A lot of people who are trying to get into trading are easily confused by all of the different terms. For example, currency trading and cryptocurrency trading sound the same and cause a lot of confusion among beginners. Before we get into the actual strategies we need to discuss the similarities and differences between the two.
The foreign exchange market (Forex, or FX in short) and cryptocurrency exchange market are absolutely separate from each other although similar in lots of ways. The main reason the difference occurs is due to the way these currencies operate. Forex trading happens between currency pairs like United States Dollars into Euros (USD-EUR) or Australian Dollar (AUD) into Japanese Yen (JPY), which have one very important thing in common – they are all backed by the centralized government. The Forex market is the most liquid market in the whole world. It is decentralized meaning that all of the currencies in the world can be traded there. FX is influenced by a huge number of different things like political processes, announcements, inflation numbers, job reports, and etc. To make a small estimate it is believed that around $5.3 trillion is traded in the FX each day. This is one of the most popular trading markets in the world with lots of companies offering FX trading for beginners’ guides for everyone interested all across the internet.
Cryptocurrencies, or sometimes referred to as digital currencies, are not the same as our average Joe currencies on the FX market. First and foremost the difference is that these digital currencies are not backed by any government and in most of the countries are not even considered as actual currencies. They are hosted online and backed by peer-to-peer trading and authentication processes restricting the usage of the same cryptocurrency more than once. Cryptocurrency examples are Bitcoin (BTC), Ethereum (ETH), Ripple (XRP), and etc. These currencies are brought into the market by people called miners. The way they “mine” the currency is by exchanging the processing power of computers to secure the network and check entries in exchange for the digital cash. The cryptocurrency market has been becoming more evolved and popular during the last decade with market cap hitting $700 billion with experts believing that the numbers will only become more as time goes on. Due to the transparent nature of this market may make it more trustworthy for some investors than others like stocks for example.
The idea behind trading is the same for both markets, this is why lots of strategies that were in place or are being developed for Forex trading can be easily transferred to cryptocurrency trading as well. They are similar due to the fact that both involve exchanging a currency for another currency, however, the difference is the most visible when we start looking at the factors influencing both markets. Due to this, the volatility of the markets are hugely different from each other. On average, for extreme currency couples on Forex, the volatility may be somewhere between 1% and 0.5% in comparison to the cryptocurrencies like Bitcoin, which is one of the most stable crypto assets out there having volatility between 5 to 15 percent. It is apparent just by this statistic that cryptos have more appeal to people who are more open to high-risk high reward case scenarios. Here’s a small comparison to how volatile the market can get: Back in 2013, if you would have invested $1000 in Bitcoin, only 5 years later, you would have your assets grow to as much as $400,000. However, the chance of higher reward brings a huge possibility of loss of whole investment as well. Cryptocurrencies are also available to anyone across the whole world. This means that even individuals in the undeveloped countries have the ability to pick up trading without nearby banking institutions.
Since we already established the fact that trading cryptos are almost the same as trading currency pairs in the most basic of manner lets delve into some of the strategies utilized by both FX and cryptocurrency traders.
Scalping is a trading strategy, which is focused on gaining profit from minor price changes. This means that the traders who utilize this strategy, or scalpers, a huge number of trades during the day to slowly increase their revenue due to extremely tiny adjustments in prices. This strategy involves buying up a currency-pair or cryptocurrency and then after a small amount of time to sell it to gain revenue. These smaller moves accumulate into bigger gains at the end of the day. This means that scalpers have a strict exit strategy to prevent their losses. This strategy relies on the technical analysis like MACD and candlestick charts for proper execution.
Hodling is also one of the strategies in the trading market. This means that a trader is buying up stock and then keeping it for a long period of time waiting for the asset to become priced much higher than it used to be and then sold at once. For example, in the cryptocurrency market Bitcoin has one of the most cases of hodling with today’s statistics showing that almost 60% of the BTC has not been moved during the last 10 years period.
— glassnode (@glassnode) January 29, 2020
High-frequency trading (or HFT) is one of the most popular methods of trading for financial institutions that are closely located to the market servers. It involves having a computer with huge processing power to make a transaction of large number of orders in fractions of a second. The computer utilizes powerful tools to with extremely complex algorithms to analyze huge chunks of the market and execute orders judging by the market conditions. As we have already mentioned this method is utilized by financial institutions, which are located in a very close proximity to the market servers due to the fact that this method requires a very low latency to make these transactions in the fractions of seconds to maximize the gain. It is important to note that this strategy may leave the institution with huge loses if there is some kind of disruption in its internet connection and the trading order or closing the trade order is delayed.