You're reading from Zero to Hero in Cryptocurrency Trading

Product typeBook

Published inSep 2023

PublisherPackt

ISBN-139781837631285

Edition1st Edition

Concepts

Financial Technology

Author (1)

Bogdan Vaida

The Centralized Exchange

In this chapter, I’m going to present how the centralized exchange (CEX) works and how to trade there, as well as discuss a tool that connects to these CEXs and allows you to trade with an easier-to-understand yet more advanced interface.

My goal for this chapter is for you to understand the types of orders you can issue on an exchange, how they behave there, and what actually happens when they get executed.

One of the main differences between good traders and bad ones is that good traders know in detail what they are doing and base their trades on a good analysis while bad traders trade emotionally, hoping the price will increase because of <insert any invalid reason here!>.

Here are the topics we’ll cover:

The CEX
Long versus short
Types of orders
Spot versus futures
Leverage and liquidation
The order book, market depth, commissions, spreads, and slippage
A metaphor for it all – 3Commas

What is the CEX?

CEXs are platforms that act as an intermediary to facilitate the buying and selling of cryptocurrencies (and other assets). They are also custodians of your funds and wallets.

The term centralized refers to the fact that there’s an entity controlling these exchanges and, by trading there, you are placing a lot of trust in that entity, including trusting it with your money.

In crypto, we also have decentralized exchanges (DEXs) that use peer-to-peer systems to facilitate exchanges without the user ceding a lot of control to the entity.

A list of CEXs can be found here: https://coinmarketcap.com/rankings/exchanges/, with Binance being currently at the top. There’s also a list of DEXs, though we won’t use them for trading just yet: https://coinmarketcap.com/rankings/exchanges/dex/.

As you can see in the first list, Binance is at the top, so I’m going to use screenshots from this exchange in this section of the book. Here’...

Long versus short

When we open a position that we expect to rise in value, we do it by opening a long position, going long or “longing.”

When we open a position that we expect to fall in value, we open a short position, go short, or just short (a token).

Even though, theoretically, we can go in both directions at the same time (and some risk management strategies do this, for example, hedging), we usually go either long or short.

When we issue a long order, the CEX buys the token for our account. For example, we can send a market order to buy one BTC at market value and, after execution, we’ll be owning (or rather our account on the CEX will be owning) one BTC.

When we open a short position at market value, what the CEX actually does is buy the token, and then instantly sell it at the price it bought it. When we close the short, the CEX rebuys the token at the new price, and we get the difference.

For example, we short 1 BTC at market value, let...

Types of orders

There are numerous types of orders on Binance (and other CEXs) but I’m going to limit myself to the most important ones that are also supported by Binance, such as the following:

Market orders
Limit orders
Stop limit orders
Stop market orders (futures only)
One-Cancels-the-Other (OCO) orders (spot and margin only)
Trailing stop orders

Let’s dive in!

Market orders

With market orders, you are buying at the current price, no matter what it is. A market order guarantees that the order gets executed because it will accept the price the token has at that moment. The following diagram shows how it works:

Figure 5.3 – A market order

Limit orders

Limit orders are instructions positioned in the order book that are only executed when the market price meets or surpasses the established limit price. You can use limit orders to purchase at a reduced price or sell at a higher price, contingent...

Spot versus futures

A financial instrument is a contract or a document that represents a legal agreement involving monetary value. It can include assets, such as stocks and bonds, or contractual rights to receive or deliver cash, such as bank deposits, loans, and derivatives.

A spot market is a market where the financial instrument being traded is immediately delivered.

A futures market is a market where the financial instrument is being delivered at a later date. You buy (and sell) derivative contracts that represent the value of the asset.

Futures trading is typically the choice for traders, thanks to its unique advantage of enabling profits from any market direction. On the other hand, spot trading is a popular choice among investors due to its simplicity. It enables them to easily buy and hold tokens.

Here is a table with the main differences between spot and futures trading:

Leverage and liquidation

When we talk about leverage (in crypto), we refer to trading using borrowed money to increase your potential for profits (and losses).

Leverage is shown in ratios such as 1:2 (2x), 1:5 (5x), 1:50 (50x), and up to 100x (on most CEXs).

This is indicative of how much your initial entry is multiplied by. This means that if you have $100, with 2x leverage, you can enter a position of $200. With 5x leverage, you’re entering a $500 position.

You enter these bigger positions by borrowing money against your balance, by leveraging your balance against your position.

The money that you borrow from is called collateral, and before you can start trading using leverage, you need to have collateral in your futures account. This account is usually separated from your spot account so only the money transferred into it might get lost.

Margin trading is when you borrow money against your collateral and use that money to open a position. Margin refers to...

The order book, market depth, commissions, spreads, and slippage

In this section, we will delve into key elements of trading dynamics such as the order book, market depth, commissions, spreads, and slippage. The order book is a vital tool, showing a list of buy and sell orders for an asset. Market depth represents the volume of orders at different price levels, providing insights into supply and demand. Commissions are fees paid to brokers for their services, while spreads denote the difference between the buying and selling price. Lastly, we’ll look at slippage, a phenomenon that occurs when a trade is executed at a different price than expected due to market volatility. Together, these components form the backbone of any successful trading strategy.

I’ve mentioned the term “order book” before but I haven’t explained what it is yet. It’s a very complex topic (entire books have been written about it) and knowing what it is and how it works...

A metaphor for it all – 3Commas

3Commas (https://3commas.io/) is a crypto trading bot platform that is very affordable for people starting out. It features smart tools for trading, a TradingView subscription inside its platform, connections to multiple exchanges, crypto signals, portfolio management, cryptocurrency trading, a trading terminal, and various bots: DCA, SMART, Options, GRID, and HODL.

