Beginners Guide to Understanding Support and Resistance

Beginners Guide to Understanding Support and Resistance

What Is Support and Resistance?

Support and resistance are price levels that traders look at when they’re applying technical analysis to their investing.

“Support” is where the price of an asset tends to stop falling and “resistance” is where the price tends to stop climbing.

While support and resistance levels are rarely the sole indicators used to determine when to buy or sell, they can provide helpful clues to estimating when a price trend may pause or reverse.

Here’s a closer look at technical analysis, support and resistance levels, as well as how investors can use them.

Technical Analysis 101

Technical analysis is a type of trading method that uses price patterns to forecast future movement. It differs from fundamental analysis, which is based on using a company’s financials, like its earnings and revenue. Professional technical analysts are called Chartered Market Technicians or CMTs.

A general rule of thumb in investing is that past performance never guarantees future results. However, technical analysts believe that because of market psychology and sentiments like fear and greed, history tends to repeat itself. So for instance, if an asset falls a certain amount, buyers tend to swoop in.

In addition to price levels and their historical patterns, technical analysts may look at volume, oscillators – such as the Stochastic Oscillator, and momentum.

Another aspect of technical analysis is that it can be self-fulfilling. If many investors and traders believe a certain price is important, they may use stop-loss orders at certain levels. That, in turn, makes it likely those points will trigger a reversal or pause in an asset’s direction.

Recommended: Technical Analysis for Stocks: The Basics

How Do You Identify Support and Resistance Indicators?

As discussed, the support level is typically a price point at which investors or traders expect a downward price trend to pause or reverse. A resistance level is the price point at which an upward price trend is expected to pause or reverse.

Here are some different ways in which support and resistance levels can be determined.

1. Round Numbers

Round numbers like $100, $500 or $10,000 can be levels at which investors, traders and analysts believe a price trend will hit support or resistance.

For instance, in a hypothetical example in the stock market, a company’s shares may climb steadily and struggle to surpass the $100 level. This may be driven more by market sentiment, as the market doesn’t believe the stock can consistently trade above that $100 level.

There could also be a more fundamental reason, such as the $100 level pushing the valuation–something like the stock’s price-to-earnings ratio–to a level the market believes is too expensive.

2. Buy and Sell Orders

Technical analysts may come up with support and resistance points by studying where buy and sell orders are congregated. In other words, they’re determining support and resistance levels by the volume of trades.

Investors, traders and analysts may have access to actual buy or sell order books. They could study price targets that bank research analysts set. They may also scour sources like social-media platforms to get a sense of where investors believe the stock may find a floor or hit a ceiling.

For instance, with Bitcoin, the chatter on a social-media platform like Reddit or Twitter may indicate the $30,000 level is where the cryptocurrency may find a bottom. Those in the market may use that to believe that’s a “support” level for Bitcoin.

3. Historical Highs and Lows

A previous high or low for an asset may be deemed a level at which there’s support or resistance.

For instance, let’s say Company Y stock had months ago climbed to hit a price level but then reversed. If Company Y stock nears that level again, investors may believe that’s a resistance point where the shares may struggle again.

How to Trade Using Support and Resistance Levels

There are roughly four types of investors who may be using trade and resistance levels:

1.   Investors who are long and waiting to buy at a support level,

2.   Investors who are shorting a stock or asset and may close their position,

3.   Investors on the sidelines and want to buy at a support price,

4.   Investors on the sidelines and simply monitoring to learn more about the stock.

One common way investors and traders utilize support and resistance levels is through stop-loss orders. Stop-loss orders are in general popular when it comes to technical analysis trading. They involve placing an order with an investor’s brokerage account to buy or sell once an asset reaches a specific price.

Stop-loss orders are a way for investors to manage their portfolio without having to monitor their holdings every day.

For example, let’s say an investor believes $1,000 is a level of resistance for Company Z stock. They could set a stop-loss order to sell the stock at $1,000, which the brokerage firm will automatically execute once the shares hit that price.

The Takeaway

Support and resistance levels are price points at which investors and traders in a market expect trends to reverse or take a pause. Individuals can think about support and resistance levels as the potential floors and ceilings for price moves in an asset.

While there’s no guarantee support and resistance levels come true, it can be a helpful way to try to time the market or have specific price points to monitor. They may also use these prices to gauge whether the velocity of a price movement will slow down, pick up or reverse course.

