Cryptocurrency Trading Part I: Building Blocks
The objective of this guide is to serve as a one-stop, all-encompassing tutorial and primer to familiarize even someone with no prior exposure or initiation in the subject with the intricacies of trading in cryptocurrency markets, or any market at large. Trading arcana is often portrayed to be as complex, mind-bending and unfathomable as quantum physics. Soon, you'll come to realize that it's pretty simple mathematics.
Jack Bogle, widely regarded as the greatest investor in American markets, was often criticized for lack of diversity in his portfolio. Bogle focused almost exclusively on low-cost, low-turnover, passively managed mutual funds in the United States. When asked of his blinkered, US-centric approach, he would protest the notion of any such bias and assert that he invested only in markets he was thoroughly familiar with.
Putting your money only into markets that you're familiar with is perhaps the primary precept in trading. Thus, before trading in cryptocurrency markets, it's imperative that one invests adequate time observing the methods and machinations typical of these curious wild-west markets. That is not to suggest that these markets are anything particularly unexampled in historical context.
Jesse Livermore, another fabled investor from Massachusetts in the late 19th century and early 20th century, after making a small fortune as a 15-year-old betting against bucket shops, thought he knew everything about trading. Without much in the way of formal education, Livermore was the epitome of an autodidact. He was so successful with his trades that all bucket shops in Boston soon banned him.
Aged 20, armed with a stake of $10,000 from his bucket shop escapades, Livermore shifted his focus to Wall Street. Within 6 months, he went bust. It was then that he realised that his bucket shop ruses were too agricultural for Wall Street trading. He understood the importance of focusing on secular trends of the market as a whole in this sophisticated new environment rather than trading the price fluctuations of individual stocks.
No longer a day-trader, Livermore adopted a buy-and-hold strategy until the market momentum shifted. He was also cognizant of the importance of having an exit strategy and sticking to it. Livermore's analyses were broadly premised upon one constant – human nature.
“There is nothing new in Wall Street. There can't be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again. This is because human nature does not change, and it is human emotion, solidly built into human nature, that always gets in the way of human intelligence. Of this I am sure.” – Jesse Livermore
There is Nothing New in Cryptocurrency Trading
And before we jump right into this glorious masterpiece breaking down all of the best bitcoin trading strategies to leverage within the growing cryptocurrency market, here is today's bitcoin price along with the latest BTC news. Once that is out of the way, focusing on the chart strategies and trading execution will be much easier to consume, digest and utilize.
Bitcoin’s price is $7,885.58 BTC/USD exchange rate today. The real-time BTC market cap of $139.7 Billion currently ranks #1 with a chart dominance at 56.53%, daily trading volume of $5.8 Billion and live coin value change of BTC -0.49 in the last 24 hours.
Live Bitcoin (BTC) Price:
1 BTC/USD =$7,885.5839 change ~ -0.49%
Latest Bitcoin Trading Analysis, BTC Price Charts and Industry Updates
Cryptocurrency markets may seem novel, exotic and inscrutable to the uninitiated but from a strictly trading perspective, without regard for technical quirks, they bear a lot of similarities to those crummy 19th century bucket shops and early stock markets, which likewise operated under scarce regulatory oversight.
These assets may be ascribed to a novel class, but the effective trading methods for this market, or indeed any market, are old hat and can still be informed by time-tested empirical observations.
Whatever is happening in cryptocurrency markets today has happened before and will happen again, regardless of the novelty of assets being traded, for as long as one commonality persists – the human factor.
Only, the unregulated nature of these markets lends to greater volatility. With greater volatility comes greater risk but also opportunities for greater rewards.
A comprehensive understanding of various trends, patterns and indicators can not only endue a trader with sufficient insight to take advantage of opportunities but, more importantly, greatly alleviate their risk exposure.
Market Analysis (Fundamental & Technical)
The two major schools of thought when it comes to analysing markets are Fundamental Analysis (FA) and Technical Analysis (TA).
Fundamental analysis is a non-statistical method of evaluating the value of an asset based on economic and financial growth factors. Put simply, fundamental analysts seek to determine the profitability of an asset based on its potential by taking into account its present value and projected future growth.
In cryptocurrency markets, rife with ill-conceived projects and even outright scams, fundamental analysis may involve examining the viability, legitimacy and value proposition of a project.
Technical analysis is a purely statistical method which entails examination of price charts, premised upon the notion that historical trends continually repeat themselves. Technical analysts believe that the price of an asset reflects market sentiment and all the necessary information at any given time and therefore focus exclusively on statistical analysis of price action.
Although the two schools of thought are often represented as antithetical viewpoints in trading, it has been empirically proven that they are not necessarily mutually exclusive perspectives.
Fundamental analysis can help identify assets which are undervalued, while technical analysis can inform a trader on the most opportune time to enter and exit a market. Some technical analysts have also been known to employ fundamental analysis as a confirmation for their trades.
It is important to note that market analysis is not exact science and there are no universal truths, only educated perspectives drawn from historical patterns. When the various perspectives are in accord and converge upon the same eventuality, the more likely it is to unfold.
Put simply, a market trend is the direction in which the price is perceived to be headed. An upward trend is said to be bullish and a downward trend is said to be bearish. The metaphorical terms are derived from the way each animal attacks – the bull thrusts its horns up to attack while the bear swipes its paws down.
A bullish or bearish market trend is temporally classified as either a secular, primary or secondary trend based on how long the trend lasts.
A secular trend is a long-term trend which may last up to 30 years. A secular trend can be either bullish (upward) or bearish (downward).
Within a secular trend, there can be multiple mid-term primary trends, lasting between one to five years, which may run contrary to the secular trend. For example, despite the crash of 1987 and the dot-com crash a decade and a half later, the US stock market is considered to be in a secular bull trend for the past 30 years.
Further, within a primary trend itself, there can be short-term secondary trends which run against the primary trend. Secondary upward trends in a primary downtrend are usually referred to as a ‘sucker's rally'. Such rallies were frequent in the great depression era after the 1929 stock market crash, before the market eventually found its bottom in 1932.
A common mistake traders make is interpreting a short-term secondary trend to be a reversal of a mid-term or long-term trend. Further in the piece, we’ll learn how to avoid falling for that trap.
Bitcoin's 8-year chart (above) in logarithmic scale, which is explained later under charts, is an excellent illustration of relatively fleeting trends developing within trends which can be falsely perceived as a reversal of a long-term trend.
The price action over this 8-year period, including the 2018 bear spell, is construed as a secular bull trend, within which alternating roughly 2-year primary trends and cyclically corrective secondary trends have played out.
