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Spot transactions or spot trading (Spot Trading) It is referred to as a spot or moment transaction, it is said to buy and sell a currency code, goods, stocks, bonds or financial instruments for immediate delivery on a certain date. Most of the contracts for spot transactions or cash transactions are related to the physical delivery of goods, currency or equipment.
Spot trading in the spot market (Spot) , which is also called the cash market, in two ways based on over-the-counter (OTC) Or exchange happens. In digital currency spot transactions, you can only use your personal assets and you will not be able to use leverage or margin.
Read more: What is leverage in digital currency?
The difference between spot and futures is their payment time. The advantages of these transactions include lower financial risk and instant delivery in cash.
In fact, spot transactions or instant transactions (cash markets) are one of the ways to earn money in financial markets such as the digital currency market. Of course, cash markets are not only limited to the digital currency market and spot transactions in forex and include gold spot transactions, various currency pairs, commodities, company shares, etc.
Assets traded in spot transactions instantly and at the price of the time of purchase or the current and momentary price (Spot Price) will be provided to the property buyer. Any trader with any amount of assets will be able to do these transactions. In the rest of this article, I intend to understand more Spot Trading and spot market in digital currency trading .
What is spot trading?
In response to the question of some friends, what is the concept of Spot Trading ? I must say, in fact, Spot It is called a transaction that the delivery of the purchased or sold goods is done during the transaction. In other words, the basic pillar of spot transactions is immediate and immediate delivery of traded goods It is a medium of exchange .
TradingIt also means trade, transaction and exchange of goods. So the spot deal (Spot Trading) Direct purchase and sale of assets with immediate payment and immediate delivery of goods to the buyer is called. This type of transactions is only limited to the spot market (Spot) is not in digital currency trading and it exists in other financial markets such as spot trading in forex, gold spot trading and stock market .
Spot transactions can be done directly between the buyer and the seller or in exchanges. In these transactions, you only have the option of using your character’s assets in trading and you cannot use leverage or margin in transactions. Centralized exchanges have provided the conditions to carry out these transactions by receiving fees from traders. Of course, different exchanges such as decentralized and centralized exchanges and similar markets OTC has the possibility of doing these transactions and the only difference is in the way of communication between the buyer and the seller and their interface with the platform .
Types of financial markets and their relationship with the spot market
Before I go into teaching the spot and what it means, I am going to explain the difference between traditional markets and financial markets. The fact is that in traditional markets, every person offers services or goods for trading, but in financial markets, instead of goods or goods, people trade exchange values or a share of the exchange value of a commodity or, in other words, financial assets themselves. .
spot market It is an environment where users trade financial instruments for cash for immediate delivery. In this market, for transactions, payment is made before receiving the asset. This has caused these markets to be called a one-way market.
People in one-way markets are only able to make trades based on the potential of market growth and profit from price increase and market rise. This means that they buy a certain amount of an asset at a certain price. With the growth of the price of the so-called asset, profit is also obtained. On the other hand, with the drop in price, they lose according to the volume of purchased assets. Therefore, despite the extreme fluctuations in the price of cryptocurrencies, the financial risk in the digital currency market is much lower with spot transactions.
What is meant by spot market ?
The spot market is considered as an open financial market for the public, where assets are traded immediately. In this type of market, buyers buy an asset with exchange intermediaries or fiat money.
The delivery of the purchased asset is usually immediate, although it will depend on the asset under transaction. These markets are due to the payment of fees before the asset is delivered by the buyers to the cash markets (Cash Market) are also famous. Spot markets have various forms and generally facilitate transactions by third parties known as exchanges or exchanges. (exchange) is. You can also do these transactions over the counter (OTC) you will also have .
Today, there is a cash market for all kinds of asset classes such as stocks, bonds, digital currency, goods, forex, etc. New York Stock Exchange Markets (NYSE) and Nasdaq (NASDAQ) are among the famous spot markets.
Centralized exchanges for spot trading Facilitators of security, legal issues, custody, etc. aim to facilitate transactions and receive a fee in exchange for providing services. On the other hand, decentralized exchanges also use blockchain smart contracts to provide similar services.
All digital currency exchanges in Iran are also part of the spot market.
What is the spot price?
Spot price is the current price for immediate purchase and delivery of a particular commodity. This instant purchase price is constantly changing and updating as the orders of buyers and sellers are filled. In fact, the spot price is based on the supply and demand of the market. This price may be higher or lower than the intrinsic value of a currency.
Therefore, the exchange rate according to which the spot transactions are carried out will be equal to the current price of the traded digital currencies. Prices in derivative markets such as futures are inevitably determined based on these currencies; Because producers and consumers of goods first participate in the market of cash transactions.
For example, if you intend to buy Bitcoin with Spot Trading right now, the price of Bitcoin is $13, but at another moment, this amount may be constant or increase or decrease.
