Crypto Lingo: Six Trading Terms You Need To Know - Reading time: about 5 minutes
Maybe you have heard about some of the following crypto trading-related terms, or maybe not. You can find this jargon featured in crypto-related discussions, news, and analyses, as the market continues its push through different cycles. For some traders, especially beginners, who may find these terms vague, this article provides a simpler perspective to help those trying to navigate the world of crypto.
Usually identified through chart analysis tools like trend lines and moving averages, resistance levels are price points at which a particular crypto asset is expected to face selling pressure and hence may struggle to rise beyond this level.
When an asset is at a resistance level—which is typically formed at previous highs—traders need to make the key decision of whether to buy or sell an asset. This is crucial because what comes next after a resistance level is the rise or fall in the asset's price. Should the digital asset break through a resistance level, it is considered to indicate a bullish signal which could lead to further price increases. Failure to break through a resistance level means a bearish signal and could see the asset’s price drop.
Support levels are the opposite of resistance levels. Unlike the resistance level, the support level suggests a price point that an asset is expected to encounter buying pressure but hang on to, thus preventing further price drop.
In most cases, support levels are typically formed at previous lows; the point where the asset had faced buying pressure in the past, or where a somewhat psychological barrier had been created.
Like the resistance level, a support level is crucial for traders to make a buy or sell decision depending on the trade goals or set price targets. It should be noted that support levels are not fixed. As is the case with the market, a support level for an asset may or may not hold. News or other developments can change the market sentiment and cause the price of an asset to move in any direction.
Consolidation in crypto trading can take on a few different meanings. Among top industry players, consolidation refers to the process of reducing the number of market participants owing to factors such as increased competition or the need for economies of scale, with the aim to increase market share or expand into new markets. One example is the case of larger exchanges acquiring or merging with one another. The idea is to enhance greater efficiency and stability in the industry as strengthened big players tend to invest more in security, and compliance, despite leaving consumers with fewer options as smaller players are pushed out of the market.
For a typical trader, consolidation takes place when the price of an asset stays longer within two supposed indecisive levels. This point, which could last between a few hours to several weeks or months, allows a trader to revise their trading strategy as well as consider other factors such as entry and exit points.
In general, consolidation captures every action that adds to making the crypto market stronger or more solid.
It is closely linked to capitulation, the state of high selling pressure leading to a drop in prices of assets, and the popular term: accumulation—when an asset is experiencing a high level of buying activity.
FOMO (Fear Of Missing Out)
Considering the volatile nature of the crypto market, the FOMO phenomenon stems from the perception by some crypto traders that the market, sometimes regardless of whether they did thorough research or followed a particular trading strategy, is meant to make their profits.
A trader caught with the FOMO bug develops a feeling of anxiety or regret that others are making desirable gains, while they are not.
While it works out pretty well sometimes, FOMO is usually one of the most common reasons for crypto traders to catch a falling knife as they dabble in buying, and get stuck with, assets whose prices are dropping.
FOMO leads to making poor and impulsive decisions based on emotion rather than careful analysis, hence increasing a trader’s chances of making failed trades in a risky market. Traders that are tempted to buy into a particular asset because they see or think that others are making profits, could end up buying at a high price and then experiencing losses when the price inevitably drops.
Aside from being caught up in unpredictable rapid price increases or decreases, such traders present others with a good opportunity to make gains.
In crypto, the concept of leverage refers to the practice of borrowing digital assets to increase the size of a trader's position in the market. Leverage enables a trader to gain exposure to more assets than they would have been able to with their own funds alone, thus increasing their chances of being able to make more investments and gains if done properly.
While it is a common term that flies around the crypto market, leverage is most commonly used in derivatives markets such as futures, options, and margin trading.
While borrowed funds help increase a trader’s buying power for potential gains, it comes with the risk of significant losses as leveraged positions are more sensitive to price movements. Leverage also comes with interest costs, which all add up to a trader’s overall investment cost.
Using leverage requires traders to carefully manage their positions to avoid being forcibly closed on them due to a drop in the value of their collateral.
To diversify is basically to spread your exposure across various digital assets. In a volatile and unpredictable crypto market, uncertainties arise when the value of a top cryptocurrency like Bitcoin drops due to one of the major reasons influencing its market trends, such as news.
A drop in Bitcoin’s value will affect many others in terms of rapid price swings and changes in market sentiment, hence likely exposing traders to more investment risks as well as causing them to record losses. Diversification helps to safeguard against this as a trading technique. This practice of spreading investments across a variety of assets instead of a single one helps traders to reduce risk against market fluctuations.
While diversification does not eliminate all risks, neither does it guarantee profits. It also reduces a trader’s potential to make huge gains in the event that the price of one particular asset spikes beyond market expectations. Diversification may not be suited to traders who may find managing several assets in their portfolio complex.
Depending on your goals, one or more of these terms will accompany you at some point, and at different stages of your crypto trading journey. Getting well-versed in what they mean will go a long way in shaping your understanding of the trading strategy you’ve chosen to adopt. Hopefully, this brief explainer complements efforts to set you on the right path.