How to Trade Compound: A Step-by-Step Guide

Comprehensive Guide to Trading Compound in 2021

23 Min Read
Last Updated July 23rd 2021

Looking for an entry point into the exciting world of Compound trading? We'll help you through it.

Compound trading is pretty straightforward once you get the hang of it. 

DeFi-inspired cryptocurrencies have been on the rise since 2020. One such digital asset that has ramped up a solid reputation among crypto enthusiasts is the Compound token. 

In this How to Trade Compound Guide, you will learn about this digital token from top to bottom. We discuss what factors can influence its price and how you can trade Compound successfully by using the right crypto broker. 

Contents:

Trading Compound digital currency is no easy feat - which is why we have put together an in-depth guide on How to Trade Compound. Within it, we explain the ins and outs of how this investment scene works, what risks and rewards you need to consider, and how you can start trading Compound today. 

How to Trade Compound in 5 Steps

To trade Compound, the first step is to open an accout with a regulated exchange, depost funds, select COMP from the platform list, and lastly Buy Compound (go Long) or sell Compound (go short).

Step 1: Open an account with a regulated exchange 

Step 2: Funds your account

Step 3: Choose how much Compound you want to trade 

Step 4Buy Compound (go long) or sell Compound (go short)

Step 5: Confirm the trade

trade compound

What is Compound Trading?

The Compound protocol is a decentralized crypto lending service that was developed on top of the Ethereum blockchain. In June 2020 - the platform launched its native token named COMP. 

Despite its relatively recent addition to the market, the Compound token has performed exceedingly well in the cryptocurrency arena. Over the past few months, it has since become a top-rated DeFi coin in terms of market capitalization. 

As with any other financial market, the law of supply and demand is applicable to Compound also. Put simply, if there is an increase in demand for Compound tokens, then the price of the coin tends to rise. 

Conversely, if there is decreased interest towards the Compound token, then the value of the asset will also drop simultaneously. 

Therefore, the price of the Compound token also changes according to these market movements. Additionally, cryptocurrencies, in general, fail to establish a stable trend. As such, Compound is categorized as a volatile asset with its value changing almost within every second. 

If you are successful in predicting the general sentiment towards Compound and place suitable trades - then you stand to make a profit. 

Let us help you understand the idea of how to trade Compound with an example:

  • Let's suppose that COMP is priced at $350. 
  • On most crypto platforms, you will find this represented as COMP/USD. 
  • After conducting thorough market research, you predict that the price of Compound is about to rise. 
  • Hence, you open your COMP position by creating a buy order worth $1,000. 
  • As you predicted, in a couple of weeks - the value of COMP tokens has risen to $380. 
  • This translates to an increase of over 8.5% in the value of the coin. 
  • You decide to capitalize on this price movement and sell your COMP coins. 

Since you timed the market correctly, you were able to make a profit of $85 on this Compound trade. 

On the contrary, if your speculation had been wrong, you would have faced losses instead of gains. As such, you must spend time to learn about the crypto markets before risking your hard-earned money by trading Compound. 

This brings us to the next section of our guide - the key factors to know about when learning how to trade Compound. 

trade compound

How Does Compound Trading Work?

As we mentioned earlier, the market price of Compound always come down to its supply and demand. That said, there are also several other considerations that are intrinsic and extrinsic to cryptocurrencies - which are likely to affect the value of this digital asset. 

Consequently, before you commence your Compound trading journey, there are few aspects you need to get right regarding the fundamentals of this DeFi token. 

Compound Trading Price Movements

Trading cryptocurrencies such as Compound is not as challenging as you might imagine - that is, until you learn the ropes of this volatile financial market. 

At its base, you are trying to predict if the price of Compound will go up or down in the future. The trick lies in identifying which factors can influence the value of this coin. 

In the case of Compound, it can be any number of aspects - such as the mining of the token, wider crypto regulations, or the rise of the DeFi sector. Ultimately, as we pointed out earlier, you ought to observe the supply and demand of the coin in the market. 