Read more: Bitcoin price depends on what factors?!
What are digital currency spot transactions?
Spot trading is also possible in the digital currency market, and its method is the same as in other financial markets. In the spot market (Spot) In the digital currency transaction, the investor or trader buys the desired cryptocurrency and waits for its price to increase.
Then he sells that digital currency in the spot market and earns a profit. Because the structure and operation of the spot market is the same as normal buying and selling, usually the first step to enter the financial markets is made by the spot market..
In these transactions, you will be able to trade and operate in the spot market with only capital and personal assets, and you do not need leveraged transactions or learning margin transactions in Binance or any other exchange. Therefore, the difference between spot and futures and even margin is in the lower risk of spot transactions.
Read more: Margin trading training in Kucoin
The method of using spot transactions in digital currency
Use a centralized (CEX) or decentralized (DEX) exchangeIt is the easiest way to participate in spot trading. Centralized exchanges (CEX) usually has a simpler experience compared to DEX Presenting data and using them seems more attractive to newbies. These transactions allow users to buy cryptocurrencies such as Bitcoin or Ethereum with local currencies.
To start working in the spot market In digital currency trading, you must first choose an exchange and create your account. Then add fiat currency to your account or transfer the currency from another digital currency wallet to the exchange.
Then choose the desired currency pair for trading. In the next step, you can enter the range of buying and selling as well as the desired amount of currency and click on buy at the end. Thus, your purchase order by matching it with the sale order in the order book Order Book is registered and executed.
For example, Bitcoin will be received in the exchange account. On the contrary, if an order is registered at the market price, the order will be completed within a few seconds and the transaction will be done immediately.
Place an order to buy Bitcoin in Spot
When you enter the exchange site to place an order to buy spot bitcoin, you can see the price of bitcoin at any time in the spot section. By viewing the spot price and based on fundamental analysis and technical analysis, you can place a purchase order at the desired price. By placing an order, when the spot price of Bitcoin reaches the price of your purchase order, your order will be completed. In this situation, the amount of bitcoin purchased is deposited into the desktop wallet or any other type of wallet. In fact, your purchase in the exchange takes place when a seller sells the same amount of bitcoins at your suggested price..
Registering a Bitcoin sale order in the spot
In Bitcoin spot transactions, you can place your order based on market analysis to sell your cryptocurrency. In this case, your order is in the order book (Order Book) It is registered and when the price of bitcoin in the exchange reaches your desired selling price, the transaction is done. Exchanges establish communication between sellers and buyers as intermediaries. In other words, your sell order is executed when someone else wants the same amount of bitcoins as your bid price.
Leverage in spot trading
To properly understand leverage in spot trading, imagine the price of cryptocurrency X It is four dollars. If you want to buy this currency from the spot market, you must pay the full amount. Therefore, if you have two dollars, you will not be able to buy this currency with spot transactions. In fact, in spot transactions, the purchase of cryptocurrency or assets is done only by the trader’s capital. Therefore, unlike futures and margin transactions, these types of transactions do not have leverage.
Liquid and spot transactions
Maybe you will be liquidated in the futures and margin markets . have experienced Liquidation or call margin (Margin Call) It happens when your margin is not enough to continue trading. In this case, the exchange will automatically close your position. In leveraged transactions, the trader enters the market with more capital than his original capital. Therefore, if the loss from the trading position equals the principal of the trader’s capital, the exchange uses liquidation to settle the loss of the trading position..
In spot trading, the trader buys the asset or cryptocurrency and sells it for a profit when the price of the asset increases. In spot buying, when the value of the asset or cryptocurrency in question becomes zero, the person’s capital also becomes zero. Therefore, in these transactions, the trader does not borrow money from the exchange for trading, and buying and selling is done with his own capital. Therefore, there is no call margin and liquidation in these transactions.
Digital currency spot market analysis
Knowing the fundamental influencing factors in financial markets is one of the success factors in any financial market. Therefore, you must have a correct understanding of the nature of the market and, based on the characteristics of that market, consider different factors for correct and principled analysis.
For example, the factors affecting the price of gold are different from oil. Based on the technology-oriented nature of cryptocurrencies, technological changes in the infrastructure related to a particular digital currency can have positive or negative effects on its price. Therefore, fundamental analysis in digital currency markets is very different from fundamental analysis used in corporate stocks.
Also, many tools available in technical analysis are also used for cryptocurrency market analysis. Of course, it should be noted that both of these analysis techniques and market strategy are complementary and must be considered together. Since cryptocurrencies are defined on distributed and decentralized blockchain networks, all transactions in it are monitored and tracked. Analysts in blockchain network transactions have the possibility to check the in-network information related to the digital currency they want.