Due to their volatile nature, unregulated markets tend to break into numerous short-living secondary trends and frequent pumps and dumps, thus necessitating a more rigorous and cautious approach to trading.
A market top for a particular trend is the highest price point of the trend and market bottom is the lowest price point of the trend. Both of these points are difficult to pinpoint and usually only identified after the event.
However, analysts believe that a good indicator of market top is when investor sentiment is said to be euphoric, with broad consensus of further gains. Likewise, an extremely downcast, despondent investor sentiment across the market is said to augur a reversal of tide in the upward direction. Historically, when investor sentiment has been extremely negative, it's often proven to be a good time to buy.
Support and Resistance
Support and resistance levels, referred to as ‘battle lines' between bulls and bears, are perhaps the two concepts that best exemplify the self-fulfilling prophesy of technical analysis.
Support is the lower level of a trend at which the price is expected to bounce. Resistance is the upper level of a trend at which the price is expected to fall.
As all traders accept these levels as trend lines which demarcate the upper and lower limits of the current trading channel, when either of these trend lines is breached, a new trading channel is said to have been established and new battle lines are drawn.
Support and resistance levels are established by the price reaching, or ‘testing', a particular level without surpassing any further. The more often a level is tested without breaking further, the stronger the support or resistance.
The image above shows the support and resistance levels for EURUSD pair over a 4 year period between 2008 and 2012. It's also an excellent illustration of secondary support and resistance levels developing within longer term primary channels.
When the price breaks down below a support level, this support level then becomes a new level of resistance. Likewise, when the price breaks out above a resistance level, the resistance now acts as a new support level.
Round numbers such as multiples of 10, 100, 1000 … and key statistical milestones such as a historical all-time high or an all-time low can also act as psychological support and resistance levels.
This is caused by buyers and sellers placing a huge number of orders at these milestone points. The concentration of buy and sell pressure at these levels often make them significant points of support or resistance.
In the event of a perceived breakout or breakdown, volume is an important factor in determining whether a support or resistance level has been truly breached. This is particularly true for breakouts above significant resistance levels. Without attendant volume, they usually tend to be a false breakout, known as a dead cat bounce, or a fleeting breakdown which cannot be sustained.
Another factor to consider is momentum, which is the rate of price shift. In markets with high liquidity, when shift in volume and shift in price are both significant, it is unwise to ‘fight the tape', which is an old expression for trading against the trend, alluding to the use of ticker tape to transmit the price of stocks.
Placing trades at exact support and resistance levels without adequate confirmation of a breakout or breakdown is not recommended.
A stop-loss order is an order to automatically exit a current position at a certain price if the market moves unfavourably. Seasoned traders usually place stop-loss orders, enabling them to capitalize on price breakouts if they are legitimate, whilst hedging against the risk of an unexpected turn.
Cryptocurrency Trading Part II: Charts Guide
Now that we've covered the basics of trading, it’s time to get down to the brass tacks of price charts, different types of charts and familiar chart patterns.
Put simply, a chart is a graphical representation of price variation as a sequence of points over time, with each point representing the closing price for a specific time interval – such as 1 hour, 4 hours, 1 day, 1 week etc…
Just as financial statements of a company are the primary source of insight for fundamental analysis, charts are the primary tools of the trade for technical analysts.
Traditionally, the Y-axis in a chart represents price, while the X-axis represents time.
The chart in the image below is a candlestick chart for Bitmex XBTUSD perpetual contract for the 2-month period from the 1st of February to the 1st of April, with each candlestick representing a 6-hour period.
The time scale of a chart is the time period represented by each point in the chart. This can be intraday, daily, weekly, monthly or yearly.
The price scale, represented on the right side of the chart above, is the price interval between two price points – which in this case is 50. Price scale can be either linear, such as in the chart above, or logarithmic.
While the difference between two adjacent price points is constant in a linear scale chart, the price points on a logarithmic scale chart are logarithms of a base number greater than 1, which is usually 10.
To explain this in simpler terms, on a linear scale chart the distance between any two points of the same numerical difference, regardless of value, is equal – the distance between 1 and 2 is equal to the distance between 4 and 5 or 8 and 9.
Whereas in the case of a logarithmic scale, the distance between price points is based on the ratio of two values – the distance between 1 and 2 is equal to the distance between 4 and 8 or 12 and 24.
The two charts below are both all-time line charts for Bitcoin. The first chart is in linear scale and the second is a log scale chart.
Types of Charts
There are four different chart types, each offering different insights and often used in conjunction by traders depending on the type of information that is sought.
A line chart is the most simple and common chart type which is drawn by connecting the closing prices of every time interval.
Although line charts can be drawn for open, high and low prices, they usually represent the closing prices for each interval over a time period. While this is not the most intricate chart type, it's commonly used to spot trends due to the emphasis most traders place on closing price over open, high or low prices.
A bar chart, also known as OHLC chart (open-high-low-close), is a more detailed representation of price action compared to a line chart, incorporating open, high, low and close prices using a series of vertical lines (bars) which are accented by a horizontal dash on each side.
The vertical lines are called range lines, used to represent the range of price for each time interval (high and low), while the horizontal dashes to the left and right represent the open and close prices respectively.
As shown above, a black range line is used to denote a rising interval, in which the close price is higher than the open price, and a red range line denotes a falling interval, in which the close price is lower than the open price.
Japanese Candlestick Chart
Developed in the late 18th century by Japanese rice trader, Munehisa Homma, the Candlestick charting technique was introduced to the western world by Steve Nison in the early 1990s. In recent years, it has become the most popular chart type in the world.
Similar to a bar chart, candlestick charts use a hollow or filled body with shadows to represent open, high, low and close prices. However, the length of the body of a candle and its shape is used to represent the intensity of trading activity for a time interval.
As shown above, a candlestick is composed of a body, representing open and close prices, and upper and lower shadows or wicks, representing high and low prices respectively.
Traditionally, if the close price for a time interval is higher than open price, the body is hollow or unfilled. If the close price is lower than the open price, the body is solid or filled.
Modern candlestick charts commonly use green for higher closing (bullish candle) and red for lower closing (bearish candle).
Point and Figure Chart
Not the most well-known chart type among traders, it has nevertheless been used by technical traders in the west since the late 19th century.
A Point and Figure (P&F) chart reflects only price movements, using a column of X for rising prices and a column of O for falling prices, without regard for time or volume. If there is no significant price movement for a length of time, the chart will show no new data.
In P&F charts, the value that is represented by each X and O is determined as a set price interval. Any price change below this value is ignored. The chart shifts to a new column, called reversal, when the price changes in the opposite direction by the value represented by a certain number of Xs or Os.
