How Cryptocurrency and Forex Trading Differ?

Cryptocurrency Trading

 

The theme of the past few months: cryptocurrencies. These digital coins such as Bitcoin, Ethereum, and Ripple are based on blockchain technology. Due to the rapid price rise, cryptocurrencies have attracted many new investors to active trading. And many who learn forex trading have started trading cryptocurrencies in addition to traditional currencies.

Anyone who studies the market on a daily basis will soon see that the two products, forex, and cryptocurrencies, behave very differently. That means that as an active trader, you also have to make other decisions. In this article, we will discuss the differences between ‘normal’ currency trading and cryptocurrency trading.

Background

All normal currencies are issued by the central bank of a country (or group of countries). Goods and services produced by that country are paid for in the local currency. If that country’s economy does well, the demand for the currency increases, and it increases in value relative to other currencies. The central bank can influence this by changing interest rates and by putting more or less money into circulation. The market responds to this with supply and demand. As a forex trader, you try to predict this and earn from it.

Cryptocurrencies do not belong to any particular country. Coins such as Bitcoin, Ethereum, and Ripple only exist on the blockchain. The blockchain is maintained decentrally and crosses national borders. You can pay with cryptocurrencies at any store or service provider that accepts them, but no one can be forced to take payment in crypto. As a result, the value (in the long term) depends on how many retailers and service providers accept a cryptocurrency.

With cryptocurrencies, there is also no central bank that determines the interest rate or the money supply. Inflation or deflation are ingrained in the cryptocurrency’s code. This differs per coin. For example, the number of bitcoins in circulation is increasing less and less quickly, until it ultimately remains the same at 21 million BTC. The number of ethers in circulation is growing faster than the number of bitcoins, which means that ETH has more inflation. Ripple has a fixed number of XRP that can never increase. Because the supply of a cryptocurrency is fixed in the computer code, the value mainly depends on the demand.

Trading based on the news

If we look around us, we have to conclude that we can hardly pay with cryptocurrencies anywhere. Two years ago, there were still small retailers and cafes that accepted payments in BTC, but the transaction costs have become too high for small payments at the end of last year. This may change with the recently introduced lightning network. Ethereum is used for all programs that run on the Ethereum blockchain, but those programs are hardly used yet. With other cryptocurrencies, you can’t do anything at all.

As a result, the demand for cryptocurrencies is almost entirely speculative. Traders buy cryptos based on the expectation that they will be used in the future. That expectation is not unjustified, because the blockchain is a promising technology. But no one knows for sure which crypto coin has the future.

What we see as a result is that the market reacts extremely to the news. For example, if a large company such as IBM or Microsoft announces that it is partnering with a cryptocurrency, the price can skyrocket 10-30% within a few days. And if a financial regulator of, for example, China says to regulate the trade in cryptos more strictly, the price can fall just as much in a short time. Often such a reaction is exaggerated, and the price corrects itself within a few days. As a trader, you can benefit from this.

 

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Volatility

This creates a lot of volatility. A currency pair such as the EUR/USD will not quickly go up or down 10% in one day. That’s because everyone has a rough idea of how well the European and American economies are doing. That doesn’t suddenly change by 10%. But because cryptocurrency prices are purely based on future expectations, they can easily fluctuate by 10% per day or more.

A consequence of this is that you have to trade with a smaller leverage factor. For traditional currency pairs, you use leverage to increase your profits. With leverage of 50x, a price increase of 25 pips (approx. 0.25%) turns into a profit of about 12.5%. But if you trade cryptocurrencies with 10x leverage, then a drop of 10% can mean that you have lost your investment, even if the price goes up again afterward. A leverage factor of more than 2-5 is not recommended.

If you want to actively trade in cryptocurrencies, then it is recommended to first develop a feeling for the market. Even if you already have experience with forex. This is possible with a demo account. This works just like a real trading account, except you don’t have to take any risk.

Technical analysis

Because the prices of cryptocurrencies are mainly based on speculative expectations, technical analysis is more important. After all, there is no real crypto-economy with a clearly identifiable value. The value of cryptocurrencies depends on market sentiment. And technical analysis is just right for predicting market sentiment. In addition, you should take into account that not all technical indicators are suitable for cryptocurrency.

Cryptocurrencies are a new phenomenon. The first cryptocurrency, Bitcoin, is less than ten years old. Most cryptos are less than two years old. Moreover, many cryptocurrencies were worth little for a long time and only rose sharply in 2017. As a result, some technical analysis tools do not work well with cryptocurrencies.

