders to bet on the ETH price movements. If the bet is on spot, the trader can then close the contract and (as the name suggests), and pocket the difference.
Futures is a time based derivative contract that gives the trader the obligation to honour the contract agreements at the set time. If used correctly and with proper homework, Futures can give a trader massive profit as compared to traditional investing.
Since the trader is bound by the contract to buy ETH at the agreed price, regardless of the market price, many aspiring traders (and indeed, veterans) see this as too big a risk. There are two other derivatives they can opt for, Perpetuals and Options. The Perpetual name is self-explanatory. The contracts do not have a defined end time and can continue as long as the trader wishes to. Options provide an alternative to a trader to back out of a contract whenever they want before expiry or just let it lapse. All the trader has to lose is the premium, saving a massive loss that would have been inevitable with a standard Futures contract.
Ethereum Analysis: The Key to Success!
Though Ethereum has had a very meteoric rise in value over its existence and breaking its all-time highs this year, again and again, it has also had its fair share of crashes and has experienced long periods of crypto winter in the past. Considering the high level of fluctuations, it is necessary to have good homework and analysis done for your successful trades.
There are two types of analysis you can go about. Taking the mathematical route comes under technical analysis, where the past numerical data pertaining to Ethereum is used to determine the future prospects of ETH. Data such as price, traded volume, active wallets and on-chain activity is taken and run under different algorithms and calculations to make trend projections. Depending on the type of technical analysis you want to do, you can run moving averages, stock to flow, golden ratios, Fibonacci sequences and ceilings to get different takes on what the Ethereum price looks like in the future. Each technical analysis will give a different reading and you will need to make a judgment call on how to reach a point that satisfies all of the calculations. It is also important to take into account the time scales of the data. Using daily price values for moving average, for example, will give you predictions on average daily future prices and negate any movements that will happen within days or months.
Whereas technical analysis is all about mathematical modelling and future projections on a scientific basis, fundamental analysis is based more on the human element and how the market feels about Ethereum. Take the 3 reasons we mentioned for trading at the start of this article. ETH 2.0 is in the test phase and when it will be near completion and ready to go live, there will be a positive market sentiment. Similarly, the DeFi growth has attracted people, but the overloaded network and high gas cost can compel many to seek alternative assets. Facts like these and others such as news, announcements from the development teams, miners, upcoming events and breakthroughs can have an impact on the Ethereum market and drive the price up or down. A keen eye will let you know where the market will move.
Apart from these, you should also take into account other factors that are not directly connected to Ethereum but have their role to play in the price shift. Things like industry regulations, legal decrees or any competition chain making progress. Even such remote things as hacks or rug pulls of other cryptocurrencies can greatly impact ETH price.
In short, you will need to take in a wealth of information and decide on how each factor will have its impact on price, guiding you to buy or sell Ethereum based contracts.
Choose a Trading Strategy
With you carry out technical and fundamental analysis, you will have a good idea of whether to buy or sell Ethereum contracts. Though it sounds easy (which it becomes eventually with practice), there is a lot more to it than just buying a contract if indications are showing an upcoming bull market. You will need to strategise your moves and learn when to open a contract, how much to let ETH price grow or fall before closing it etc. There are many strategies that you can employ. Some of these are discussed below.
Intense and heavy, scalping is a fast-paced strategy that sees a trader place several orders in succession and tandem, wait a few seconds or a minute at the most for the ETH price to rise, and close the orders. The minuscule profit captured is very small—almost insignificant. However, with tens, maybe hundreds of orders placed and closed over a short period of time can hopefully combine together the almost negligible profits into a significant value.
- Day Trading
Lasting over a course of a single trading day, day trading is all about opening orders, capturing the profits and closing them before calling it the end of the day. Typical trades last from a few minutes to hours. The plan in this strategy is to finalise the trades and take out all the invested amount to save from any unforeseen price slippage during off trading hours. Every day is a new day for a day trader.
- Swing Trading
From a few days to a couple of weeks, swing trading captures the larger movements over extended periods of time. Unlike day trading, the orders are kept open even during weekends. The analysis timelines are adjusted accordingly and the time when the trader is not in front of a computer observing the trading environments is also accommodated in the order.
- Position Trading
The longest of all trading strategies, position orders are all about going for the longest haul. The trader ignores the ups and downs of Ethereum that happens during days, with the eye set for a larger prize, mostly what is called in the trading sector as a “moon”. A position trade can last for months.
- Short Trading
Although not an independent trading strategy, shorting is a method to still be able to make profits in a bearish market. Shorting works in conjunction with the above-mentioned strategies. Basically, in shorting, a trader bets that the price of Ethereum will fall. If the analysis is correct and the ETH price does fall, the trader rakes in profits. However, shorting can also result in heavy losses if the trade does not go your way.