In the example shown above, each X or O represents a change by 2 dollars and reversal occurs if there is a change in the opposite direction by a value of at least 4 dollars. Although time can be represented in the X-axis, it is never reckoned as a factor in P&F charts.
This method of charting is used to eliminate the distraction or skewing effect that occurs in other chart types from accounting for time intervals with insignificant price movements.
Familiarizing with different, commonly encountered chart patterns can help traders break down the complexity of identifying trend lines. Chart patterns provide a cogent perspective into the intricate dynamics between supply and demand sides of a market.
Typically, chart patterns are classified into three categories based on their consequence – continuation, reversal and bilateral patterns.
Continuation patterns usually indicate a brief consolidation period, following which the prevailing trend is likely to continue in the same direction.
Reversal patterns portend a shift in the balance of supply and demand, often resulting in a trend reversal. These patterns can be typically sub-divided into top and bottom formations.
Bilateral patterns are triangle formations which indicate that the trend could sway either way, which, ostensibly, may not seem like the most helpful insight. However, these scenarios have historically proven to be very profitable when they are played right. We'll look into how bilateral patterns can be capitalized upon.
It's important to remember that for any pattern to qualify as valid, prior trend information is critical. Depending on this information, the same pattern can be interpreted in multiple ways. Prior trend often dictates both the significance and the consequence of a pattern.
Cup with Handle
Cup with handle pattern can be either a continuation or reversal pattern depending on the prior trend.
Cup with handle in an uptrend (as shown above) is a bullish continuation pattern, indicating that the prevailing upward trend will continue. The two components of this pattern are the cup and the handle formations as shown in the image. The cup should be bowl-shaped, more of a “U” and not a “V”. In an ideal scenario, the cup would have equal highs on either side before consolidating in a handle formation. Estimated price target for the next breakout following consolidation is symmetrical to the height of the cup.
When the same pattern develops in a prevailing downtrend (as in the chart below), it signifies the end of the downtrend and a breakout into an uptrend. Once the cup formation transitions to a handle formation, price must not decline beyond half the height of the cup. If price declines beyond half the cup's height, selling momentum is too significant and the formation is not valid.
The longer it takes for the pattern to form and the deeper the cup formation, the greater the momentum behind the breakout and higher the price target. Adding the height of the cup to the breakout point provides a good indication of short-term price target.
In both of the above scenarios, place stop-loss order just below the low of the handle formation to hedge against an abortive rally.
Flags and Pennants
Flags and pennants are continuation patterns which are formed when a brief consolidation in price occurs before the market resumes moving in the same direction.
This brief consolidation phase is seen as a mid-point of a long-term trend and takes the form of a rectangle (flag) or a symmetrical triangle (pennant). While the flag formation is strictly sideways, the pennant is formed by a slight sloping move in the direction opposite to the prevailing trend.
These patterns are usually preceded by a sharp rally or decline. The distance from the support or resistance level preceding the rally or decline to the top of the flag or pennant formation is called flag pole.
Trend lines are drawn along the highs and lows of the formation. When a flag or pennant formation occurs in a bullish trend, long entries should be placed just above the formation's high, whereas short entries should be placed just below the formations low in a bearish trend.
Price target is usually deduced by adding the length of the flag pole to the top of the formation in an uptrend and subtracting the length of the flag pole from the bottom of the formation in a downtrend.
Head and Shoulders
Historically, Head and Shoulders (HS) has proven to be one of the most reliable reversal patterns.
Head and Shoulders Top
HS top is a bearish reversal pattern in a prevailing uptrend that consists of three parts – two smaller peaks or lower highs on either side of a taller peak or higher high.
Connecting the low of the left shoulder to the low of the head creates what is known as the ‘neckline'. Once the price falls below this line, the upward trend breaks down and the market enters a bearish trend.
Target estimation for the decline depends on the ratio of the higher high to the breakout point along the neckline. For example, if the higher high is 40 and the breakout point is 20, a 50% decline, then the estimated target for the breakdown below the neckline would be 10, a further 50% from the neckline.
When entering into short positions, place the order just below the trend line and use a stop loss just above the high of the right shoulder.
Head and Shoulders Bottom
HS bottom (also known as Inverse HS) is a bullish reversal pattern when the prevailing trend is downward. Similar to HS Top, it consists of three parts – two shallower valleys or higher lows either side of a deeper valley or lower low.
A trend line connecting the high of the left shoulder to the high of the head forms the angle of the neckline. When the price breaks above the neckline, a breakout occurs and the market enters an uptrend.
Price target is deduced by either adding the height of the head to the breakout point or projected similar to the HS Top formation based on the ratio between the lower low and the neckline. For example, if the lower low is 20 and the breakout occurs at 30 (2:3 ratio), then the target is estimated to be 45.
When taking long positions, enter once the price breaks above the trend line and place a stop loss just below the low of the right shoulder.
A double top is a bearish reversal pattern in a prevailing uptrend which is characterized by a brief pullback followed by abortive rally and a second pullback at the previous high which usually results in the price breaking down below the earlier low.
It's recommended to wait until the price drops below the first pullback low after retesting the top as the formation is only complete when this occurs.
Price target is calculated by either subtracting the height of the formation from the point where support breaks or based on the ratio between the formation's top and pullback low. If the formation's top is 20 and pullback low is 10(2:1), then price target for the breakdown is pegged at 5.
When taking short positions in this formation, enter once the price breaks down below pullback low and place stop loss at the most recent rally high.
A double bottom formation is a bullish reversal pattern in a prevailing downtrend which is the mirror opposite of a double top.
This pattern forms when the price rallies to register a local high following a downtrend, falls again to the level of the previous low, before rallying again to break out above previous high, reversing into an upward trend. The formation is only complete when the price breaks out above the first rally high.
Price target for the breakout is deduced by either adding the height of the formation to the breakout point or based on the ratio between the formation's bottom and first rally high. If the bottom of the formation is 5 and the first rally reaches 10, then price target would be 20.
When taking long positions, set entry just above the first rally high and place stop loss at the most recent pullback low.
Triple Top & Triple Bottom
Both double top and double bottom patterns may sometimes extend further to form a longer-term triple top and triple bottom formations, which are also reversal patterns.
Triple top formation features three roughly equal peaks split by two valleys, whereas the triple bottom formation consists of three identical valleys split by two abortive peaks. Trend lines connecting the highs and lows within the pattern form support and resistance levels.
These patterns are traded similar to the double top and double bottom patterns. Price target is calculated by adding or subtracting the height of the formation to or from the breakout point.
The rounding bottom, also known as saucer bottom, is a bullish reversal or continuation pattern characterized by a steeper cup or bowl formation than the cup with handle pattern and bears quite a few similarities to the Inverse Head and Shoulders pattern, only without discernible shoulders. The lows within the pattern can be connected to form a shape resembling the bottom of a saucer.