Take, for example, support and resistance levels. For many currency pairs, the rates at which support or resistance is experienced can be determined historically. By going back in the chart, we find price levels that the price does not easily break through. Because cryptocurrencies do not have a long history, it is difficult to find support and resistance based on the historical price chart.

Or another important indicator: moving averages. An indicator such as the 200-week SMA (simple moving average) does not exist for many digital coins (because they are less than 200 weeks old). In the shorter term, we can calculate SMAs and EMAs (exponential moving average). But those averages give a distorted picture if the price has risen enormously in a short time.

The most useful indicators for cryptos are pivot points, Fibonacci levels, and Elliot waves. For example, bitcoin’s price chart often shows a rise in five waves and a fall in three waves. Course corrections are often 38%, 50%, or 62% of the peak. And if the price starts to rise again, the new top is often 62% higher than the previous peak. These levels help you to determine your price target and your stop-loss for your crypto trades.

Conclusion

Cryptocurrencies are still very young. They are not linked to a country’s economy, and there is no central bank that determines supply. Since there are still few real applications for cryptocurrency, most demand is speculative. This means that technical analysis is more important than usual. But not all technical indicators apply to crypto.

Cryptocurrencies are extremely volatile. The market often overreacts to news, allowing you to trade on the expected correction. That makes cryptocurrency particularly attractive to active investors, but there are also risks involved. Protect yourself by not trading with too much leverage. And remember: blockchain technology will experience a lot of growth in the coming years.

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The Forex Market And The Cryptocurrency Market

The market of foreign exchange is the biggest as well as the busiest financial market in the globe as it has opened numerous opportunities to traders which has allowed them to earn a large sum of money in only a short period of time. While this a fact, forex trading isn’t all rainbows and butterflies. When engaging in forex trading, it is crucial that you have good knowledge and understanding of the forex market prior to making decisions.

The Forex Market – Working With An Experienced Forex Broker

Similar to other forms of investments, it is fundamental that you make time to research and study the conditions surrounding forex trading. To do this, many forex investors and traders partner with a forex broker, with the presence of the best Islamic forex broker in the industry, to help them in their forex trading journey and evade any frustrations and obstructions towards making a favorable trade.

Let’s have a look at some of the advantages of working with a forex broker, such as the best Islamic forex broker, for anyone who would want to make some profits.

  • They Help You Better Understand the Forex Market. If you are new to the forex market and forex trading and decide to do it on your own, you may encounter plenty of challenges, roadblocks and even losses. To avoid such, work with a professional forex trader as he/she can teach you the ins and outs of the market and forex trading and can also do the bidding for you.
  • They Aid You In Making Decent Profits. Forex markets are extremely volatile and disruptive. If you want to earn decent profits, you have to be open-minded as well as keep to a minimum your expectations.  Working with an experienced forex broker can very much help you earn decent profits.
  • You Save A Lot of Time. Learning and implementing what you have learned about forex trading, not to mention being constantly updated of the market, is actually time-consuming. If you are impatient or already have a lot on your plate, it is best and wise to hire a reliable and trusted forex broker. They can do the trading for you and work on commission. This is better than exhausting all your valuable time learning how to trade on your own.

The Cryptocurrency Market – The Benefits of Crypto Trading

While forex trading can be very profitable, there are those who prefer to do crypto trading. Yes, there is an opportunity to make huge profits in the cryptocurrency market. However, similar to forex trading, it is imperative that you have knowledge and understanding of cryptocurrency, the crypto market and of course crypto trading. But, why is crypto trading so appealing to many even if it isn’t considered a legal tender? Below are some reasons:

  • Runs 24 Hours. The market is open 24/7 since a government doesn’t control it making it decentralized. Hence, crypto traders can make a trade at any time of the day.
  • Transparency and Security. With the blockchain technology, your transactions and crypto wallet are transparent, however your personal information are hidden. In terms of making money transfers, transparency is crucial. When making use of cryptocurrency and the blockchain, security is increased as the protocol or the transaction cannot be changed or manipulated by anybody.
  • Cheap Trading Fees. Compared to the usual bank payments, particularly for transaction of high-value, crypto transactions fees are very low.
  • Volatility. The volatility of cryptocurrencies makes the market very exciting. Because of this, crypto trading bots have become prevalent among traders as it allows them to always control their trading.

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