Sign Up on an Online Broker or Derivatives Exchange
To be able to trade, you will need to sign up on a trading platform. You have two options on how you can buy and sell different ETH derivative contracts. It can be either a derivative exchange or an online broker.
The concept for both types of platforms is the same: trade different contracts for profits. The only difference is that you as a trader, interact directly on a derivative exchange while an agent does it for you on your behalf on a broker platform. Though using a broker seems unnecessary and just adding a middleman for no reason, using it can be advantageous in certain conditions. A broker can offer you higher leverages, access to advanced trading facilities and options such as crypto trading bots and their dedicated agent can even give you tips on upcoming opportunities.
When you finalise your decision of using a broker or an exchange, simply head over to the platform’s website and register on it. There will be KYC and AML checks that you will need to clear before you can begin your trading and these checks can at times take a couple of days so be sure to register well in advance of your order opening strategic window.
Registered and all checks cleared, the next step is to transfer over money so you can start trading. Though each platform will have a different user interface, the deposit option will mostly be within your profile or have a dedicated wallet.
Again, depending on the platform, you will have one or more deposit options. Since trading involves derivative contracts that use Ethereum price and not the Ether tokens themselves, you will normally find only fiat deposit options but some platforms also allow for crypto deposits. This can be a bank transfer, credit or debit card deposits and even other payment transmitter options such as PayPal. Each deposit option will come with detailed instructions that you will need to send funds. For example, if you select the bank deposit option, you will be provided with the bank name, account number, location etc. For cards (credit/debit, PayPal etc.), you will need to enter relevant information such as card number, expiry date, and CVV code.
One thing to note here is that under KYC and AML regulations, many platforms will only accept funds from sources that are under the name of the trader.
Before you send money to your trading account, it is prudent to send a small amount as a test to ensure that everything is in order and to avoid losses in case of hiccups. Once your initial test amount is received successfully, you can send over the rest of the money to begin trading.
Open Your First Ethereum Trade
Analysis done, strategies set and your trading account all funded, you are finally ready to open your first trade. Select your Ethereum trading pair (for example, ETH/USD if you want to trade with the United States Dollar as the base to calculate Ethereum value). The trading interface will adjust to show you relevant data in different sections.
There will be a graph that can be adjusted to show different data charts, such as candlesticks to help you update your analysis. Apart from this, you will find a stacked data container with Buy/Sell or Bid/Ask data. This is the order book that contains all data on orders placed, but not executed as yet. Buy and sell orders are placed separately, with each row aggregating similarly priced orders, displaying the price requested and the total contract value locked in.
You will be able to place your orders using different order types. Usually, you will find at least three different types. A market order is the simplest of these, where you accept the market price of ETH and simply place an order of the required quantity. If you are not ok with the market price and want to define your own rate, you can always select the limit order type, where you can enter the ETH price you want along with the quantity.
At times you might want to decide the perfect market condition to place your limit order. You can use the stop-limit order option which will combine the benefits of a stop and limit order.
Derivative platforms can allow traders to take out order specific loans in the shape of leverages. These are multipliers that allow users to increase their invested exposure without committing a significant amount of money. At the end of a successful trade, the loaned amount is returned to the platform plus any interest charges and you get to keep all of the profits made. There’s a dark side to leverages though. A bad trade can quickly see your collateral being liquidated by the platform to recover their money. Make sure you can afford to take the high risk of losing money rapidly due to leverage before placing an order.
You can also use a long position and a short one to make sure you can make profits in any kind of market situation. A long position is when you buy low and sell high, pocketing the difference. Shorting is when you place your confidence in a bear market, betting that ETH price will fall. If your prediction is true, you make profits, else a loss.
Experts Insights: Common Ethereum Trading Mistakes and How to Avoid Them“ There are very basic rookie mistakes that people new to trading can end up doing and running losses. This doesn’t mean that these classic mistakes can be avoided. Following are some basic mistakes you can avoid easily. A registered and regulated trading platform is your true friend. They may be tedious to register on due to the tough KYC and AML requirements, and not offer much in terms of leverages or other options that unregulated platforms may offer, but with regulations comes responsibility and security. On the trading side, always depend on your analysis and less on intuitions. Trading is not a game of chance but reducing chances of losses through eliminating as many variables as possible. FOMO and FUD should not rule your trades, but your calculations. Similarly, stick to a decided strategy. Be careful when using leverages. Only leverage an amount that you can afford to lose. ”- Saad Ullah
Our Favourite Platforms to Trade Ethereum
Following is a list of our selected Ethereum trading platforms, based on security, trading ease and regulatory compliance.