The formation begins with concerted selling pressure, which eventually loses steam and transitions into an uptrend with buyers seizing control of the market. When this pattern forms as a reversal in a prevailing downtrend, it portends a significant long-term uptrend.
The pattern is only complete when the price breaks out above the starting point of the initial decline within the pattern. Place long entries once the pattern completes and use stop loss at the most recent swing low or at the bottom of the cup.
To deduce short-term price target for this pattern, add the height of the cup to the resistance line.
There are two types of wedge patterns – the rising wedge and the falling wedge. Each can be interpreted as a continuation or reversal pattern depending on the prior trend preceding the formation.
The rising wedge is regarded as a bearish pattern. The formation consists of an upward sloping, converging channel of support and resistance lines which forms a cone, where the lower support line is steeper than the resistance line. The steeper slope of the support line is due to more frequent higher lows than higher highs, resulting in congestion between the lines and eventual breakdown.
Rising wedge pattern in an uptrend signals a bearish reversal, whereas in a downtrend, it is seen as indicative of a continuation of declining prices.
When entering into a short position, it is prudent to wait for confirmation of the support line being broken in a convincing manner. There can sometimes be a brief reaction rally (as shown in the Bitcoin chart above) immediately following a breakdown to test the support line as the new resistance.
The falling wedge is the mirror opposite of the rising wedge and is considered a bullish pattern. It is formed by a downward sloping, converging channel of support and resistance lines. The slope of the upper resistance line is steeper than the support line.
The falling wedge pattern indicates bullish reversal when it forms in a prevailing downtrend and a continuation of increasing prices when it forms in a prevailing uptrend. Bitcoin was in a falling wedge pattern prior to the recent upturn in price, as shown below, before breaking out to rally convincingly during the first week of April.
Before entering into a long position, wait for confirmation of the resistance line being breached convincingly backed by significant rise in volume. Volume is a key factor for confirming falling wedge breakouts.
The rectangle, also known as trading range or consolidation zone, is a continuation pattern characterized by the price ranging between parallel support and resistance lines. During this impasse, the price will test support and resistance levels within the range several times before breaking out and continuing the prior trend, whether that is upward or downward.
In a prevailing bearish trend, the price will break down below the lower support level of the trading range after consolidation. In a bullish trend, the price will eventually rally above the upper resistance line to continue the upward trend. The pattern is only complete when this breakdown or breakout has taken place.
When placing a long trade in a bullish rectangle pattern, wait for confirmation of breakout above the resistance line and use stop loss at the most recent low within the pattern. In a bearish rectangle pattern, enter into a short once the price breaks down below the support line and place a stop at the most recent high.
Price target is symmetrical to the height of the rectangle formation and is derived by adding this height to the point of breakout or breakdown.
Bilateral Patterns (Triangles)
The ascending triangle is generally a bullish continuation pattern in a prevailing uptrend. However, it can also form as a reversal pattern in a downtrend. As a bilateral pattern, an ascending triangle can occasionally break downward. It would be wise to wait for a convincing break of support or resistance before making a play.
The formation consists of two or more roughly equal highs and increasing lows. While the resistance line is horizontal, the extended support line slopes upward and converges with the resistance line to form a shape resembling a right-angle triangle.
For the pattern to be valid, each successive swing or reaction low must be higher than the previous low. Volume begins to dwindle as the pattern takes shape. The pattern is usually considered complete when the price breaks out past the upper resistance line backed by a significant surge in volume. Once the resistance level is broken, the price may return to test this new-found support level.
Price target can be calculated by adding the height of the triangle's base to the breakout point. Stop loss should be placed at the most recent swing low.
The mirror opposite of the ascending triangle, the descending triangle is typically a bearish continuation pattern in a downtrend but can also sometimes form as a reversal pattern in an uptrend. Just like an ascending triangle, it may occasionally break out upward so it’s important to play the pattern as it develops and use tight stops.
In a descending triangle, equal lows form a horizontal support line and decreasing highs form a downward sloping resistance line. Both lines are extended to complete a right-angle triangle.
As in the case of an ascending triangle, successive reaction highs must be lower than the previous high within the formation for the pattern to be valid. Breakout is confirmed when the support line is breached accompanied by an increase in volume, although volume confirmation is not as important as in the case of an ascending triangle.
Price target is deduced by subtracting the height of the base of the triangle to the point where support breaks down. Place stop loss at the most recent swing high.
Of the three triangle patterns, the symmetrical triangle is the quintessential bilateral pattern. Regardless of prior trend, there is no telling the eventuality of this pattern until a clear breakout is confirmed.
Often seen as a consolidation pattern, a symmetrical triangle consists of a sequence of lower reaction highs and higher reaction lows, at least 2 each. The resistance line slopes downward and the support line slopes upward. When the lines are extended, they converge to form the apex of a symmetrical triangle with a line connecting the support and resistance line at the beginning of the pattern forming the base of the triangle.
As the support and resistance lines converge, volume diminishes. A breakout is only confirmed when the support or resistance line is breached with attendant surge in volume, especially for an upward breakout. After price breaks through, the apex of the triangle can often turn into support or resistance level for future.
Since the direction of the breakout is difficult to determine, seasoned traders play this pattern by placing two orders, one long and one short, and closing the other when one of them hits.
Price target can be estimated by adding or subtracting the height of the base of the triangle to the breakout point. For long-term price estimation, an extended trend line can be drawn parallel to the support line (if the pattern breaks upward) or resistance line (if the pattern breaks down) passing through the other vertex of the triangle’s base. Stop loss is placed at the most recent swing low if price breaks upward or the most recent swing high if price breaks downward.
Top Five Profitable Patterns
With a plethora patterns to digest and reckon for when perusing charts, you're understandably feeling a little overwhelmed and probably wondering how to condense all this information to structure an effective trading strategy.
Perhaps knowing which patterns have proven to be most profitable historically could help you seek out the best patterns to trade on. Here are the top five patterns to look out for,
- 1 – Triangles (ascending, descending & symmetrical triangles)
- 2 – Head and Shoulders
- 3 – Double/Triple top and bottom
- 4 – Cup with Handle
- 5 – Flags and Pennants
Crypto Trading Part III: Technical Indicators
We've learned how to identify and interpret chart patterns which means we're all set to start trading, right? Not so fast. For long-term trading, chart patterns may be sometimes sufficient but remember we talked about trading not being exact science? With that being the case, smart traders will always seek as many confirmations as they can derive from the data that is available. Besides, even for long-term trading, technical indicators can be used to determine the most favourable entry and exit points.