Investors can track support and resistance levels and employ technical analysis by monitoring their holdings on the SoFi Invest® brokerage platform. The Active Investing platform allows users to buy and sell company stocks, exchange-traded funds (ETFs) and fractional shares with zero commissions. SoFi Invest users also get access to certified financial planners who can provide investing advice for no additional costs.

Start investing on SoFi Invest now.

Photo credit: iStock/Jay Yuno


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Earn Interest on Crypto: Savings Account vs. Wallet

Earn Interest on Crypto: Savings Account vs. Wallet

A bitcoin savings account gives holders the ability to earn interest on crypto. But how do they work?

Interest from Bitcoin and other cryptocurrencies can be earned in a number of ways. In the current era of zero or even negative interest rates, many investors have ventured outside the traditional financial system in search of a positive yielding returns. A crypto interest account can for some individuals be the solution for rock-bottom yields.

But the crypto investing ecosystem is still young. Bitcoin was created in 2009, making the technology only twelve years old as of 2021. Platforms that offer a type of bitcoin savings account are newer still.

For this reason, investors would do well to first learn crypto basics and conduct their own due diligence when looking to earn interest on crypto. The ways to go about earning that yield range from high-risk and questionable to lower-risk and reasonable. Choosing one method over another could mean the difference between earning a stable yield and losing 100% of the savings offered.

Bitcoin Savings Account vs. Cold Wallet

When it comes to long-term crypto holdings, investors can choose between several options. Two of the best options might be a bitcoin savings account or a cold storage crypto wallet. Each of these come with their pros and cons.

The main benefit of a cold storage wallet would be security. The term “cold storage” refers to funds that have been taken offline where hackers and thieves can’t access them. Bitcoin can be stored in this manner for extended periods of time. Cold storage is thought to be among the safest methods possible to store crypto.

Recommended: Cold Wallet vs. Hot Wallet

The main benefit of a bitcoin savings account would be earning a steady return on those savings. While coins in cold storage might be safe, they won’t be earning anything beyond their potential increase in value. Using one of the potential methods to earn interest on crypto ensures that the coin gets put to work generating passive income for an investor rather than sitting idle indefinitely.

Of course, offering up crypto savings in exchange for interest comes with some kind of risk. The risk varies depending on the method, but in situations like these investors have to assume that the organization they entrust their money to will safeguard it completely.

As we’ll see, this may not always be the case.

Four Ways to Earn Interest on Crypto

What kind of crypto interest account is best? It depends on a user’s preference, technical know-how, and risk tolerance.

There isn’t just one kind of official bitcoin savings account. The term loosely refers to any number of ways that holders can earn interest on their bitcoin or other cryptocurrency holdings.

Here are a few of those methods.

1. Crypto Staking

Staking isn’t technically a bitcoin savings account, but it does provide a return for crypto assets in a similar way.

Coins that use a proof-of-stake protocol work differently than those that utilize proof-of-work (like bitcoin). We won’t go into great detail about consensus mechanisms here, but proof-of-stake involves token holders “staking” their coins for a chance at winning the next block reward. Staking can be an involved, technical process, or it can be as easy as keeping coins in the right wallet on an exchange.

Some exchanges have everything set up on the backend so that all a user has to do to earn staking rewards is hold coins in their hot wallet. Typically, staked coins have to be locked up for a period of time, but some exchanges have worked things out to allow users to move their coins at any time while still earning regular rewards. This method obviously requires learning how a crypto exchange works first.

Keep in mind that staking rewards will be denominated in the token of choice, meaning if that token goes down in price, so too will any rewards.

Recommended: A Guide to Crypto Staking

2. DeFi Protocols

One of the riskier types of cryptocurrency savings accounts might be decentralized finance (DeFi) protocols.

Some DeFi projects automate the borrowing and lending process. This means that smart contracts govern the loans.

Borrowers like this because they can get a loan with no credit approval necessary. Lenders like it because they can get high yields when lending out capital. Searching for yield in this manner is sometimes referred to as “yield farming.”

While the system can be great for everyone when it works, it can also be catastrophic when it fails. There have been several reports of DeFi protocols either having programming bugs in them or being outright frauds from the beginning. In either case, investors can lose everything and have no recourse.

DeFi platforms typically don’t have to follow any cryptocurrency regulations, making them a sort of “wild west” kind of environment for investors.