I mostly use it for its Smart Trade feature and its ability to connect to multiple exchanges (and to trade on them in parallel). This is its main site where you can create a free account:

Figure 5.14 – 3Commas site

After signing in, you are presented with an onboarding process where you can connect to an exchange and learn about its interface. Alternatively, if you skip it, you are presented with this interface:

Figure 5.15 – Main interface

The first step you have to take is to connect to an exchange such...

Summary

This chapter went into depth regarding the various trading tools that you have at your disposal on the CEX.

My goal was for you to understand the types of orders you can issue on an exchange, how they behave there, and what actually happens when they get executed. Basically, you got to know the tools you’ll be using in the later chapters.

I left you with a lot of activities to do, but (I hope) you haven’t started trading just yet. That’s because in the next chapter, we’ll cover risk management, which is a must-read before any money is involved.

The rest of the chapter is locked

You have been reading a chapter from

Zero to Hero in Cryptocurrency Trading

Published in: Sep 2023Publisher: PacktISBN-13: 9781837631285

A free Packt account unlocks extra newsletters, articles, discounted offers, and much more. Start advancing your knowledge today.

undefined

Unlock this book and the full library FREE for 7 days

Get unlimited access to 7000+ expert-authored eBooks and videos courses covering every tech area you can think of

Start free trial

Renews at $15.99/month. Cancel anytime

Author (1)

Bogdan Vaida

Bogdan Vaida is a seasoned private investor who has backed over 300 crypto startups. He is a founding member of Iron Capital, a VC company incorporated in Dubai. Eight years ago, he founded his own company and has managed teams at various stages of development. He is an advisor for several blockchain projects, including Gravvity, Blockchain Valley Virtual, Gentlemen Capital, Bountie, MetaVill and Umay. For fun and profit he trades daily, having his own trading course and programming his own trading indicators and strategies.
Read more about Bogdan Vaida

Personalised recommendations for you

Based on your interests and search pattern

Et al.

Ever wonder why speech recognition systems don't understand the Scottish accent, or what would happen if an astronaut only ate mac 'n' cheese, or other spurious reflections you'd have at a bar? We did, then collated those deliberations into absurd research articles with fake figures and methodologies inspired by even more fictionally absurd studies.

BookAug 2023230 pages5

Generative AI with LangChain

This book is a comprehensive introduction to LLMs and LangChain, demystifying the basic mechanics of LangChain, its functionalities, and the myriad of applications it can be integrated into.

BookDec 2023360 pages4

Generative AI with LangChain

This book is a comprehensive introduction to LLMs and LangChain, demystifying the basic mechanics of LangChain, its functionalities, and the myriad of applications it can be integrated into.

BookDec 2023360 pages5

Generative AI with LangChain

This book is a comprehensive introduction to LLMs and LangChain, demystifying the basic mechanics of LangChain, its functionalities, and the myriad of applications it can be integrated into.

BookDec 2023360 pages1

Generative AI with LangChain

This book is a comprehensive introduction to LLMs and LangChain, demystifying the basic mechanics of LangChain, its functionalities, and the myriad of applications it can be integrated into.

BookDec 2023360 pages5

Mastering Tableau 2023

This book is a comprehensive resource to mastering your Tableau skills and becoming a BI expert. As you progress, you will learn how to build advanced dashboards and improve your storytelling to derive key business insight, as well as make you well-versed with advanced functionalities of Tableau in the business intelligence domain.

BookAug 2023684 pages

Building AI Applications with ChatGPT APIs

This guide covers all ChatGPT API features for effortless creation of robust AI powered apps. With its help, you’ll be able to leverage ChatGPT’s cutting-edge NLP models to take your app development skills to the next level. You’ll also work on ten exciting projects that will give you the practical know-how that you can apply to your existing applications.

BookSep 2023258 pages5

Building AI Applications with ChatGPT APIs

This guide covers all ChatGPT API features for effortless creation of robust AI powered apps. With its help, you’ll be able to leverage ChatGPT’s cutting-edge NLP models to take your app development skills to the next level. You’ll also work on ten exciting projects that will give you the practical know-how that you can apply to your existing applications.

BookSep 2023258 pages2

Data Engineering with AWS

Embark on a journey to master data engineering pipelines on AWS! Our book offers a hands-on experience of AWS services for ingesting, transforming, and consuming data. Whether you're an absolute beginner or someone with basic data engineering experience, this guide is an indispensable resource.

BookOct 2023636 pages5

Modern Data Architecture on AWS

Every organization wants an agile, performant, and cost-effective data platform that meets all their current and future business needs. Purpose-built AWS analytics services and their features play a big part in building such a modern data platform. This book brings to you all the design and architectural patterns that’ll help you achieve this goal.

BookAug 2023420 pages5

Practical Guide to Applied Conformal Prediction in Python

Discover the power of Conformal Prediction with the "Practical Guide to Applied Conformal Prediction in Python." Master the latest techniques to quantify uncertainty in machine learning and computer vision models, and seamlessly apply them to your industry applications.

BookDec 2023240 pages

TinyML Cookbook

With over 70 project-based recipes, the TinyML Cookbook is a practical guide that will help you to get the most out of your microcontrollers. It provides a comprehensive understanding of the theoretical foundations while giving you hands-on experience training ML models for deployment on Arduino Nano 33 BLE Sense, Raspberry Pi Pico, and SparkFun RedBoard Artemis Nano microcontrollers.

BookNov 2023664 pages

Spot	Futures ...