Compound is currently available across many popular crypto providers. However, if you are a beginner - you might be surprised by the fact that each platform quotes a slightly different price for the same COMP tokens. 

This is primarily due to the volatile nature of Compound - and nothing to worry about from a profit perspective. 

Don't Miss: Compound Price Predictions

Compound Trading Pairs

Now that we have cleared what factors you need to look at, let us consider how you can trade Compound. 

To begin with, you will need to decide whether you want to trade Compound against a fiat currency such as the US dollar or euro - or against other cryptocurrencies such as Bitcoin or Litecoin. 

Most beginners prefer to start trading a crypto-fiat pair. This will be denoted on cryptocurrency platforms as COMP/USD, COMP/EUR, COMP/GBP, and so on. 

The advantage of trading such pairs is that it will be relatively easier for you to speculate its future exchange rate. In addition, if you trade COMP against fiat currencies, you are also likely to gain access to high liquidity and competitive spreads. 

Depending on your chosen crypto broker, you will also have the option to access less-liquid markets such as COMP/CAD (Canadian dollar), COMP/AUD (Australian dollar), and COMP/JPY (Japanese yen). 

On the other hand, when it comes to trading a 'crypto-crypto' pair, the process can be slightly more complicated. This is because you will need to speculate on the value of Compound as well as the second cryptocurrency that makes up the pair. 

As you can imagine, if you are just starting your trading journey - this can be a challenging mission. 

Therefore, you have to be extremely careful in deciding which Compound pair you want to trade and whether or not you are confident about making the right trading decisions. 

Long or Short-Term Trading

The next crucial aspect to evaluate when trading Compound is your financial goals - as in, whether you are looking to make profits in the long-term or the short term. In fact, your strategy will be entirely dependent on this. 

For instance, let us say you prefer a long-term strategy. In this case, you will be purchasing Compound tokens and storing them in your wallet for years - hoping that the currency will appreciate in value over time. 

If you have been reading up on cryptocurrency investments, you might have come across this strategy - termed as 'HODLing.' In this method. you will hold the Compound coins until the time is right for you to sell them - hopefully for a significant profit. 

Of course, whether or not you will be able to make a profit will rely on the future state of Compound itself. 

Alternatively, you can also get into Compound trading by adopting a short-term strategy. 

In this method - as opposed to a long-term price increase, you will be looking to capitalize on the short-term volatility of the coin. For example, the value of Compound will fluctuate every second. As a trader, you will be placing multiple positions on Compound and targeting modest profits. 

Over time, these small gains can add up to a sizable amount. 

In comparison, a short-term strategy involves a steep learning curve. For one thing, you will have to be thoroughly knowledgeable about Compound and the broader crypto market. 

Secondly, you will also need to know your way around technical indicators, short-term trading methods and be swift in placing trades. 

For newcomers, it might be worth considering a long-term strategy until you are confident about your trading skills. 

Read Also: Pros and Cons of Investing in Compound

Trade and Own Compound 

Regardless of which strategy you choose, you will need to find a reputable crypto provider that can give you access to Compound. 

Currently, there are dozens of cryptocurrency platforms that allow you to trade Compound with ease. But your assets will be safest with a regulated online crypto broker - like eToro. 

This social trading platform has over 20 million registered worldwide users. There are numerous reasons why this broker attracts so many traders. 

For one, eToro is regulated by multiple financial authorities - including the FCA, ASIC, and CySEC. In addition, you will also have access to an in-built digital wallet that will allow you to store your Compound tokens for free. 

Above all, you will not be required to pay any commission to trade Compound on eToro. And if you are a beginner, you have plenty of educational resources to guide you through the Compounding trading process. 

This includes a CopyTrader feature that will allow you to mirror the trades of another experienced trader - without having to do any research or legwork yourself. 

Compound Trading 

Now, let us focus a bit more on short-term trading. As we mentioned earlier, in this approach, you will be trading Compound more frequently. 