3. Exchange Wallets

Some exchanges reward users for holding stablecoins in their exchange wallets. Dollar-pegged stablecoins like USDC and DAI might be eligible for these kinds of rewards.

The interest earned is typically as low as 0.2% or as high as 2%. The upside to this kind of arrangement is that it might not require investors to do anything out of the ordinary. Simply buying stablecoins and holding them in the appropriate wallet could do the trick.

The potential downsides are that the interest earned could be very small (although still greater than fiat currency held in a bank) and not all exchanges will offer this feature.

4. Third-Party Savings Apps

A number of centralized cryptocurrency savings accounts have sprung up in recent years. These are organizations that facilitate the borrowing and lending of crypto assets. Users typically earn a high yield, although not as high as DeFi protocols.

An upside of these apps might be that they offer a good balance between risk and reward. They also tend to be user-friendly and have good customer service, making them ideal for beginners.

The drawbacks might be that these kinds of accounts come with the same third-party risk as anything else. Depositing coins requires entrusting your crypto to those who hold it, and there may or may not be an insurance fund for when things go wrong.

The processes of these organizations are not always transparent, either. It can be unclear how exactly they provide depositors with yield or what kind of risk is being taken.

The Takeaway

In an era of ultra-low interest rates, some investors have turned to the cryptocurrency market to earn additional yield. While the crypto universe isn’t appropriate for all yield hungry investors, some measures like crypto staking, DeFi and savings apps may provide a solution.

With SoFi Invest, investors can buy cryptocurrencies like Bitcoin, Ethereum, Cardano, Uniswap and Chainlink 24/7: weekends, holidays, middle of the night. Furthermore, on the mobile app, investors can trade cryptocurrencies alongside the company stocks, exchange-traded funds (ETFs) and fractional shares that they already own.

Learn more about the different types of cryptocurrency and open a SoFi Invest® account today.

Photo credit: iStock/Delmaine Donson


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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What is a Retail Investor? Definition, Pros, and Cons

What Is a Retail Investor? Definition, Pros, and Cons

When it comes to buying and selling stocks, bonds, exchange-traded funds (ETFs) and other securities, there are two primary types of investors: institutional investors and retail investors.

Unless you work at an investment bank or big brokerage firm, you likely fall into the latter category. In general, institutional investors buy and sell securities on behalf of corporations, funds, organizations, or other individuals, whereas retail investors make investment decisions for themselves.

Here’s a closer look at what a retail investor, or retail trader, is and the pros and cons of investing on your own.

What Is a Retail Investor?

A retail investor is a non-professional, individual investor who invests money in their own accounts, typically through traditional or online brokerage firms. They may invest as an active investor, allocating the money and making trades on their own, or they may hire a professional, such as a financial planner or advisor to oversee the investment decision-making process.

Retail trading typically involves relatively small transactions, perhaps in the hundreds or thousands of dollars. Institutional investors on the other hand, such as hedge funds, might move many millions of dollars with every trade.

While individual investors’ trades may not amount to huge numbers, there are more than 100 million retail investors. Taken as a whole, retail investors represent a significant portion of the American markets. American households own $29 trillion, or 58% of the US equity market directly or through retirement accounts, mutual funds and other investments.

How Retail Investing Works

Retail investors get started by opening a brokerage account either with a traditional or online broker. Online brokers may offer automated accounts, or robo advisor accounts, that can help investors who prefer a hands-off approach to build a portfolio.

Investors transfer money into their brokerage account and then buy and sell securities, including a wide range of stocks, bonds, exchange-traded funds (ETFs), mutual funds, and index funds. Alternatively, they can have a financial professional do the buying and selling on their behalf.

Investors may have to pay investment fees to make trades, especially when working with a professional. Because retail investors tend to make smaller trades, these fees may be relatively high. That said, many online brokerages have eliminated fees for individuals making trades for certain securities like stocks or ETFs. Investors can minimize the impact of fees by avoiding frequent trades and holding investments over the long term.

The Securities and Exchange Commission (SEC) protects retail investors by enforcing securities laws and providing online education for investors.

Recommended: Investing 101: A Guide to Investing for Beginners

What Impact Do Retail Investors Have on the Markets?

Retail investors can have a big impact on individual stocks and the market at large.

