Improve Your Spot Trading Strategy—Here's How!
Published August 1, 2022.
Cryptocurrency spot trading is the buying and selling of digital currencies at the current market price. In other words, it's the immediate purchase of a cryptocurrency, often used to get around the long waiting times associated with taking part in a crypto exchange. Regarding having a spot trading crypto strategy, it’s often a trading style that has a specified date and time requiring specific market conditions to be executed.
Let’s take a look at a simple example. Let’s say that you want to buy Bitcoin but don't want to wait for an order to be filled on an exchange with the current market conditions. So, you go to a website that offers spot trading and buy it there instead. Because there's no middleman (like an exchange) involved in this process, it's oftentimes seen as more convenient—though it can also be more expensive. Now, let’s take a look at how spot trading works in depth.
Best Spot Trading Strategies
All in all, spot trading can be a convenient and profitable way to trade cryptos. However, it's important to remember that spot markets can be more volatile and expensive than exchanges, so make sure you're comfortable with the risks you’re taking before you start. Also, keep in mind that not all cryptocurrencies are available on spot markets, so you may need to use a less popular exchange.
When it comes to the best spot trading crypto strategy, it’s worth mentioning that there is no one-size-fits-all approach. The best spot trading crypto strategy for you will depend on your personal goals and risk tolerance. However, here are a few general tips to keep in mind:
- Start trading with a small amount of cash As you learn and optimize your spot trading crypto strategy and learn to manage the risks, you can gradually increase the amount you’re trading with.
- Minimize losses Make sure to set stop-loss orders to limit your losses in case the market turns against you.
- Take profits Take profits when you can to lock in your gains. Make sure you have clear goals and never sidestep them.
- Practice patience Don't let emotions dictate your trades. If your emotions are having a big impact on your trades, consider trading cryptocurrency algorithmically instead.
How to Spot Trade Crypto
Now, let’s take a look at the necessary steps to take so you can start spot trading cryptocurrencies.
- Find a spot trading platform that supports the cryptocurrencies you want to trade
- Create an account and deposit funds on the platform
- Buy the cryptocurrency you want to trade at a specific market price
- Sell the cryptocurrency when you want to cash out
- Withdraw your profits to your personal wallet
Best Coins for Spot Trading
The most popular cryptocurrency in the world and it's also one of the best coins for spot trading. This is because Bitcoin has a high level of liquidity, with a large number of buyers and sellers always ready to trade. BTC is also supported by most major exchanges, making it easy to buy and sell at a moment’s notice.
The second-largest cryptocurrency by market capitalization and it's also a good choice for spot trading. Just like Bitcoin, ETH is highly liquid, and it's supported by a number of major exchanges. The main downside to trading ETH is that it can be quite volatile—more volatile than BTC, in fact—so make sure you're comfortable with the risks before you start.
Another cryptocurrency with a considerable market capitalization which makes it a good option for a spot trading crypto strategy. XRP is less volatile than ETH, so it can be a good alternative for traders that prefer lower risks. The main downside to trading XRP is that it's not as widely available as BTC or ETH, so you may have to use a less popular exchange.
Bitcoin Cash (BCH) and Litecoin (LTC)
BCH and LTC are wo of the most popular forks of Bitcoin and make for decent spot trading options. They are both highly liquid, which is crucial when optimizing your spot trading crypto strategy, and they have a large number of buyers and sellers always ready to trade. BCH and LTC are also supported by most major exchanges, so they are easy to buy and sell as well as long as your trading strategies are well-put.
Advantages and Disadvantages of Spot Markets
- The ability to quickly take advantage of opportunities as they arise
- No need to wait for settlement periods
- Greater price transparency compared to other types of markets
- Typically lower transaction costs when compared to other markets
- Spot trading markets are some of the best markets to do high-frequency trading
- Higher risks due to volatile prices
- Less time to make precise decisions about trades
- The need for quick execution of trades
Differences Between Spot Trading and Margin Trading
While spot trading is the buying and selling of cryptos at the current market price, margin trading is the buying and selling of cryptocurrencies with leverage. In other words, when you margin trade, you're effectively borrowing money from a broker in order to trade more than you could with just your own capital, and you’re using leverage. This can drastically increase your profits if things go well, but it can also amplify your losses if things go wrong.
It’s worth mentioning that margin trading is generally not available on spot trading platforms—instead, it's offered by specialized exchanges and brokers. In most cases, margin trading platforms will require you to open an account and deposit a specific amount of funds before you can start trading.