What is trading, and how to earn from it

September 20, 2023
Last Update December 07, 2023

Trading is buying an asset or a financial instrument at a lower price and selling it at a higher price with the aim of making a profit. Crypto trading has the same aim.

For example, a trader buys an asset at a lower price and sells it at a higher price. The price difference constitutes the profit. 

In trading, not buying assets but borrowing them to trade is common. So, a trader borrows assets when they cost less, sells them at a higher price, and then buys them back later for a lower price and, thus, gets a profit. 

Structure of a crypto trade

A crypto trade involves two persons: a buyer and a seller. So, there is always somebody who gets profit (wins) and somebody who suffers a loss (loses). To minimize your risks of losing, you shall know the basics of how the crypto market functions.

Buyers and sellers set prices in an order book. Normally, buyers set prices lower than those set by sellers. It creates the two sides of an order book.

When there are more buyers than sellers, the demand for the asset grows, and thus, its price grows, too.

When there are more sellers than buyers, the demand for the asset drops, and thus, its price drops, too. 

How to profit from trading

If you buy an asset, you want to buy it at the cheapest price possible, and if you sell it, you want to do it at the highest price possible. While it seems to be easy, there are more ways to benefit in trading, such as shorting or longing an asset. You can long an asset when you buy it at a low price in the hope of selling it when the price grows. This approach works well in a bullish market. 

Shorting an asset means selling it with the intention of buying it back when its price drops. The price difference is your profit. 

For example, you expect that the BTC price is going to drop, and you have 10 BTC. You sell them at a current price, say, 40,000 USD/BTC. So, you get 400,000 USD in your account. When the BTC price drops to, for example, 35,000 USD, you buy 10 BTC back, but you spend 350,000 USD. In the end, you get your 10 BTC back, and you are left with 50,000 USD in profit. This approach works well in a bearish market. In crypto, traders often use borrowed funds for shorting. This trading type is called leverage trading.

Trading types

While investors hold an asset until its price grows, traders don’t do it. Instead, they try to make a profit within a specific period. Depending on the period length, we distinguish the following trading types:

  • Position trading - when a trader holds positions from months to years (it is close to holding an asset, or investing)
  • Swing trading - when a trader holds positions from days to weeks
  • Day trading - when positions are held throughout the day, with no overnight positions
  • Scalping or scalp trading - when positions are held for minutes or even seconds, with no overnight positions.

Trading crypto comes with a responsibility

While there are a lot of people who sell “100% working strategies” or promise you a guaranteed profit, trading is a risky activity that requires knowledge and skills. That’s why always do your own research on a crypto asset you are going to include in your portfolio and the market trends.