While they played a relatively small role in the historic rally and bull market leading up to the recession in spring of 2020. Yet, during the pandemic retail investors took more interest in trading themselves and flocked to online brokers, trading apps, and automated investing services.

Individuals are now having a greater impact on the market than they have for the last decade, according to some experts. In recent months, for example, in which retail investors have driven up the price of so-called “meme stocks” in an effort to thwart hedge funds attempting to make money shorting the stock. Such campaigns have created volatility throughout the market.

Whether this enthusiasm will continue remains to be seen. But some believe the recent popularity points to a permanent structural change in which retail investors continue to play a big role in market movements in the future.

Pros and Cons of Being a Retail Investor

Being a retail investor can give you access to a lot of benefits, though there are a few drawbacks to be aware of as well. Here’s a look at some pros and cons of being a retail investor compared to an institutional investor.

Pros: Being a Retail Investor

•  Small investments: As a retail investor you can have a small stake in the stock market. You can buy as little as one share of stock in a company, or some brokers may even allow you to buy fractional shares, which allow you to invest in companies whose share price might otherwise be too expensive for you. Some platforms also allow retail investors to make trades in alternative investments, such as cryptocurrency, or in IPOs.

  Other types of investors can have equity requirements for trades. For example, the SEC requires day traders using margin accounts to have a minimum of $25,000 in the account each day trading takes place.

•  Liquidity: Stock and bonds are relatively liquid, meaning you can quickly exchange them for cash by selling. Institutional investors may have a tougher time liquidating their positions, especially if they are bound by a set of rules or agreements that holds them to a certain course of action.

•  Little paperwork: The only time you’ll have to deal with investment-related paperwork as a retail investor is at tax time if you owe capital gains taxes or taxes on dividends. You only owe capital gains if you sell an investment at a profit. If you held the investment for less than a year you’ll owe short-term capital gains equal to your income tax rate. All other investments are subject to long-term capital gains taxes, for which you’ll owe 0%, 15%, or 20%, depending on your tax bracket.

Recommended: Paying Taxes on Stocks: What You Need to Know

Cons: Being a Retail Investor

•  Fees: Brokers may charge you a fee when you make a trade. This fee can vary depending on what type of security you’re buying. That said, many brokerage firms and online brokers no longer charge fees for trading stock and some other investments. While professional traders can write off fees as a tax deduction, retail investors are stuck with them.

•  Lack of professional guidance: Professional traders may have a deep well of experience and access to information that helps them choose investments that meet their needs. A retail investor flying solo, doesn’t necessarily have that back up. If you want a little extra guidance, consider working with a financial professional who can help you build a well diversified long-term portfolio.

The Takeaway

If you’re an individual saving for the future with investments, you’re a retail investor. While there are some disadvantages to being a retail investor compared to an institutional investor, there are also many benefits, and it’s a good way to build financial security over time.

If you’re ready to get started investing you can open a brokerage account with a traditional broker or an online option like the SoFi Invest® brokerage platform. It allows you to invest in stocks, ETFs, and even cryptocurrency directly from the app on your phone.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected] Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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Crypto Diversification: Can You Diversify with Crypto?

Crypto Diversification: Can You Diversify with Crypto?

In 2021, as bitcoin and cryptocurrencies have become more of an acceptable asset class to many big investors and institutions, many retail investors might find themselves wondering if it’s worth having an allocation to crypto in their own portfolios.

Is investing in cryptocurrency worth it? Should crypto diversification be a part of every investor’s diversification strategy? Here’s a closer look.

What is Diversification?

Diversification involves spreading investments across different asset classes in an attempt to minimize risk and maximize returns. A diversification strategy often involves making investments across different sectors of the economy and within particular sectors.

The factors that make an asset good for portfolio diversification will vary depending on an investor’s existing holdings. One of the main goals is to ensure that if a particular sector or asset class takes a dive, the event won’t decimate the entire portfolio.

Ideally, a well-diversified portfolio will see gains in other areas when certain areas see corrections. In this way, downside risk can be mitigated even amidst the many unpredictable factors that come with investing.

Here are a few examples of assets that can be used to create diversification in a portfolio.

REITs

Real estate investment trusts (REITs) are tradable securities that give investors exposure to real estate. REITs also provide shareholders with a substantial portion of their income in the form of dividends.

