If you’ve visited a cryptocurrency trading platform, you’ll see trading pairs like ETH/USDT, ETH/BTC, BTC/USD, and many other similar options. However, do you know what these cryptocurrency trading pairs mean, and how to interpret them? Let’s take a look at cryptocurrency trading pairs, how they work, and how to choose a trading pair.
What are cryptocurrency trading pairs?
Cryptocurrency trading pairs consist of two assets that you can trade with each other on exchanges. A cryptocurrency pair combines one cryptocurrency with another cryptocurrency or fiat currency. Examples of cryptocurrency pairs include BTC/ETH, LTC/BTC, BTC/USDT, etc., while combinations of cryptocurrency pairs include ETH/USD, BTC/GBP, etc.
How cryptocurrency trading pairs work
The trading pair contains the stock name of each cryptocurrency involved in the transaction, usually separated by a slash (/) or a dash (-). The first set of letters represents the first asset in the trading pair, and the second group represents the second asset.
These letters are abbreviations for the native token names of cryptocurrency networks, just like we do with fiat currencies, where the US dollar is represented as USD and the Swiss franc is represented as CHF. In this case, we use BTC for Bitcoin, XRP for Ripple, ADA for Cardano, and so on.
Base currency and quote currency
A cryptocurrency trading pair consists of a base currency and a quote currency; The base currency is the first currency in that trading pair against other currencies.
For example, if you have LTC/USD, LTC is the base currency and USD is the quote currency. As the name suggests, the quote currency is the currency in which the base currency is quoted. It always comes after the base currency.
How buy and sell orders are interpreted in cryptocurrency pair trading
The value of one currency is compared to another currency in a trading pair. A trading pair shows how much of the base currency is needed to buy one unit of the quote currency. Let’s say BTC/ETH is $13.8; this means that 1 BTC is worth 13.8 ETH. To use another example, if ETH/USD is trading at $1319, then you need $1319 to buy one ETH.
When you buy a currency pair, you are buying the base currency and selling the quote currency. On the other hand, when you enter a short position on a currency pair, you are selling the base currency and buying the quote currency. Cryptocurrency pair trading involves buying one currency and selling another at the same time. Although you only need to make one order, the process of buying and selling is simultaneous and automatic.
Therefore, if you initiate a buy order for ETH/USD, you are investing in ETH against the US dollar. You buy ETH and automatically sell USD because you believe the price of ETH will rise against USD. On the other hand, if you believe that the price of ETH will fall against the dollar, you will have to go short. In this way, you are selling ETH and automatically investing in USD.
4 factors to consider when choosing a cryptocurrency pair for futures trading
There are a few things you need to consider when choosing a cryptocurrency pair to trade.
1. Your Trading Strategy
A trading strategy may work for one currency pair but not for another. For example, a strategy that works for BTC/USD trading may not work for ADA/BTC
Before deciding which cryptocurrency pair to risk with, you must have already developed the right technical and basic trading strategy for it. Getting the right strategy also requires you to backtest it with lots of market data to understand how it works, or to trade on a demo for a while until you’re confident in it.
2. Trustworthy trading pairs
Sometimes, the currency pair being traded may be based on a currency pair offered by an exchange or broker you trust. Since the safety of your funds should always be a priority, the choice of trading pairs can be based on what the exchange you trust has to offer, rather than depositing on an exchange you don’t trust.
Some cryptocurrency pairs are more common on exchanges than others. For example, BTC/USD and ETH/USD are available on many exchanges and broker platforms. Currency pairs with USD and BTC as quote currencies are also more common compared to some other cryptocurrencies.
3. Your trading goals
What do you want to achieve when trading? Do you want a currency pair that gives you more trading opportunities? If so, you may want a currency pair that is more volatile. The more volatile the currency pair you choose, the greater the risk you will face.
Highly volatile currency pairs will also provide you with more trading opportunities and potential profits. High volatility combined with proper risk management should give you good results.
On the other hand, if you prefer to trade in a slower market, whether due to your personality, trading style, or level of experience, then a currency pair with lower volatility may be the best fit for you.
4. Liquidity of cryptocurrency exchanges and assets
Liquidity refers to how easy it is to trade a currency pair. Trading illiquid currency pairs can affect your overall profits as you may find it difficult to execute and close trades at your desired price. This means that you will experience significant slippage when trying to execute trades.
Not being able to execute a trade at your desired price is a significant problem that can end up with significant losses. We advise day traders to stay away from illiquid assets or exchanges with low liquidity.
There is no need to wait for a bullish move to take a profit
For cryptocurrency pairs, you can try to take short positions when the market price is falling and long positions to profit when the market price rises. You don’t have to wait until there is a long bull run in the market to accumulate profits.
Trading cryptocurrency pairs is not as simple and straightforward as you read. Therefore, you must take the time to master skills such as different types of analysis, trade management techniques, and risk management practices to have a chance to get ahead.
The above information does not constitute financial advice, investment advice, or trading advice and should not be considered financial advice. SoftwareGuide does not advise on any transaction or investment matters, nor does it recommend the purchase or sale of any particular cryptocurrency. Always do your own due diligence and consult a licensed financial advisor for investment advice.