The special project “Foundations of cryptotrading” was prepared by ForkLog magazine in partnership with the Cryptics crypto currency market forecasting platform based on the AI, which presents a wide range of functions for trading.
After acquaintance with the key features and principles of cryptotrading, it’s time to get acquainted with the terminology.
Among the main terms of cryptotrading: currency pair; bid, ask and spread; Stock exchange glass; long and short positions; orders, as well as their main types, etc.
What is a currency pair?
Currency pair – the ratio of two currencies, which shows how many currency units of one currency are a unit of another currency.
For example, in the ETH / BTC pair you buy the Ethereum crypto currency, paying for it with bitcoin. The first currency in a pair is called the base currency, and the second one is quoted. Thus, the currency pair shows how much a quoted currency is needed to buy one unit of the base.
Bid, ask and spred
Bid is the price that the buyer of the asset is willing to pay. Ask is the price at which the seller is willing to sell the asset. Spread (Spread) – the difference between the prices of ask and bid.
In simple words, in any market, the buyer calls the price at which he is ready to buy something (bid), and the seller – for which he is ready to sell something (ask). This is similar to the situation in the usual grocery market, when some amateur bargains call a lower price, and the seller defends the higher. At the same time, both tend to maximize their benefits.
During the bidding the seller can slightly reduce the price. Under the onslaught of the seller, the buyer can retreat somewhat and agree to buy with not so big, but still a discount. In the bidding process, bid and ask approached the point of contact – the equilibrium price. Spread is narrowing. When the seller and the buyer agree on the price to be paid and the price at which the goods are to be sold, a transaction is made (i.e., the bid becomes equal to the ask).
The processes that occur on the crypto-metabase are fundamentally the same as those described above, in a typically “market” scheme. In most cases, the seller does not want to part with the assets at the current, not the most profitable for him, and prefers limit orders that are not executed immediately.
A trader who wants to buy a crypto-currency usually does not seek to do this at the current market price. He puts out an interesting bid for himself, and the selling trader – the price of asc. In fact, there is a normal bargaining.
For example, if the current market price of any koin is $ 1, then it is likely that the ask price will reach $ 1.02, and the bid price will be $ 0.98 (or even less, depending on the liquidity of the coin).
Spreads are usually small on large sites, where large volumes of crypto assets are rotated daily. Much also depends on the liquidity of the digital currency itself. For example, on a large site, the spread of the Ethereum crypto currency will most likely be narrower than that of any YOYOW or Eidoo.
This concept is the digital display of traders’ current orders for buying and selling. The exchange cup has the form of a table, where real-time orders for purchase and sale of an asset are displayed.
To make an exchange transaction, the trader sets up an order specifying the parameters of the future transaction: purchase or sale, the required volume of the asset and the desired price. The transaction is executed upon detection by the exchange system of a counter application, which fully meets the requirements specified in the warrant.
If there is no relevant counter-application for a while, the order is entered in the “order book”. Appearing in the exchange cup, the order begins to wait for a counter application.
Stock cup (Bitfinex trading platform, data as of December 17, 2017)
The arrow down in the screenshot above shows the sorts sorted in order of decreasing price; arrow up – increasing and approaching to the equilibrium price “bid”. When the hands, conditionally speaking, collide with each other – the deal is executed.
The difference between the “most favorable” prices of the buyer and the “best” prices of the seller form a spread. As mentioned above, the spread can vary depending on various circumstances.
Long and short positions
In the language of traders, a long position (‘Long’) – buying an asset in anticipation of an increase in its price.
A short position (‘Short’) is when a trader sells an asset, expecting a decline in his exchange rate. The opening of short positions is possible only when trading with the “shoulder”. Such functionality is presented, in particular, on the BitMEX futures exchange, as well as in the Margin Trading section on the Poloniex exchange (a similar section exists on Bitfinex and many other trading floors).
Types of Orders
The order (exchange order, order, Order) is a commission created by the client for the exchange to carry out an operation for the purchase and sale of crypto-currency under certain conditions.
In exchange trading, several types of orders are used. By type of execution, market, deferred and limit orders are distinguished.
Market Order is executed immediately after the entry to the exchange, at the best current price, if it has an appropriate reverse limit order for it.
For example, in order to execute a market buy order (Market Buy), a limit order for the sale (Sell Limit) is required. To execute a market order for sale (Market Sell), a limit buy order (Buy Limit) is required. The market order for the purchase is executed at Ask price, and the market order for the sale is at the Bid price.
In other words, market orders are executed at the best price, until the number of units of the asset at this price is exhausted (Order quantity)
Pending order (Pending order) – the order type, the opening parameters of which are set in advance.
A pending order is executed only when there are conditions for its execution. For example: the current market price is 8000 USD per 1 BTC. We issue a Take Profit order – when the price reaches 10 000 USD, sell 1 BTC at a price of 9,990 USD.
This situation means that at the moment the limit order is not yet formed on the stock exchange and in the glass it is not. However, it “hangs” in the trading terminal and waits for the moment when the price of the last transaction (last price) will reach 10 000 USD.
Limit Order (Limit Order) is an application for the purchase or sale of a specified quantity of an asset at a specified price.