Furthermore, there are different types of REITs, and these could provide even more diversification. Some REITs specialize in commercial real estate, like shopping malls. Others hold residential real estate like single-family homes, apartment complexes, and condominiums. There are even REITs for the healthcare industry and data centers.

Recommended: Pros and Cons of Investing in REITs

ETFs

Exchange-traded funds (ETFs) can serve many purposes as part of an asset diversification strategy. There are ETFs for almost anything imaginable.

An ETF typically holds a basket of securities that aims to recreate the market performance of a particular index. Or the ETF could simply be a collection of top stocks in a particular sector, making it easy for investors to gain exposure without having to pick specific stocks. For instance, thematic ETFs focus on niche sectors like electric cars or artificial intelligence.

Recommended: Benefits of Exchange-Traded Funds (ETFs)

Gold

Gold is an asset that investors might diversify with. Other precious metals investments like silver, platinum, and palladium also fall into this category. Gold is what’s known as a “safe haven asset,” meaning people prefer it during times of uncertainty.

Holding gold can serve as a financial shelter during times when other asset classes see increased volatility or subpar returns. During the initial panic of early 2020, for example, gold performed well at a time when stock markets around the world witnessed historic corrections.

Gold is likely the closest analogy to bitcoin when it comes to asset classes and diversification examples. Inventors tend to seek both for exposure to something that can serve as a long-term store of value, a hedge against inflation, and a non correlated or less correlated asset.

Recommended: Bitcoin vs. Gold

Asset Diversification With Crypto

One of the key reasons some market observers see crypto as a potential choice for asset diversification is because it sometimes isn’t correlated with other asset classes.

Bitcoin was positively correlated with the S&P 500, the benchmark index for U.S. equities in the fall of 2020. However, the correlation between the two dropped in February 2021, as the cryptocurrency market surged ahead. The 90-day correlation between the two dropped to 0.21 from a high of 0.5 in October.

Meanwhile, Bloomberg reported in May 2021 that some of the volatility of Bitcoin was spilling over into the stock market . A study by Singapore-based DBS Group found that S&P 500 futures contracts tended to post bigger swings after Bitcoin swung 10% up or down in the span of an hour.

How to Diversify a Crypto Portfolio

Once someone has learned the crypto basics and made the decision to diversify with crypto, they might then start asking whether or not they should diversify within crypto. In other words, should they invest in different types of cryptocurrency other than bitcoin?

The answer can be complicated and dives deep into what cryptocurrencies are and how they work. Bitcoin may be the easiest to understand as it only has one use case at present, and that is to serve as digital gold (a store of value) that can be easily divided and transferred among individuals (a medium of exchange).

Most other cryptocurrencies have myriad potential applications and tout themselves as being decentralized solutions. After learning how a crypto exchange works, investors are likely to be exposed to many different tokens.

Bitcoin vs. Smaller Coins

Bitcoin is the largest crypto by market cap and the highest hash rate of any proof-of-work coin, making it the most secure network and the most liquid market. It was also the first cryptocurrency created and therefore has the longest track record of success. These features make bitcoin the investable asset of choice for most large investors.

Smaller and newer crypto assets can see high returns in short periods, but their risk is also higher by several orders of magnitude. Many altcoins have seen their values plummet by 90% or more over time, with some going to 0.

Some courageous investors sometimes choose to speculate on the value of an altcoin’s alleged use case through regular crypto trading. These investors are similar to venture capital or angel investors who take on substantial risk for the hopes of finding a rare jackpot or “unicorn” project. This is an available option, but not one well-suited to the average investor with lower risk-tolerance.

Different Strategies for Crypto Diversification

Here are some ways investors can try to diversify within the crypto market:

1.   Different types of crypto: Stablecoins, altcoins, Bitcoin itself–investors can seek coins and tokens that have different backgrounds and histories.

2.   Different crypto market caps: Larger market-cap crypto tokens and coins include Ethereum and Bitcoin, but there are smaller ones, like Dogecoin, that have suddenly become very popular and grown in market cap.

3.   Different crypto industry focuses: Some cryptocurrencies focus on payment, others on video or the Internet. Investors can seek out different industry focuses.

The Takeaway

While the cryptocurrency is volatile and not suitable for every investor, there can be benefits to this market, such as periods of time when it’s less correlated to other asset classes and offers a form of diversification. Investors who want to diversify with crypto can do so by buying Bitcoin, the oldest cryptocurrency, or by delving into other tokens and coins.

