Evaluation of application design and implementation - Docsity Define basic algorithms t, Cheat Sheet of Computer science

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Preface

Hi! We're Binance Academy. We're on a mission to build the best platform for cryptocurrency education. Whether you want to understand the basic mechanics of Bitcoin or brush up on the strongest technical analysis metrics, we've got you covered.

The purpose of this eBook is to gently introduce you to a range of trading topics. If you're a total novice, this is the guide for you. But even if you know what you're doing already, think of this eBook as a reliable handbook for sharpening your skills.

We’re going to cover a lot of content in the coming chapters. Where relevant, we’ve provided some handy links to additional material on the Binance Academy website (academy.binance.com). If you want to discuss crypto with our community, head over to the Binance Academy Chat on Telegram (t.me/BinanceAcademyChat).

Alright, enough of the pleasantries. Let's get right into it.

• Preface
• I. Trading Basics
  • What is trading?
  • What is investing?
  • Fundamental analysis (FA)
  • Technical analysis (TA)
    • Which one is better?
  • What drives financial markets?
  • What is a market trend?
  • What is a market cycle?
• II. Financial Instruments
  • What are financial instruments?
  • Spot and derivatives markets
• III. Trading and Investing Strategies
  • Portfolio and risk management
  • Day trading
  • Swing trading
  • Trend trading
  • Scalping
  • Asset allocation and diversification
  • The Dow Theory
  • The Elliott Wave Theory
  • The Wyckoff Method
  • Buy and hold
  • Paper trading
• IV. Getting Practical
  • Long position
  • Short position
  • Order book
  • Order book depth
  • Market order
  • Slippage
  • Limit order
  • Stop-loss order
  • Makers and takers
  • Bid-ask spread
• V. Technical Analysis Basics
  • Candlestick charts
  • Candlestick chart patterns
  • Trend lines
  • Support and resistance
• VI. Technical Analysis Indicators
  • Leading and lagging indicators
  • Momentum indicators
  • Trading volume
  • Relative Strength Index (RSI)
  • Moving Average (MA)
  • Moving Average Convergence Divergence (MACD)
  • Fibonacci Retracement
  • Stochastic RSI (StochRSI)
  • Bollinger Bands (BB)
  • Volume-Weighted Average Price (VWAP)
  • Parabolic SAR
  • Ichimoku Cloud
  • Final thoughts

I. Trading Basics

What is trading?

It's probably wise to kick things off with a definition of the topic we'll be discussing. A staple of economics, trading simply refers to the buying and selling of assets. When you buy your groceries at the local shop, that's a trade. When you exchange your old PC for a new game console, that's a trade. We could go on forever here. To cut a long story short, any activity where you give something to someone in return for something else is a trade.

This principle really extends to the financial markets. You trade financial assets like stocks, bonds, Forex pairs, options, cryptocurrencies, etc. Don't worry if you don't know what any of those are yet. By the end of this book, you'll be an expert!

What is investing?

You might hear people talking about trading financial instruments, but you might also hear them talking about investing in them. The aim in both of these activities is similar ( let's make some monaaay! ), but they're somewhat different in their methodologies.

When you invest in something, you're hoping to get a return on that investment – the goal is to get back the money you put in, plus some more. For example, you could buy a run-down fast food restaurant for $100,000, fix it up, and try to resell it for $500,000 in a few years. You

Bobcoin – which trades for $10. But Alice's findings indicate that the asset should actually be worth $20. In this case, she might decide to buy lots of Bobcoins as she believes that the market will eventually value them at $20.

On the topic of cryptocurrency-specific fundamental analysis, it's worth noting that some consider on-chain metrics when conducting their research. On-chain metrics is an emerging field of data science. It is concerned with data that can be read from public blockchains: network hash rate, distribution of funds, the number of active addresses, etc. By taking this abundance of public information, analysts can create sophisticated indicators that measure the network's health.

Fundamental analysis is popular in the stock markets, but it's perhaps not very suitable for cryptocurrencies in their current state. The asset class is so new that there simply isn't a standardized, comprehensive framework for determining market valuations.

What's more, much of the market is driven by speculation and narratives. As such, fundamental factors will typically have negligible effects on the price of a cryptocurrency. However, more accurate ways to think about crypto asset valuation may be developed as the market matures.