Investigating this kind of information in the network with On Chain analysis it is famous. Such analysis, along with technical and fundamental analysis, increases the accuracy of price prediction in the cryptocurrency market..
Attention: Technical analysis without fundamental analysis will be an incomplete analysis. Therefore, it is suggested not to rely on the results of this analysis alone for investment.
What is the order book?
The order book refers to the list of open buy and sell orders that are registered by traders in the market for any asset or cryptocurrency. The order book actually shows the supply and demand of that cryptocurrency or asset.
The open order remains in the order book until another person accepts it or the person who placed the order cancels it. On the two sides of the order book, the volume of transactions and price information are shown, which are called Buy-Side and Sell-Side.
Suggested price for buying Bid and selling Ask
The first sales order in the order book order listIn fact, it is the highest price that the buyer is willing to pay for that asset. purchase department (Buy-Side) Includes all open buy orders that have a price lower than the previously traded price. at the suggested purchase price from the buyer Bid Called. Suggested purchase price Bid represents market demand and it will usually be shown in red color in exchanges .
The first purchase order in the Order book It is the lowest price that the seller has put his property up for sale. sales department (Sell-Side) It includes all open sell orders whose price is higher than the previously traded price. At this price, the suggested selling price or Ask is said to be displayed as a green list in the exchange .
If the price registered in both lists matches, an agreement will be made between the seller and the buyer and the spot transaction will be done. After spot trading Spot Trading, as soon as the transaction is confirmed, the asset is deducted from the seller’s account and transferred to the buyer’s account .
Liquidity power in the spot market
Any difference between Ask price and Bid price If it is less, the liquidity in that market will be faster and higher. The difference between these two prices causes a sales queue. spread (Spread) is actually the difference between the lowest selling price and the highest buying price .
The depth of the spot trading market
By checking the list of orders, it becomes clear who has the power? Buyers or sellers! The imbalance of orders on each side of the order list determines the direction of the market.
In a price range, a large order volume indicates the level of resistance at that price and a large number of buy orders also represents the support area. But it is noteworthy that this information alone cannot be a signal for buying and selling or performing a spot transaction.
How to do spot transactions
To enter the spot market, you must first buy a currency. Spot trading in a reputable exchange is the best trading strategy for beginners. By entering this market and checking the spot price of the currency you want and evaluating the sales orders placed for that currency, you can register your offer price in an order.
Also, if you have a certain amount of currency and decide to convert it to another currency, you can do so by registering a spot order at any exchange that supports currency pair trading. In exchanges, there are usually two methods for doing spots, which we will discuss below:
Market order
spot market order The first method of spot trading is according to the current market price. This order is for when you don’t want to wait in line to buy or sell. You can make your transaction based on the best price offered in the market just by specifying the amount of currency you intend to trade. However, there is no guarantee that the market price will not change at the time your order is executed.
If there is not enough volume to fulfill your order, the rest of your order will be filled at a different price .
Limit order
spot limit order It is when you consider a specific price for the currency you decide to spot and place it in the market in the form of registering an order with a certain offer price. When the currency price reaches the number you want and your order is accepted, the transaction is done.
Stop limit order
This order is actually accompanied by a price condition, which is generally suitable for determining the loss limit of the transaction. If the condition set in the market is fulfilled, your order will be automatically registered in the list of orders by the exchange. In this way, you are able to register any number of orders stop as you wish and until your order is activated, your capital will not be involved in the transaction .
In fact, stop is the same price condition that if the market reaches it, your order will be activated, and if the price reaches the desired limit level It is the price at which your order is registered in the order book. If these two prices are considered very close to each other, there is a possibility that the market will quickly reject your desired price and your order will not be filled..
Order OCO
OCO Abbreviation (One Cancels The Other) It means a method that is only specific to the spot market of some exchanges such as Binance. Using the feature OCO You can specify two orders at the same time, if one of them is activated, the other order will be canceled.
This method is a combination of two methods, stop limit and limit order, which in the price section , determines the spot order price. Also in the episode stop The price condition and in the price limit section is determined in order to register a stop limit order. Therefore, you can determine the profit limit and the loss limit of your trade at the same time.
Advantages and disadvantages of spot trading
The spot trading market, like other markets, has advantages and disadvantages that I will mention below :
Advantages of spot trading
The advantages of spot trading include the following :
Property ownership
In these transactions, you are the owner of the purchased digital assets and therefore you can use them for different purposes. For example, use them as collateral to buy other assets or borrow from decentralized loan pools..
Less risk
These transactions are much less risky than margin and futures transactions, and your loss is only limited to the capital you enter .
Easy to use
Doing these transactions is relatively easy, especially for beginners .
More crypto options
In these transactions, more cryptocurrencies are supported in digital currency exchanges than margin transactions .