If chart patterns portray the supply and demand dynamics of the market in geometric form, technical indicators present an arithmetic assay of price action. Each indicator is essentially a formula used to arrive at a sequence of data points which can be used to infer market characteristics such as trend, volume, volatility and momentum.
Any single technical indicator on its own is not particularly telling without context, which is provided by information such as prevailing trend, chart pattern and other indicators. An indicator can be understood as a piece of a jigsaw puzzle, which when pieced together with other complementary indicators can paint a coherent picture of the market.
Indicators can be overlays or oscillators and each can be further classified as either a leading or lagging indicator. Overlays are indicators which use the same scale as the price and are plotted on top of the price chart, whereas oscillators are displayed independently on a different scale below the price chart and typically oscillate between a minimum and maximum value.
A leading indicator is one that has strong predictive qualities and can often indicate the direction of the market before the price follows through. Leading indicators can be very effective in portending imminent change in trend or momentum before it occurs. Popular leading indicators are Relative Strength Index (RSI), Stochastic Oscillator and On Balance Volume (OBV)
A lagging indicator is less predictive, follows the market trend and is delayed in its indication of a shift in the tides. Lagging indicators are useful in trending markets and as a confirmation of leading indicators but offer little insight in a ranging market with no clear trend. Bollinger bands and moving averages are two of the most frequently used lagging indicators.
Moving averages are trend overlays which can indicate short, medium and long-term trend by computing the average price over a period of time. Moving averages are used to eradicate a lot of the noise (inconsequential fluctuations) and refine the price chart to make trends easier to spot. There are two common ways of doing this – Simple and Exponential. Both are considered lagging indicators, the former more so than the latter.
Simple Moving Average (SMA) is quite simply the sum of all the closing prices over a particular time period divided by the number of periods. For example, a 5-day SMA is calculated by adding the closing prices for each day and dividing the sum by five. The longer the time period, the greater the lag. Longer scales are used to smooth out price movements, and thus tend to be less responsive than shorter time scales. In the chart below, notice how the 50-day moving average lags behind the price while the 10-day moving average tightly hugs the price movements.
Exponential Moving Average (EMA) differs from SMA by placing greater weightage on the most recent data points, which makes EMA less tardy and a lot more responsive to price movements of recent periods than SMA.
A weighting multiplier is used to determine the weightage given to the most recent data point.
The formula used for calculating the multiplier is [2 / (Time period + 1)]
The weighting given to the most recent price for a 10-day EMA would be [2 / (10 + 1)] = 0.1818 (18.18%)
Current EMA = Today's price x weighting multiplier + Yesterday's EMA x (1 – weighting multiplier)
It's not important to memorize these formulae as modern chart tools automatically make these calculations but knowing how data points for an indicator are derived helps to better understand the significance of the indicator.
Simple and exponential moving averages are just different ways of analysing trends and one is not necessarily better than the other. Exponential moving averages respond faster to price movments, whereas simple moving averages are great for identifying long-term support and resistance levels. The slope of the simple moving averages are also used to gauge momentum of a trend.
Crossovers between two averages of different time scales are considered pivotal events indicative of a trend change. A bullish crossover (also known as a golden cross) occurs when the shorter scale moving average crosses above the longer scale moving average. When the shorter scale moving average crosses below the longer scale moving average, it's considered to be a bearish crossover (also known as a death cross).
The 200-day SMA and 50-day SMA are the two most popular scales used to identify medium to long term trends, support, resistance and bullish or bearish crossovers and divergences. Further, the current price itself crossing above or below a long-term moving average is also seen as indicative of a bullish or bearish breakout.
Moving average convergence-divergence (MACD)
Invented in 1979 by Gerald Appel, Moving average convergence-divergence (MACD) is a trend-following oscillator which is widely regarded as the most effective momentum indicator. MACD juxtaposes two exponential moving averages, typically 12-day and 26-day EMA, plotted against the zero line to measure the momentum of a trend.
A derivative of MACD is MACD Histogram, developed in 1986 by Thomas Aspray. MACD Histogram measures momentum based on the relationship between MACD and its signal line (9-day EMA of MACD).
The modern MACD oscillator comprises four elements – MACD line, Zero line, Signal line and MACD Histogram
MACD line is the 26-day EMA subtracted from the 12-day EMA (12-day EMA – 26-day EMA)
Zero line is the point where the two EMAs are equal
Signal Line is the 9-day EMA of MACD
Positive MACD, when the 12-day EMA is above the 26-day EMA, indicates that the market is bullish. The higher the value, the stronger the upward momentum. Conversely, negative MACD indicates that the market is bearish, with lower values suggesting strong downward momentum.
MACD Histogram, plotted as bars along the zero line, is the difference between MACD line and the signal line (MACD line – Signal line).
Convergence, crossover and divergence from the zero line and signal line are construed as pivotal events indicating relenting momentum, shifting of market forces and surging momentum respectively.
Please note that the scale for MACD and signal line are commonly used values. Traders may opt to change the scale to suit their own trading needs.
Relative Strength Index (RSI)
Mechanical engineer turned technical trader J. Welles Wilder sired multiple new technical indicators in his 1978 book, New Concepts in Technical Trading Systems. While other indicators such as Average True Range, Average Directional Index and Parabolic SAR have also stood the test of time, Relative Strength Index (RSI) remains arguably the most enduringly popular of Wilder's concepts.
RSI is a momentum oscillator and an excellent leading indicator used to identify strength of trends, as well as oversold or overbought market conditions.
The indicator oscillates between 0 and 100 and the typical timeframe recommended by Wilder is 14 days. An RSI value below 30 represents oversold conditions, whereas an RSI value above 70 indicates overbought conditions. Some traders use 20 and 80 instead of 30 and 70, which may be more effective for highly volatile markets. As a leading indicator, the slope of the RSI can often presage a trend change before it occurs.
RSI = 100 – (100/1+RS)
Where RS (Relative Strength) = Average Gain/Average Loss
Gains are periods where the price closes above the previous day's closing and Losses are periods where the price closes below the previous day's closing. It should be noted that values are absolute, meaning that losses are reckoned as positive values.
The first calculation is made by simply adding gains and losses and dividing each by 14.
For subsequent gain and loss calculations, a modified average is calculated as follows,
Average Gain = [(previous average gain) x 13 + gain for current period] / 14
Average Loss = [(previous Average Loss) x 13 + loss for current period] / 14
RSI divergences can be handy trading signals but only within appropriate context – just another reminder to never use any single indicator as a signal without sufficient context.
A bullish divergence occurs when the price makes a lower low and RSI makes a higher low. A bearish divergence occurs when the price makes a higher high while RSI makes a lower high.