There are several strategies that you can employ in short-term Compound trading - such as 'day trading' or 'swing trading.' That said, there is one critical difference between this method when compared to long-term positions. 

Instead of taking ownership of Compound coins, you will be trading COMP tokens using a CFD (Contract for Difference). These are financial instruments that only reflect the value of Compound. 

This way, you do not have to purchase Compound coins or own them to profit from its price movements. Additionally, for the same reason - you will also be able to speculate on a bearish market of this digital asset. 

Moreover, trading through CFDs will also allow you to apply leverage on Compound. 

However, CFDs are widely considered a highly complex and risky instrument. Therefore, many countries have strict regulations for using CFDs. In fact, in the US and UK, crypto CFDs are entirely prohibited. 

You might still be able to access leveraged Compound instruments through unregulated cryptocurrency exchanges. Needless to say - these might be operating without supervision of any financial authority and are best avoided. 

trade compound

How to Trade Compound Online - Setting up a Trade

When learning how to trade Compound - one of the first things you need to be thorough with is the usage of appropriate trading orders. 

Now, trading orders are directions to your broker on how you want to trade Compound. Using the right ones are crucial - as it can determine how much profit or loss you will make when placing Compound trades. 

For those who are unacquainted with the concept of trading orders, we have created a list of the most useful ones you will need to efficiently trade Compound. 

Buy or Sell Order

A buy/sell order is perhaps the most straightforward trading order you will use. 

To put it briefly:

  • When you are going long on Compound, you will open your trade with a buy order
  • When you are going short on Compound, you will issue a sell order to open your position. 

As you might have already guessed, when you open a Compound trade with one of these two orders, you will have to close it with the other. 

To elaborate, if you are entering the market by placing a buy order, you will be looking to exit with a sell order - and this also works conversely. 

Entry Price

Obtaining the right entry price for Compound can be crucial in your trading strategy. As such, apart from a buy order and sell order - you can also benefit from knowing the distinction between a market order and a limit order

  • A market order is usually preferred by traders when they want to buy or sell Compound at the quoted price. In this case, your chosen broker will try to execute your trade right away. 

However, it is nearly impossible to avoid slippage - which is a slight price variation that occurs in volatile markets. 

  • That said, if you want to buy or sell Compound at a specific value, then it will be best to use a limit order. This will allow you to define at what price you want to execute the trade. 

Your broker will keep your order pending unless your limit order price on Compound is met. If it's taking too long to realize this, then you will need to cancel the order manually. 

Exit Strategy

In order to make profits from Compound trading - you also need to be clear about how you want to close your positions. 

Here are the two commonly used orders to exit open trades. 

  • Take-profit order - These are used to lock in your profits at a specific level and close your trade. For instance, suppose you have a profit target of 5%. You will set a take-profit order at 5% above or below your entry price (depending on whether you are long or short). 

When Compound hits this level, your broker will automatically close the trade - securing the profits for you. 

  • Stop-Loss order - Instead of securing a profit, this order is used to limit your losses. Similar to a take-profit order, you can set a predefined price level, and the broker will automatically close your Compound trade for you if the coin hits this stop-loss point. 

Understandably, it might be a little confusing when thinking of how these orders work together. Here is an example that will clear things up for you. 

  • Let's imagine that you want to place a buy order on COMP/USD. 
  • The current price of Compound coin stands at $350.00. 
  • Since you are looking to enter the market only if Compound hits $355.00 - you set your limit order at $355.00
  • Your profit target on this trade is 5%, and your risk tolerance is a maximum of 1%. 
  • Therefore, you place a take-profit order at $372.75 (5% above $355.00)
  • Additionally, you also place a stop-loss order at $351.45 - which is 1% below your entry price

Once you open the trade, regardless of which direction Compound moves - your respective take-profit or stop-loss order will eventually kick in. 

Either way, your broker will automatically execute the orders for you. This will eliminate the need for you to manually watch over the market. 

Check Out: Should You Buy Compound?