For example, a trader bought 100 certain tokens at $ 20 per piece. He expects that the market will continue to grow and the coin will reach the level of $ 25. Since a trader can not (or does not want to) constantly monitor his positions, he decides to fix the profit at $ 24.50. To do this, he sets a limit order for the sale of 100 of these tokens. If their rate reaches $ 24.50, then the limit order will be executed and the trader will make a profit. Excluding the trade commissions of the exchange, it will be: 100 * (24.50-20) = $ 450.
A limit order can easily be executed immediately if at that price there is a counter order (in fact, the situation is the same as in the case of a market order).
Limit order to buy (Buy Limit) is set at a price that is lower than the current market. The trader uses this order if he hopes that the price will first fall, and then, rebounding from the support level, will start to grow.
Limit order for sale (Sell Limit) – an application for sale at the specified price. Sell Limit is set at a price higher than the current market. Thus, the trader uses this order when he hopes that the price will first rise, but then, having reached a given level, he will turn around and begin to fall (that is, he expects to bounce down from the resistance level).
Stop Order (Stop Order) – an application for the purchase or sale of a certain amount of crypto currency when its price reaches a certain mark.
A stop buy order (Buy Stop) is an order for a purchase at a specified price or higher. The trader uses this order when he hopes that the rising price, having overcome a given level of resistance, will nevertheless continue to grow. Buy Stop is set at a price that is higher than the current market. As soon as the price of the last transaction becomes equal to or exceeds the price set in the Buy Stop order, it immediately turns into a market order for the purchase. To trigger a Buy Stop order, you need the Ask price to be equal to or higher than the price specified in this order.
Stop-order for sale (Sell Stop) – an application for the sale of an asset at a specified price or lower. The trader uses this order when he hopes that the price, with its downward movement, reaching a pre-set level, will continue to fall. Sell Stop is set at a price that is lower than the current market.
In other words, once the price of the last trade becomes equal to or less than the price specified in Sell Stop, the order immediately turns into a market order. To trigger Sell Stop, you need the Bid price to be equal to or less than the price set in this order.
A stop-warrant is used both for opening a position and for exiting it. In the latter case, the stop-warrant is used as a protective order, limiting losses (Stop Loss; stop-loss). In this case, the Buy Stop order provides hedging of a short position (sale), and Sell Stop – protection of a long position (purchase).
Also, any warrant on the stock exchange can be executed not completely, but partially (or even not at all). To execute an order you need the opposite order, and it may not be at the moment, or its size may not be enough for full execution. So, on the Bitfinex exchange, it is possible to issue orders of type Fill-Or-Kill (FOK, “execute or cancel”). Such an order means that the order must be immediately executed or canceled. In this case, partial closing or opening of the position on the FOK order is not allowed – the application can be executed only in the declared amount.
Glossary of the article
Bulls are players who try to earn on the growth of the asset’s rate. When bulls dominate the market (purchases exceed sales), the asset rate grows.
Bears are those who earn on the fall. Actively selling, the bears “flood” the course down.
A whale is usually an experienced and wealthy market participant, capable of significantly influencing the price of an asset and even the market as a whole with its large orders.
Fiat – national currencies of different countries (American dollar, euro, ruble, hryvnia, Chinese yuan, etc.).
Trend – a unidirectional price movement that lasts for a certain time. In other words, it is a segment of the growth or fall of the price that is clearly visible on the chart. Trends can be ascending (bullish), descending (bearish) and lateral (flat, “outset”).
Tozemun (“To the Moon”) – when the price rises sharply, as if flying “to the moon.”
Drain – a very sharp drop in the rate (the moment when panic-stricken hamsters sell off assets bought by hayas, experienced investors at that time “put buckets”, setting limit orders for purchase).
Support – the price level at which the market enters the buyers. When moving down the price rests on the “floor”. At this point, a number of buyers enter the market. The latter for some time intercept the advantage of sellers and restrain further price reduction.
Resistance is the level of the asset price at which a growing offer does not allow the price to rise higher. As we approach the level of resistance, bulls are less eager to buy, and bears are selling even more actively than before. The level of resistance means the place of a potential stoppage of price growth and a possible reversal down.
Pump (Pump) – “pumping” the asset with large volumes of purchases to cause an intensive increase in its price. Pump usually attracts hordes of “hamsters” who come to the market and support the upward price movement until the last. Usually the pump is replaced by a dump.
Dump (Dump), the same as the drain – a swift movement down the price of the asset, caused by an active profit-taking from the pampas.
Short (short position) – opening a position for sale. Used when trading with the shoulder. The reason for the opening of a short position is the expectation of a decrease in the price of the asset.
Long (Long, long position) – opening a position for sale in the hope of an increase in the price of the asset.
Volatility – fluctuations in the price of an asset. High volatility implies broad opportunities for profit, but also involves increased risks.
Take Profit – the type of order, designed to close the position according to the rules of execution of limit orders. Used to make a profit when the price reaches the asset of the forecasted level.
Stop Loss (stop-loss, “moose”) – an order designed to minimize losses in the event that the asset price moves in a loss-making direction. If the instrument price reaches the Stop Loss level, the position will be completely closed automatically. This order is always associated with an open position or with a pending order.