An RSI failure swing is seen as an indication of potential trend reversal. A bullish failure swing is when RSI falls below 30, bounces past 30, falls back but does not fall below 30 and makes a new high. Likewise, in a bearish failure swing, the RSI breaks above 70, falls back, bounces without breaking 70 and falls back to a new low.
Parabolic SAR (Stop and Reverse)
Originally known as the Parabolic Time/Price System, Wilder invented Parabolic SAR as a tool to identify trend momentum and reversals.
An overlay lagging indicator, it is based on the idea that price tends move in parabolic curves when it's trending. Thus, this indicator is most effective in trending markets. SAR tightly trails price movements over time, always below the price curve in an uptrend and above the price curve in a downtrend. Thus, traders use SAR to set trailing stops and protect their profits.
The formula used to calculate SAR is different for rising and falling SAR and is based on the data from one period behind,
For rising SAR,
Current SAR = Last period's SAR + AF (EP – Last period's SAR)
For falling SAR,
Current SAR = Last period's SAR – AF (EP – Last period's SAR)
Where EP is the extreme point, which is the highest high or the lowest low of the current trend and AF is the Acceleration Factor. Initially set to a value of 0.02, AF increases by 0.02 for each new high or low made by the extreme point.
Increasing AF increases SAR sensitivity and tightness to the price curve. Lower AF moves SAR further away from the price and higher AF moves SAR closer to the price. Setting the value too high can result in too many whipsaws and lead to false reversal signals.
SAR is most effective when used in conjunction with another concept of Wilder's, the Average Directional Index, which is used to determine the strength of a trend. Let's find out how.
Average Directional Index (ADX)
In recent years, ADX has risen in popularity to become a widely favoured indicator for estimating the strength of a trend. A lagging oscillator, ADX on its own offers little insight into the actual direction of a trend but only the magnitude of market forces behind a trend.
ADX oscillates between 0 and 100. According to Wilder, ADX is typically below 20 in a ranging market and above 25 in a trending market, with values above 40 indicating strong trends.
To calculate ADX, we need determine the positive and negative directional indicators, +DI and -DI respectively, together referred to as the Directional movement indicator. DMI is computed by collating the highs and lows of consecutive periods.
- +DI = (Smoothed +DM / ATR) x 100
- -DI = (Smoothed -DM / ATR) x 100
Where +DM = Current period's high – Previous period's high, -DM = Previous period's low – Current period's low and the smoothing technique used by Wilder involves taking the average of last 13 periods, adding the most recent value to it and dividing the sum by 14.
ATR is Average True Range, another concept developed by Wilder, which is a volatility indicator.
True Range (TR) is the absolute value of the greatest amongst three differences (current period's high – low, current period's high – previous period's close, current period's low – previous period's close).
ATR = [TR of last 13 periods + current TR] / 14
Directional Index (DX) = [(+DI – -DI) / (+DI + -DI)] x 100
ADX = [DX of last 13 periods + current DX] / 14
The formulae may seem complex at first glance but as we've discussed before, it's not necessary to memorize any of the formulae by rote. The purpose of knowing how an indicator is calculated is only to better understand its significance and context for generating signals.
Although ATR offers no indication of trend direction, +DI and -DI do exactly that. Besides using ADX for determining the strength of a trend, traders also use crossovers of +DI and -DI to generate signals for potential reversals. For example, +DI line crossing above or diverging upward from -DI line with ADX above 40 is a strong bullish signal. However, crossovers and divergences while ADX is below 20 are not signals of much consequence. The chart below shows how to read ADX within the context of Parabolic SAR.
Named thus for the use of Italian mathematician, Leonardo Bogollo's Fibonacci sequence, which starts with 0 and 1 with each successive number in the sequence being the sum of the two preceding numbers, Fibonacci retracement is a concept in technical trading used to identify the extent of corrective retracement after a rapid price advance or decline.
In the Fibonacci sequence, the ratio of any number to its successor is .618(61.8%). This is called the golden ratio or phi – where the ratio of the larger number to the smaller number is the same as the ratio of the sum of the numbers to the larger number. The golden ratio is ubiquitous in nature and has great historical significance in various fields of science.
Fibonacci retracement uses this ratio to identify support and resistance levels, known as alert zones. The five alert zones are 23.6%, 38.2%, 50%, 61.8% and 78.6%. The 50% alert zone is not based on the Fibonacci sequence but originates from Dow Theory, which postulates that corrections typically result in a 50% retracement from the previous move. The retracement levels are drawn on a price chart after marking the high and low point of a trend.
A 23.6% retracement is often seen in shorter timescales and a bounce from this level is less common if the correction has momentum. 38.2% and 61.8% retracements are more likely reversal zones, the latter known as the golden retracement.
Some traders also use a derivative of Fibonacci retracement, the Fibonacci extension, to identify how far a strong rally may reach. The sequence can be extended as 78.6%, 100%, 161.8%, 261.8%, 423.6%…
The Elliott wave principle is another closely related concept developed by American accountant, Ralph Elliott in 1938. After studying American markets for a decade in his retirement, Elliott asserted that prices invariably and perpetually move in a fractal wave pattern governed by natural laws which can be delineated using the Fibonacci sequence.
According to Elliott, prices move in two types of waves – impulse wave and corrective wave.
Impulse waves, also known as motive waves, move in the direction of prevailing trend and consist of five smaller waves, three trend advancing or actionary sub-waves split by two corrective sub-waves.
Corrective waves, which can be part of a larger impulse wave, move against the direction of prevailing trend and comprise three smaller waves, two corrective sub-waves split by one actionary sub-wave.
An impulse wave and a corrective wave together, consisting of 8 sub-waves referred to as the 5-3 structure, make up each Elliott wave cycle. The image below is a good illustration of Bitcoin's extended Elliott wave cycles, buttressed for most of 2018 by the 78.6% Fibonacci support level.
As with any other signal, Fibonacci retracement levels and Elliott wave patterns are only a part of the picture. When retracement reaches Fibonacci alert zones, it's time to take a look at other indicators and see if other signals corroborate reversal at these alert zones.
Named after American financial analyst, John Bollinger, who developed it in the 1980s, bollinger bands is a moving average based overlay used to measure price volatility. It comprises three bands – a middle band which represents simple moving average, an upper band and a lower band, which represent standard deviations.
The middle band is typically the 20-day simple moving average (SMA). The upper band is 2 x 20-day standard deviation added to the 20-day SMA. The lower band is 2 x 20-day standard deviation subtracted from the 20-day SMA. The number of periods can be adjusted to trading preferences. However, the same number of periods used to calculate the SMA is also used for the standard deviation.