How to Make Money Trading Compound

The use of the right strategies and orders can influence your profit when trading Compound to a certain extent. However, the amount of gains you can make will be determined by a few other aspects of your trade. 

As such, when considering how to trade Compound - you need to be aware of the following. 

Stake 

When you trade Compound, your broker will require you to enter a stake amount. This is nothing but the amount you are willing to put up on this particular asset. 

If you stake higher amounts, your potential profit will also be proportional to that. But, notice that this also means a greater risk exposure. 

Therefore, when you decide how much you want to stake on Compound, you should carefully think of what you can afford to lose. 

Typically, in order to keep emotions away from the decision-making process - traders employ a bankroll management strategy. This simply means that you will always limit your stake amount for every trade. 

As a rule of thumb, many traders will never risk more than 1 or 2% of their trading capital on a single Compound trade. For example, if you have $10,000 in your trading account, you will limit your exposure to $100 or $200. 

Ideally, when adopting such strategies, you need an online broker that allows you to trade Compound with lower stakes. eToro is a perfect example of this - as you will be able to place Compound trades from just $25 on the platform. 

Compound Trading Leverage

Another factor that can magnify your profit is leverage. This is mostly applicable when you are trading Compound CFDs. 

In simple terms, leverage allows you to multiply your profits (and also losses). If you apply leverage of 1:2 - then your stake will be multiplied by 2, enabling you to twofold your gains. 

For example:

  • Say you are staking $500 on a Compound trade. 
  • Your broker allows you to apply leverage of 1:2. 
  • This means that your stake is now $1,000. 
  • Suppose the value of Compound increases by 5%. 
  • If you hadn't applied leverage - your profit from your trade would have been $50. 
  • But with leverage, your profits are magnified to $100. 

At first glance, you might think that leverage is an easy and straightforward way to boost your profits. However, you should bear in mind that - in case the trade goes wrong, your losses will also be magnified. 

Therefore, if you are not able to access Compound CFDs legally where you live - you should never use an unregulated broker to apply leverage. This can only invite more risk to your trades. 

Fees to Trade Compound Online

Apart from stakes and leverage, the brokerage fees you pay can also play a crucial part in determining your profits. 

Compound trading fees are always different from platform to platform. Therefore, you need to take some time analyzing what charges you are liable to pay and whether it is worth the service you receive. 

Below we have listed some commonly found fees across online Compound brokers. 

Compound Trading Commission

On most brokerage platforms, you will be required to pay a trading commission whenever you buy or sell Compound. 

Commissions are commonly represented in percentage terms, and the total amount will depend on the stake you put up on Compound. 

For example, let's say your chosen broker has a commission structure of 2.99% on all Compound trades. If you are to stake $1,000 on a trade, then you will have to pay $29.90 when you buy Compound. Additionally, when you are looking to cash out, you will be left to pay this fee of 2.99% yet again. 

Fortunately - you will also be able to find brokers such as eToro that offer you commission-free trading on all of its supported cryptocurrencies, including Compound. 

Compound Spread

When trading Compound, you should also be aware of an indirect fee called the 'spread.' This is the difference between the buying price and the selling price of Compound quoted on the platform. 

Additionally, this also means that you will be opening trade at a loss - because your gains have to be more than the spread in order for you to walk away with a profit. 

To elaborate - suppose your chosen broker has a spread of 0.5% on COMP tokens. This means all your Compound trades will open at a loss of 0.5%. You will need to make a minimum profit of 0.5% to hit the break-even point on your position. 

Other Compound Trading Fees

Apart from the aforementioned fees, these are some other charges that you might end up paying to your brokerage platform. 

  • Deposits/Withdrawals: It is common for brokers to charge a fee for processing your deposits and withdrawals. 
  • Inactivity Fee: If you do not use your account continuously for over six months, you might also be required to pay an 'inactivity fee' - which will be deducted from your trading account balance. 
  • Overnight Fee: Some brokers will also charge you an 'overnight fee' for keeping your CFD position open the next day. 

Read More: Could Compound Be A Millionaire-Maker Coin?