Want the low-down on fundamental analysis? Check out the Binance Academy article: ⬥ What is Fundamental Analysis (FA)? ➤ bit.ly/AcademyEBook

Technical analysis (TA)

To put it simply, technical analysts believe that past price movement can dictate future price movement.

Technical analysts don't try to find out the intrinsic value of an asset as fundamental analysts do. Instead, they look at the historical trading activity and try to identify opportunities based on that.

This can include analysis of price action and volume, chart patterns, the use of technical indicators, and many other charting tools. The goal of this analysis is to evaluate a given market's strength or weakness.

With that said, technical analysis isn't only a tool for predicting the probabilities of future price movements. It can also be a useful framework for risk management. Since technical analysis provides a model for analyzing market structure, it makes managing trades more defined and measurable.

In this context, measuring risk is the first step to managing it. This is why some technical analysts may not be considered strictly traders. They may use technical analysis purely as a framework for risk management.

The practice of technical analysis can be applied to any financial market, and it's widely used among cryptocurrency traders. But does technical analysis work?

Well, as we've mentioned earlier, the valuation of the cryptocurrency markets is largely driven by speculation. This makes them an ideal playing field for technical analysts, as they can thrive by only considering technical factors.

Interested in reading more? Check out: ⬥ What is Technical Analysis? ➤ bit.ly/AcademyEBook

What is a market trend?

A market trend is the overall direction where the price of an asset is going. In technical analysis, market trends are typically identified using price action, trend lines, or even key moving averages.

There are two main types of market trends: bull and bear market. A bull market consists of a sustained uptrend, where prices are continually going up. A bear market consists of a sustained downtrend, where prices are continually going down. In addition, you could identify consolidating (or sideways ) markets where there isn't a clear directional trend.

💡 Did you know? The market trends' animal names echo the methods used by each creature to attack. Bulls typically charge and thrust their horns upwards, while bears tend to swipe their paws downwards.

It's worth noting that a market trend doesn't mean that the price is always going in the direction of the trend. A prolonged bull market will have smaller bear trends contained with it, and vice versa. This is just the nature of market trends. It's a matter of perspective, as it all depends on the time frame you're looking at. Market trends on higher time frames will always be more significant than market trends on lower time frames.

A peculiar thing about trends is that they can only be determined with absolute certainty in hindsight. You may have heard about the concept of hindsight bias, which refers to people's tendency to convince themselves that they accurately predicted an event before it happened. As you can imagine, hindsight bias can have a significant impact on the process of identifying market trends and making trading decisions.

What is a market cycle?

You may have heard that "the market moves in cycles." A cycle is a pattern or trend that repeats itself over time.

Typically, long-term market cycles are more reliable than short-term market cycles. Even so, you can observe market cycles on an hourly chart just as you can when you zoom out to look at decades of data.

Markets are cyclical in nature. Cycles can result in certain asset classes outperforming others. In other segments of the same market cycle, those same asset classes may underperform against other types of assets due to the different market conditions.

A QUICK RECAP!

Hopefully, by now, you've got a decent grasp on the basics of markets and trading:

⬥ Markets exist where supply meets demand – people want to buy an asset, while others want to sell it.

⬥ The markets move in cycles, in which upwards, downwards, or sideways trends can be identified.

⬥ Technical analysis and fundamental analysis are used to try and predict the future price of an asset.

⬥ Traders try to anticipate market movements to try and make a profit.

II. Financial Instruments

There is a lot that you can trade. If you have something that someone else wants to buy, then there's a market for that thing. We could call any tradeable asset a financial instrument.

Practically, though, we're not going to place tennis balls in the same category as stocks.

What are financial instruments?

Generally, financial instruments refer to things like cash, precious metals (gold, silver, etc.), documents that confirm ownership over something (e.g., businesses or resources), or rights to deliver or receive cash.

Financial instruments can be really complex, but the basic idea is that whatever they are or whatever they represent, they can be traded.

They can be classified depending on their type. One of the classifications is based on whether they are cash instruments or derivative instruments. As the name would suggest, derivative instruments derive their value from something else (like a barrel of oil). Financial instruments may also be classified as debt-based or equity-based.