The width of the bands indicates volatility. Widening of the bands indicates increase in volatility and a trending market. Narrowing of the bands means that volatility is dwindling and the market is ranging.
Around 90% of price movements occur within the bands. Therefore, price moving sharply out of the upper or lower band is often considered indicative of a breakout. During a strong uptrend, the price tends to hug or even frequently move out of the upper band and during a strong downtrend, the price activity is usually concentrated around the lower band. The middle band acts as resistance in a downtrend and support in an uptrend.
The two key patterns traders look for with bollinger bands are double top and double bottom, also referred to as M top and W bottom. Bollinger identifies multiple structural variations of these patterns.
The M top occurs in an uptrend and is indicative of a bearish reversal. In this formation, the price registers a high above the upper band, pulls back below the middle band, moves up again but stops short of the upper band. The second swing high failing to reach the upper band is a sign of weakening trend and portends a reversal.
The W bottom formation is the mirror opposite of an M top and signals a bullish reversal. The price first registers a swing low below the lower band, rallies past the middle band before making a second swing low but does not touch lower band and rallies past the earlier swing high to break out into a bullish reversal.
On Balance Volume (OBV)
A volume-based oscillator, detailed by Joe Granville in his 1963 book, Granville's New Key to Stock Market Profits, On Balance Volume (OBV) is a leading indicator which quantifies volume and uses cumulative volume for a period to measure the strength of trends in either direction.
Granville theorized that significant changes in volume often precede price movements and that volume tends to be higher on days when the price moves in the direction of the prevailing trend.
OBV simply adds volume on periods when the close is higher than the previous close and subtracts volume on periods when the close is lower.
The actual value of OBV is of little consequence. The rate of change, rise or fall, in OBV is what indicates the strength of buy/sell pressure. When OBV is rising, buy pressure is higher and could lead to higher prices, whereas falling OBV could mean a price decline is imminent.
Traders use the OBV oscillator to identify support and resistance levels and look for breakouts which often precede price breakouts. OBV diverging from the prevailing trend could signal a possible bullish or bearish reversal.
If price makes a higher swing high and OBV makes a lower swing high, it is a sign of weakening uptrend. Similarly, when price makes a lower low and OBV makes a higher low, the downtrend is losing steam and a bullish breakout could be right around the corner.
Granville's student and prominent technical educator, George Lane, developed the stochastic oscillator, a leading oscillator which measures momentum, in the late 1950s. Lane based the indicator on the idea that momentum always shifts before price and variations in momentum can often previse a change in market direction.
By measuring the relationship between the closing prices over a given period and the trading range (high and low) of the period, stochastic oscillator is primarily used to identify potential trend reversals, overbought and oversold conditions. The indicator oscillates between 0 and 100, which are the bottom and top of the trading range over a given time scale, typically set to 14 periods.
The oscillator comprises two lines, the slow oscillator or %K and the fast oscillator or %D
%K = [(Current period's close – Lowest of all periods) / (Highest of all periods – Lowest of all periods)] x 100
%D = 3-period simple moving average of %K
Values above 80 and below 20 are identified as overbought and oversold levels. It's important to note that these are not to be interpreted as reversal signals per se. In strong trends, the price can hover at these extreme levels for a significant period of time.
Crossovers and divergences over and under %D, the signal line, indicate reversals and surges in momentum. Lane also theorizes that the closing prices typically hover in the upper half of the trading range in an uptrend and in the lower half when the prevailing momentum is downward. Traders therefore look for crossovers at the midpoint as indicative of the trend shifting.
A bullish divergence occurs when the price makes a lower low while the oscillator registers a higher low. Whereas the price making a higher high while the oscillator swings to a lower high indicates bearish divergence. Watch out for breakouts and breakdowns in these scenarios above or below the midpoint and potential signal line crossovers. The price breaking past the most recent swing high in a bullish divergence and the most recent swing low in a bearish divergence are also confirmations of a reversal.
The inverse of bullish and bearish divergences are what Lane refers to as bull and bear set-ups.
In a bull set-up, the oscillator swings to a higher high even as the price makes a lower high. Despite the price swinging to a lower high, market momentum is still surging and the price will likely appreciate further.
A bear set-up is when the oscillator swings to a lower low while the price holds at a higher low. In this scenario, although the price diverges upward, progressive downward momentum indicates that a sustained upward rally is unlikely.
There are two other variations of the oscillator, slow and full versions. In the slow version, a 3-period smoothed SMA of %K is used to streamline the %K line. The full version is fully customizable where traders can set custom look-back and smoothing periods.
A derivative of the stochastic oscillator, StochRSI, was explained by Stanley Kroll and Tushar Chande in their 1994 book, The New Technical Trader, which applies Lane's oscillator to Wilder's Relative Strength Index (RSI) instead of the price. StochRSI is therefore a momentum oscillator of a momentum oscillator.
StochRSI shows the relative position of RSI with respect to its high-low range for a given set of periods. It is calculated using the same formula as the stochastic oscillator, except that the price values are replaced by RSI values.
Spotting and confirming signals
Let's say there is a bullish divergence on the directional movement index. Should you trade it? Not yet. However strong a signal, it's imperative to seek as many confirmations as possible by looking at complementary signals.
Does this divergence on the directional movement index mean anything? Only if ADX and SAR indicate a trending market. With no noticeable trend, we know that the divergence is likely of no consequence in a ranging market. But a trend may soon take shape, therefore it's important to keep an eye on… OBV perhaps?
To illustrate how to collate signals to inform our position, we're going to take the ETHUSD chart below, from April-May 2018, and try to determine a medium to long term position based on moving averages and RSI.
As I'd expect you to have noticed, with you now being familiar with how to interpret these indicators, there's a vicious death cross on the moving averages and a bearish divergence on RSI.
On the 10th of April, the 50-day MA crosses below the 200-day MA. If any signal is strong enough on its own to warrant predicating a trading strategy upon, it's probably the 50/200 day crossover as this signal, particularly in a trending market, almost always foreshadows a trend reversal.
But hold your horses! The moving averages are diverging bearishly alright, but the price is still appreciating at great velocity. What do we do now? Do we trust the price action or moving averages? Neither! We solicit sage counsel from the most effective momentum oscillator, Relative Strength Index.
Help us out here, RSI!
Even as the price continues to trend upward, peaking in the first week of May, there's a divergence on RSI at the exact time period. RSI behaviour confirms the death cross signal from moving averages that a reversal is imminent, which means it's time to abandon this ship, pronto!
We confidently take a short position towards the end of the first week of May.
Sure, we could use more signals here to confirm our position but in this scenario, that would be quite redundant. When we talk about confirmations, we're not necessarily speaking of every indicator being perfectly concordant, which almost never occurs, but more specifically about the quality of these confirmations. A golden cross or death cross and concurrent RSI divergence are signals of the very highest order.