How to Trade Compound 2021 - Step-by-Step Walkthrough

At this point in our How to Trade Compound Guide - we have covered what you need to research about this digital asset, the strategies you can use, and what trading orders are. 

We will now proceed to how you can start trading Compound using an online broker. 

Step 1: Choose a Compound Trading Site

As you can imagine, the first thing you will have to do is pick a trustworthy Compound broker for your trades. Among the hundreds of online platforms, it can be tough to find the most suitable one for your financial goals. 

In light of this, we have noted down some of the most important factors that will help you separate the wheat from the chaff.  

  • Regulation: What regulatory licenses does the brokerage platform hold?
  • Fees: What fees and charges are liable for Compound trading?
  • Payments: What payment methods are available?
  • Minimum Deposits: Do you have to pay a minimum investment amount to trade Compound?
  • Compound Pairs: Which Compound trading pairs are available on the platform?
  • Trading Platform: Is it beginner-friendly?
  • Mobile App: Can you access all account features through a mobile app?

Even with these guidelines, finding a broker that ticks all the right boxes is not easy. If you are looking for further help, we suggest that you check out eToro. 

As we have already mentioned, eToro is regulated by the FCA, CySEC, and ASIC. It gives you access to thousands of assets - ranging from stocks, bonds, commodities, forex, ETFs, and cryptocurrencies. The best part is - all of these financial instruments are accessible at a 0% commission rate. 

Step 2: Open a Compound Trading Account

When you have made a decision regarding your chosen broker, you can visit its website and create your trading account. 

Apart from providing your basic personal details such as your full name, address, and phone number - regulated platforms will also require you to prove your identity. This is a part of the guidelines they have to follow. 

This is an easy step that you can complete by providing a copy of your government-issued ID and proof of address. 

Step 3: Deposit Funds

When your ID has been verified, you can proceed to fund your trading account. Pick your preferred payment method - from a debit card, credit card, wire transfer, or an e-wallet such as PayPal. 

Step 4: Choose Compound Trading Market

You might already know which Compound trading pair you want to trade. 

In order to find the respective trading page on eToro, you can simply search for COMP on the platform, and the respective Compound pair will be displayed. 

Step 5: Place Compound Trade

As we discussed, this is where you pick your trading orders and enter the stake amount. 

Finally, confirm the trade. Your broker will execute your trading orders based on your instructions. 

If you have chosen eToro - you have just completed a 100% commission-free trade on Compound. 

How to Trade Compound Guide - The Verdict

When you are thinking of how to trade Compound - there are a number of factors that you will need to evaluate carefully. Your financial goals and risk tolerance will decide the strategy to use and the COMP trading pair you pick. 

Once again, the most important thing is to engage in Compound trading only via a regulated crypto broker. 

As is clear by now, eToro is one of the best brokers out there. Not only will you be able to place commission-free trades on Compound, but eToro will also give you access to the cryptocurrency markets at a minimum stake of just $25. 

eToro – The Best Platform to Trade Compound

eToro have proven themselves trustworthy within the Crypto industry over many years – we recommend you try them out.

Virtual currencies are highly volatile. Your capital is at risk.

Read Also:

10 Reasons Why You Should Invest In Compound (COMP) Today

Is Compound A Good Investment And Should I Invest in COMP?

Why Compound Is Going To Explode

FAQs

Is Compound trading safe?

Yes, as long as you use only a regulated crypto broker, your Compound trades can be placed in a safe environment.

Which is the easiest way to start trading Compound?

Find a regulated online Compound broker, fund your account, select your COMP pair and start trading.

How much money can you make by trading Compound?

This will depend on your trading strategy, the COMP pair you choose, your stake amount, and whether or not you apply leverage. 

Can I trade Compound CFDs legally in the USA?

No, crypto CFDs are considered highly risky financial instruments by US authorities and are thus prohibited in the country.

Can I apply leverage to Compound trades?

Yes, it is possible to apply leverage to Compound trades. However, whether or not you will depend on the country you reside in.

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