But where do cryptocurrencies fall? We could think of them in multiple ways, and they could fit into more than one category. The simplest

A note on margin trading

Margin trading is a method of trading using borrowed funds from a third party. In effect, trading on margin amplifies results – both to the upside and the downside. A margin account gives you more access to capital (you can trade with more funds than you have). A margin account can also eliminate some counterparty risk. How so? Well, you can trade the same position size but keep less capital on the cryptocurrency exchange.

Suppose that Alice has $1,000, but she's confident that BTC will increase by 10%. With such a small amount of capital, she's unlikely to make any significant gains. Instead, she might opt to increase her position with leverage.

She puts up her own $1,000 (referred to as margin ) and borrows money from the exchange. If Alice had 2x leverage, she would be trading with double her margin (i.e., $2,000). What if Alice had 5x leverage? She'd be trading with $5,000.

What could go wrong? If Bitcoin price goes up and Alice has 5x leverage, she'll make five times the profit. However, if it goes down, she'll incur five times the losses. Indeed, the higher the leverage used, the closer the liquidation price is to your entry. This is the point when the exchange closes your position and takes all of your margin.

Want to learn more about margin trading? We've got you: ⬥ What is Margin Trading? ➤ bit.ly/AcademyEBook ⬥ The Binance Margin Trading Guide ➤ bit.ly/AcademyEBook

Derivatives markets

Remember how we made the distinction that assets are getting "instantly delivered" in spot markets? That will hopefully start to make more sense as we talk about derivatives. These instruments can have a plethora of different forms, delivery methods, settlement assets, and probably more complexity than us mere mortals can even imagine.

So, what are they? Derivatives are financial assets that base their value on something else. This can be an underlying asset or basket of assets. The most common types are stocks, bonds, commodities, market indexes, or cryptocurrencies.

The derivative product itself is essentially a contract between multiple parties. It gets its price from the underlying asset that's used as the benchmark. Whatever asset is used as this reference point, the core concept is that the derivative product derives its value from it. Some common examples of derivatives products are futures contracts, options contracts, and swaps.

According to some estimates, the derivatives market is one of the biggest markets out there. Derivatives can exist for virtually any financial product

• even derivatives themselves. Yes, derivatives can be created from derivatives. And then, derivatives can be created from those derivatives, and so on.

Does this sound like a shaky house of cards ready to come crashing down? Well, this may not be so far from the truth. Some argue that the derivatives market played a major part in the 2008 Financial Crisis.

III. Trading and Investing Strategies

There's no single playbook that everyone turns to transform $10 into $10,000. If everyone used the same strategy, nobody would have much success. Participants in the markets range from teenagers with six screens watching things unfold minute-by-minute to elderly investors that bought a stock ten years ago and don't plan on checking in on it for another ten.

In this chapter, we'll talk about a wide range of trading and investment strategies. As with technical and fundamental analysis, many choose to mix and match their approach for the best results.

But first, we'd better define what we're talking about! A trading strategy is simply a plan you follow when executing trades. Regardless of your approach, establishing a plan is crucial – it outlines clear goals and can prevent you from going off course due to emotion. Typically, you'll want to decide what you're trading, how you're going to trade it, and the points at which you'll enter and exit.

Portfolio and risk management

With any investing or trading strategy, portfolio and risk management are a must. Not sure what these are? Let's find out!

Portfolio management

Portfolio management concerns itself with the creation and handling of a collection of investments. The portfolio itself is a grouping of assets – it could contain anything from Beanie Babies to real estate. If you're exclusively trading cryptocurrencies, then it will probably be made up of some combination of Bitcoin and other digital coins and tokens.

Your first step is to consider your expectations for the portfolio. Are you looking for a basket of investments that will remain relatively protected from volatility, or something riskier that might bring higher returns in the short term?

Putting some thought into how you want to manage your portfolio is highly beneficial. Some might prefer a passive strategy – one where you leave your investments alone after you set them up. Others could take an active approach, where they continuously buy and sell assets to make profits.

Risk management

Managing risk is vital to success in trading. This begins with the identification of the types of risk you may encounter:

⬥ Market risk: the potential losses you could experience if the asset loses value.

⬥ Liquidity risk: the potential losses arising from illiquid markets, where you cannot easily find buyers for your assets.

⬥ Operational risk: the potential losses that stem from operational failures. These may be due to human error, hardware/software failure, or intentional fraudulent conduct by employees.

⬥ Systemic risk: the potential losses caused by the failure of players in the industry you operate in, which impacts all businesses in that sector. As