With the SoFi Invest® crypto trading account, investors can trade cryptocurrencies like Bitcoin, Ethereum, Cardano, Uniswap and Chainlink 24/7: weekends, holidays, middle of the night. Furthermore, on the mobile app, investors can trade cryptocurrencies alongside the company stocks, exchange-traded funds (ETFs) and fractional shares that they already own.

Learn more from SoFi’s crypto guide and open an account today.

Photo credit: iStock/Eoneren


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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5 Strategies for Day Trading Cryptocurrency

5 Strategies for Day Trading Cryptocurrency

The term “day trader” comes from the stock market, where trades generally only happen during regular business hours on weekdays. One notable difference when day-trading cryptocurrency is that crypto markets stay open 24 hours a day, 7 days a week.

For would-be day traders, it helps to know some day-trading basics along with a few things to know before investing in crypto in this manner.

First, What is Day Trading?

Day trading is a short-term trading style involving trades that are bought and sold during the same trading day. This is also sometimes called “intraday trading.” Day traders attempt to use intraday trading strategies to profit from the price moves of a particular asset or financial instrument.

Recommended: What Is Day Trading?

Things to Know About Crypto Day Trading

There are two market conditions that must be present for day trading to be profitable:

•  Liquidity: Traders need to be able to enter or exit trades quickly without moving prices too much. In a market with low liquidity, slippage—when a large position can’t be liquidated at the price a trader desires—could eat into a trader’s profits. With slippage, the position must be sold in increments, with each order having a lower price than the previous one, leading to smaller gains overall by the time the whole position has been sold.

•  Volatility: A lack of volatility means prices aren’t moving, and there’s no chance of buying low and selling high. Because day traders try to buy and sell during the same day, markets have to be going up and down on a short-term basis for this strategy to be viable.

Bitcoin mining could also play a role in markets at times. If miners are selling most of their coins as they mine them, this could increase downward pressure on prices for a time. Anyone learning how to day trade Bitcoin could benefit from learning how the technology itself works, too.

5 Day Trading Crypto Strategies

On a multi-year timespan, simply holding bitcoin or some other cryptocurrencies has been a profitable strategy. The gains have largely outpaced that of other asset classes.

So when considering how to invest in Bitcoin, one strategy might be to just buy and hold. This can be especially true during crypto bull markets, when corrections tend to be short-lived. However, it’s also important for investors to remember that Bitcoin and other cryptocurrencies are highly speculative investments. Just because an investment has risen in the past, that doesn’t mean it will continue to do so.

For investors specifically interested in day trading, there are numerous strategies to try. Technical analysis might be among the most popular strategies, as entire communities of traders have sprung up around this school of thought.

One thing’s for sure: having a rule-based trading strategy of some kind is a must for short-term traders. Here are five strategies for day trading cryptocurrency.

1. Technical Analysis

Technical analysis (TA) involves using mathematical indicators and chart patterns to try and predict which way prices will move next. Some technical indicators are simply generated with a computer program like TradingView (RSI, for example), while others must be identified by humans looking at charts (the cup-and-handle pattern, for example).

One popular technical indicator is the relative strength index (RSI). This appears as a single line beneath a chart with a value between 0 and 100. The closer the RSI gets to 100, the more overbought conditions are thought to be, meaning prices could fall. The closer the RSI gets to 0, the more oversold conditions are thought to be, meaning prices could rise. This is one example of how someone day-trading cryptocurrency might use TA.

2. News and Sentiment Analysis

While it’s less popular among short-term traders, looking at headlines and overall market sentiment can also be used in Bitcoin day-trading. Sometimes, big news items can move crypto markets quickly.

For example, on the day this article was written in mid-April 2021, the nation of Turkey announced that it would ban Bitcoin and other cryptocurrencies as payment options within its borders. This sparked a global crypto market selloff, with Bitcoin falling about 3.2% initially and more than 10% later.

Additionally, there are websites that attempt to track the sentiment of the most popular cryptocurrencies by analyzing Twitter chatter. More positive tweets about a crypto equals more bullish sentiment, while more negative tweets equals more bearish sentiment—or so the theory goes.

3. Range Trading

Range trading assumes that prices tend to move within a certain range. Using this strategy involves looking at candlestick charts and support and resistance levels.

