Spot trading is a type of cryptocurrency trading. You may have heard of the term before. It’s different to other types of trading as we will discuss below. Keep in mind that this is only a small part of the crypto market. The many different terms traders commonly use are a testament to this. But if you are serious about trading, it’s vital that you learn some of the more common terms. Not only will this make you a better trader, but it will save you a lot of time in the long run.
If you are new to the world of trading in general, this crypto guide is for you. This is apparent by the terms both kinds of traders use. This can be seen by some of the many terms that are used by both industries. Knowing these terms will help you start trading. Once you are familiar with trading, you will get to know many of these terms better.
A mistake related to trading terms usually happens when a trader mixes up margins and spot trading. We will describe both and why they are different from each other.
Once we have covered the difference, we will look at spot trading directly. We will also cover information needed for spot trading in practice. This information will help you start spot trading as soon as you are ready.
But before we get there, you first need to understand what spot trading is.
In simple terms, spot trading involves the process of trading one asset for another at an immediate price point. These transactions are done in real-time, which has given rise to the name. It’s also among the most popular types of trading in the world. This is because it covers a wide range of different assets. These assets include commodities, stocks, as well as bonds. The associated assets are bought and sold at something called a spot price. Measuring the spot price is difficult as it’s always in flux.
This is because crypto asset prices are fairly unstable. It doesn’t take much for them to suddenly change to a different value. And this is why spot trading is important. This is the moment that the trade is created. Day traders will use spot trading most frequently. If you intend on becoming a day trader, you will have to watch the markets as they change.
Trade time is another concept that is worth learning. But in general, there are two main terms when it comes to trade timing. These two terms are:
These are just two terms to know before you start. But there will be many other terms that will come up. For the time being, keep in mind that spot trading is quite fast. Many people that engage in spot trading often do it at a fast pace.
Now that you have an idea of what spot trading is, let’s look at platforms. It will quickly be apparent that spot trading works well with centralised cryptocurrency exchanges. These platforms offer services for spot trading. For most traders, this means that most transactions are crypto-to-crypto in nature.
It’s worth keeping in mind that some platforms may also have crypto-to-fiat services available. There are some strict regulations when it comes to this, however. Expected limited availability of fiat currencies. It’s still important to remember that these trades do exist. There are lots of groups that have made fiat spot trading popular in recent years.
Spot traders can expect to come across some fees. These fees cover the running costs of the platform. Most of the time, said fees are based on something known as the maker-taker model. Without these fees, exchange platforms would not be unable to provide any trading opportunities.
Many platforms support peer-to-peer trading. Here, traders place bids, and then can select their method of payment. It makes it a lot more flexible when compared to other similar methods. The main problem with P2P trading is that volumes are generally much lower. Completion of P2P settlements takes longer than others.
Before we move on to margins, let’s look at trading at scale. Traders will sometimes need to trade in quantity. In these cases, the trader could be eligible to make use of over-the-counter services. Brokers manage OTC services. These brokers set the orders and will handle the transactions privately. There is also no logging of private transactions.
Margin trading is important to know and understand. Many modern cryptocurrency exchanges offer margin trading. It is not as accessible as spot markets, however. This is due to certain technicalities related to the market.
It’s easy to view margin and spot trading as the same. Both these types of trading share similarities. These systems provide fast transactions that are based on current market rates. There is an important distinction between the two, however: leverage and borrowing.
You can trade on margins beyond what your funds allow. This means that you can borrow more assets from brokers as needed. On the other hand, spot trading is only possible using available assets. This is not a limit to margin traders. They acquire leverage tokens which extend their trading options. It’s also worth knowing about margin requirements. Once a trader reaches a requirement, they receive a margin call. The margin call means they must either add more assets or sell their positions. This maintains market equity. Equity helps you deal with the instability of the market.
Another important difference is risk. In terms of margin trading, the risk is higher. But this also means that a trader can expect higher rewards in turn. Therefore, you might see x5 or x 100. These specific numbers provide insight into how much a position can increase. The leverage makes a trade profitable if it goes well. On the other hand, a trade that doesn’t go well is a problem. In this case, you will have to liquidate your assets. This also means that leverage is an important difference to keep in mind.
Now that we have covered an important comparison, it’s time to focus on spot trading itself. Knowing the theory is quite different to actually trading in crypto. For this, we’re going to need to have a look at the exchanges. These exchanges are where all the action takes place. There are many exchanges to choose from. Each one offers something unique, such as low fees or a greater choice of crypto coins. Some of the most well-known exchanges include:
Most of the exchanges you use are centralised. This means that the exchange is regulated by a central entity. This is similar to how fiat currencies work. In comparison to this, many are decentralised. An example of a decentralised ecosystem is Ethereum. Regardless, you are going to want to know about both. Centralised exchanges are just as important. The largest centralised exchange in the world is Binance. Binance is based in China and oversees millions of transactions every day.
If you don’t want to use Binance, there are many options. Crypto exchanges work much the same. This means that once you’ve learned how to use one, you can start using others. Always keep the following in mind, regardless of the exchange you are using. For one, you are advised to use multi-factor authentication wherever possible. Security is vital in any kind of crypto trading. Remember that there are a lot of people out there that want your crypto assets. This means that you need to take any length necessary to lock everything down as much as possible.
Make use of strategies as much as you can. This applies whether your goal is to make a profit or just following the market in general. A chosen strategy will help you achieve your set goals. There are also many tools available that can make trading easier.
It’s important to have a goal in mind when you begin to participate in crypto trading. Regardless of whether you want to make a profit or just test out the crypto market. Having a strategy in place makes a big difference.
Modern exchange platforms will have a series of trading tools you can use. Some of these tools will allow for mock trading. This gives you a chance to play with the market a little. No investment will be necessary to make use of these tools. Knowing these toolkits will help you use both spot trades and futures trades.
Most traders want to sell high and buy low. This is how most day traders operate. And it’s also why it’s important to always watch the markets. Find suitable trades and then watch as the prices fluctuate. Once the prices are in your favour, consider making purchases.
This breaks down further in short and long positions. In crypto trading, shorting has you borrowing an asset and expecting its market price to decrease. Once the price has reached your expectation, you purchase it on the spot market. The amount is then sent back to the lender. This amount will usually be lower.
When a trader makes an order, it will sit in the order book. This order will have to be matched. Once it has been matched, it increases the market depth. This liquidity is why it is called a maker. The other term to know is taker. A taker is an order that is completed instantly. When this happens, the market depth is decreased.
The price of an asset at any given time is its spot price. This is the price at which the asset is purchased or sold immediately. The price of these assets is set by buy and sell orders. The spot price can change at any moment. This is because of the entry and fulfilment of orders.
The amount of time an order sits varies. The general rule, however, is that they sit for around two business days. On the other hand, some financial institutions will complete an order the next day.
Forward pricing relates to the differential interest rate between two currencies of a spot trade. This is a combination of the interest cost and spot price. This is calculated using the time until the settlement occurs.
Spot trading is profitable for the trader that knows what they are doing. A risk management plan is vital to make the most of what spot trading has to offer.
There is a lot of information here to take in. Read through it a few times to get a better idea of spot trading. Within the crypto market, spot trading is a straightforward way of exchanging cryptocurrency assets. But you can also trade for fiat currencies. It’s most common on centralised exchanges. Spot trading and margin trading are similar, but also have subtle differences. Start by looking at both of these types of trading. Become as familiar with both as possible.
Use your newfound knowledge to start trading on the market today. As you begin to learn more, you will find spot trading easier. Before long, you will begin to start seeing more profit. Save some of these profits and reinvest the rest into more trading to build a healthy portfolio.