Disadvantages of spot trading
Below I will mention some of the disadvantages of spot trading :
Limited profit
Spot trading does not provide leverage to traders. This means that you should only use your own funds, which can limit potential profits and losses.
Wage
These transactions have different fees such as withdrawal fee, transaction fee and network fee for buying and selling cryptocurrencies. This issue can affect the overall profit of traders.
Objectives of traders in the digital currency spot market
Spot traders enter the cryptocurrency markets with the following objectives:
Long-term maintenance of assets
Some traders buy cryptocurrencies with the aim of long-term holding or holding digital currency and investing. These people believe that the price of these assets will increase in the future; Therefore, they prefer to buy these assets and keep them for a long time. Traders with this mindset are known as long-term investors.
Read more: What is digital currency holding or HODL?
Exploitation of short-term price fluctuations
The second category includes short-term and active traders whose goal is to exploit short-term and daily price changes and achieve profits in a short time. These people are trying to get profit by taking advantage of the difference in buying and selling rates by continuously buying and selling in a period of several minutes to several hours.
Using cryptocurrency for other purposes
In addition to the above two cases, sometimes people buy digital currencies for other purposes. For example, using them as collateral to get a digital currency loan, using nft in real estate, paying for goods and services, etc. are some of these things.
Exploitation of short-term price fluctuations
The second category includes short-term and active traders whose goal is to exploit short-term and daily price changes and achieve profits in a short time. These people are trying to get profit by taking advantage of the difference in buying and selling rates by continuously buying and selling in a period of several minutes to several hours.
Using cryptocurrency for other purposes
In addition to the above two cases, sometimes people buy digital currencies for other purposes. For example, using them as collateral to get a digital currency loan, using nft in real estate, paying for goods and services, etc. are some of these things.
Appropriate trading strategies in digital currency spot trading
Usually, professional and successful traders in the crypto market use special strategies and methods in order to maximize the efficiency of their spot trading. Below I will point out some of the most efficient and important strategies in spot trading:
dollar cost averaging (DCA)
In this strategy, traders can continuously and regularly buy a certain amount of the cryptocurrency they want.
In other words, you spend a fixed amount of money to buy an asset every month or every week regardless of price fluctuations. The advantage of this strategy is that the average purchase price will be lower for you and you will be protected from market fluctuations. Also, as the price increases, you will automatically profit without having to sell the asset.
swing trade
Swing trade strategy is based on the analysis of price patterns and recognition of suitable entry and exit points in the short term. The trader is trying to start trading by knowing the ups and downs of the market at the optimal entry and exit points and get the maximum profit from it.
technical analysis
The use of indicators and technical analysis tools can accurately identify suitable entry and exit points and also predict future market trends. By examining patterns and indicators such as RSI, MACD, moving average, and Bollinger Bands, as well as drawing trend lines, support and resistance levels, and various price patterns, traders can identify suitable entry and exit points.
Reverse transaction
Another highly profitable strategy in the financial markets is reverse trading, which is also used by some cryptocurrency traders. In this spot trading strategy, buying and selling is done against the general trend and direction of the market.
Combination of strategies
Professional traders generally use a combination of different strategies to achieve high returns in addition to financial risk management. Of course, using this method of spot trading requires a lot of skill and experience.
Finally, every trader should choose the best spot trading strategies based on his goals and trading conditions, and after learning them, implement and optimize them continuously in order to achieve the desired efficiency.
Potential risks of digital currency spot trading
Although spot transactions are less risky compared to other financial market transactions; But still, it cannot be considered without risk. Being aware of potential risks and following important points can significantly protect traders against losses:
Strong market fluctuations
One of the biggest risks faced by spot traders is sudden and drastic price changes. Because these fluctuations can cause heavy losses or even the loss of all capital. Also, the lack of liquidity and the impossibility of selling assets in the required period is another risk for traders. This happens more often with lesser-known cryptocurrencies.
Human errors
Human errors and mistakes such as disclosing account information or sending currency to the wrong address in Maalat Spot can cause unauthorized access of other people to your account and theft of assets.
No refund guarantee
Unlike banks, exchanges do not offer any refund guarantee in case of any errors or violations.
In order to make a profit in any market, you must have sufficient knowledge about it and the influencing factors in the price of cryptocurrencies. On the other hand, with the fluctuations in the cryptocurrency market, the use of margin and futures markets and leveraged transactions is high risk. Therefore, cryptocurrency spot transactions are more favorable than other markets for many activists in this field.
In each spot transaction, the assets will be available to the buyer instantly at the price of the time of purchase. Current market price or spot price (Spot Price) turns it into simple transactions that any trader can participate in with any amount of assets .
Order Book In most exchange transactions, it is an important part where open buy and sell orders are displayed. In this section, in addition to the order type, transaction volume or Size , traded price or Price and total price are also specified .