Traders might buy when prices reach a support level and sell when prices reach a resistance level. Or they might go short when prices hit resistance and close out the short when prices fall to support.

Pivot points are an example of range-bound trading. Calculating pivot points gives investors an idea as to what price levels are likely to see reversals in momentum.

4. Scalping

This strategy involves trying to profit from very small price moves over short periods. Often these are market inefficiencies like gaps in the bid-ask spread or gaps in liquidity.

Because they are aiming to take advantage of tiny price movements, “scalpers” often trade using leverage like margin or futures contracts to amplify their gains. This also amplifies potential losses, however, so managing risk is especially important with this strategy.

Scalpers might utilize strategies like volume heatmaps, order book analysis, or a range of technical indicators to determine entry and exit positions for their trades.

Due to the fast-paced and high-risk nature of scalping, it’s better suited for experienced traders.

Recommended: What Is Scalp Trading and How Does It Work?

5. Bot Trading

Bot trading, or high-frequency trading (HFT), involves the use of algorithms and trading bots that can be programmed to execute a large number of trades very quickly. Using this method requires knowledge of advanced trading strategies and programming.

While crypto trading bots conduct the trading itself, high-frequency traders don’t simply sit back and let a computer program do all of the work. Trading bots involve coming up with a specific strategy, developing the appropriate program to execute that strategy, and then constant monitoring, backtesting, and updating of the algorithms to keep up with changing market conditions.

There are some pre-made trading bots available for purchase from certain dealers. One thing to keep in mind when considering such a bot is this: if the bot is profitable and easy to use, why isn’t everyone using it, and why are its creators selling it rather than using it themselves?

Which Cryptocurrency is Best for Day Trading?

It depends on what’s currently happening in the crypto markets. As mentioned, liquidity and volatility are key for any day trading strategy, so any cryptocurrency with sufficient liquidity that is showing high volatility could be a good option.

One coin that has enjoyed increased liquidity and a surge of volatility as of early 2021 is Dogecoin (DOGE). Originally created as a joke, this meme-based cryptocurrency skyrocketed from a fraction of a penny to over $0.25 in a matter of months. The market cap exploded by billions of dollars.

Dogecoin still has high volatility because it’s easy to mine and there might be a lot of people holding large amounts of DOGE who sell them whenever the opportunity arises. This also creates opportunities for day traders.

This is only one potential example—and this specific coin could be completely irrelevant by the time you read this article. Such is the volatile nature of cryptocurrency.

Crypto Day Trading: Taxes and Regulations

It’s important for traders to educate themselves about the rules and taxes associated with day trading in their area. For example, two important things for day traders to be familiar with are short-term capital gains taxes and the wash sale rule.

Short-term capital gains taxes apply to the sale of any asset that was held for less than a year. This means any earnings are taxed as regular income or at the “marginal rate,” so based on an investor’s tax bracket. The IRS changes these numbers every year in order to adjust for inflation. For the 2021 to 2022 tax rate, the rates ranged from 0% to 37%.

The wash sale rule is also a must-know for day traders. This rule prevents investors from taking a loss on their taxable income when they sell a security then buy the same security within the next 30 days.

There are many more nuances regarding taxes and day trading. Traders should consult with a certified tax professional to understand all the necessary details for their own situation.

What Are the Downsides of Day Trading Crypto?

The majority of people who engage in day trading lose money. An estimated 85% of professional money managers underperform their market benchmarks. Timing the markets can be difficult, and human traders now compete with sophisticated computer bots.

Another issue is trading fees. Every trade involves a small fee, and these fees can quickly add up when making large numbers of trades. Some crypto exchanges, such as Binnace, have their own exchange tokens that provide users a discount when paying trading fees in the form of that token. Even then, day traders still have to subtract fees from their profits.

The Takeaway

Day trading is a strategy that involves buying and selling stocks throughout the course of the trading day to try and turn a profit. With crypto, the trading “day” is even longer, as crypto markets are open 24/7. That said, day trading can be an especially risky pursuit, with no guarantee of profits.

Interested in trading crypto? With the SoFi Invest® crypto trading platform, members can buy and sell Bitcoin, Ethereum, Cardano, and more coins, all on a secure platform that ensures your holdings are protected against fraud and theft.

Find out how to invest in crypto with SoFi Invest.

Photo credit: iStock/MF3d


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
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