So how would this short position on ETHUSD have turned out for us? Suffice to say, Ethereum has not returned anywhere close to these price levels a year later and is languishing just below 170 USD at the time of this writing. Hey presto!
Let's briefly shift gears and talk about three other fundamental factors to equate for all of your bitcoin trading activities in a) the upside b) shorting options and c) investment metrics
Cryptocurrency Trading Guide Part IV: The Execution Behind Bitcoin Trading
Bitcoin Trading: The Upside
Trading with Bitcoin can be a daunting prospect. There are a lot of articles and opinions floating out there that only further confuse this. But an agency whose job it is to offer clients advice on how to move forward during competitive markets may actually suggest using Bitcoin for transactions. Why is that?
Permission Not Necessary
Bitcoin is not like a fiat currency. This makes it not dependent on government, gold, financial institutions, or international organizations. It has no borders, it cannot be banned out of existence, and is mostly untouched by the devaluation of other currencies.
The digital currency Bitcoin is also completely free to use.
Seizures Not a Risk
Fiat currency is technically borrowed from a bank. Since we keep money in banks, it can be seized for various reason by government entities. This includes creditors that have judgements against you.
Bitcoin does not have this problem. It can never be seized because you OWN it. Blockchain tech means it can’t be stolen and you are the only person with the digital keys to it.
It’s Limited Supply
Current fiat currencies fall prey to devaluation because of money printing but bitcoin is more scare than that. New coin can never be made. There will always be a finite amount of 21 million once it is all mined.
This limited supply keeps certain value, becomes predictable, and cannot be influenced by speculators.
Easy and Fast
One of the best things about Bitcoin is its speed. Transactions can be completed near instantly because of the peer-to-peer transfers the Blockchain insists upon.
Bitcoin almost never has fees attached. Visa, PayPal, and Mastercard charge clients fees through their banks when making transactions (its why some stores require a minimum $5 payment to purchase with a card, in order to make it worth it for them to allow you to charge with a card). This is the reality with all central payments systems.
Another big benefit to Bitcoin is its anonymity. Transactions with Bitcoin keep the user hidden if wanted, and that includes from government. It does not require name, email, or any sensitive information of its users in order to take part in it. While this started out as a benefit of high crimes, cash still reigns kind and it has since slowed down.
4 Popular Options for Shorting Bitcoin
The air is full of optimism around cryptocurrency and it's not hard to see why. The bearish market in Q1 has been nullified by an absolutely stunning rise int he fortunes of most coins during April and it was all because of Bitcoin. Once the big coin started steamrolling the trading charts, everyone else followed.
These days, people are waxing lyrical about a new bull market that will eclipse the previous one and many are looking to get rich by hodling for as long as possible. Sweet. If you think that's all pie in the sky thinking by traders who should know better, then you are definitely looking to short Bitcoin and make a fortune off of others' misery. If that sounds like you, then here are the 4 most popular options for shorting Bitcoin in today's market.
Prediction Markets: Difficult for beginners, great for blockchain savvy traders
Blockchain powered prediction markets are perfect for shorting anything. It is the best way to bet that Bitcoin will fall, and that right soon. Platforms such as Augur and Veil will allow you to wager against the further price increase in Bitcoin.
What is usually done is staking another cryptocurrency that Bitcoin will fall. Let's take Ether as an example and the Veil platform to expand it. You can set a wager with 0.9999 ETH that Bitcoin will fall on a predetermined date. The other option would be that it would rise. Should you turn out to be right, you would be paid out in Ether.
Prediction markets might not be classic shorting of a currency, but they are exceedingly similar and they are something that only very technically savvy investors that understand smart contracts should be using. If you are not clued up with regards to how these prediction markets truly work, you might look at another method such as using a digital asset exchange.
Digital Asset Exchange: the easiest method to short Bitcoin
You won't find an option to short Bitcoin on all exchanges, but ones that do offer this ability are Bitfinex, BitMEX, and Kraken. The method which you would use is to sell the digital currency at the current point and buy it back when it is priced lower. How would you do this? Well, the first thing you need to do is borrow the asset and this is all done behind the scenes on the exchange side. You will be paying a small fee for borrowing the asset which will be deducted from your profit (should you make any profit).
Many exchanges that offer an option to short sell cryptocurrencies also give the traders the option to enable margins. This then allows traders to use leverage in their trades which can boost profits massively.
CFD: The Classic Short Bet System
Private investors might find it easier to use CFDs (contracts for difference) that are found on any good retail brokerage exchange. CFDs are common in the currency, and commodities speculation markets and they have the benefit of the trader not needing to own the asset.
While it was different some time ago, today all major brokerages support Bitcoin trading and you can short sell to your heart's desire. It is also easier if you are already using a brokerage to speculate on other assets such as currencies, stocks or commodities. If you are here looking for the easiest way to short Bitcoin but have little to no experience with crypto exchanges, then your best bet would be to use your brokerage account and use the CFD option to trade in Bitcoin.
Bitcoin Futures: Sell them for a profit
A futures contract is considered a derivative financial instrument. You can find them in all sorts of places such as BitMEX, which is an unregulated cryptocurrency trading market. Alternatively, you can use the Chicago Mercantile Exchange which is a properly regulated (and leading) US-based derivatives exchange.
What is a futures contract? It is simply a contract that allows the holder to buy a certain asset at a certain price at a certain point in time. This allows you to bet on an asset's price without needing to own the asset itself. Putting it into context, you could sell a contract guaranteeing the buying party Bitcoin for $5200 dollars in June of 2019. If the price falls to $4200 in June, the sale goes through and your profit is $1000 on the trade. While futures Contracts are much more specific, that is the general way it works.
Choosing the Right Benchmark to Measure Your Investments
For the most part, the reason why many people have run away from the crypto market is because of its instability. The market is popular for many things including its ripeness for investors but also its volatility. However, with the recent upward streak Bitcoin has been experiencing for a while now, there has been a noted incursion of investors into not just the Bitcoin space but the entire crypto market in general. However, for investors who don’t know a lot about crypto, the market is largely based on unusual technology and this might be a bit daunting for most people. It is for this exact reason that it’s almost compulsory for you to understand exactly how the market works and what particular moves to take and when to take them.
Measuring the Success of Your Investments
The only way to know if your investments are really paying off and you’re not just wasting money is to properly measure them with a particular yardstick or benchmark. Doing this precisely tells you if you’re making or losing your assets and helps you re-strategize if the latter is the case.
Normally, this is a very easy concept but if you’re investing in crypto, setting the right benchmark might be a bit tricky. Crypto investors, for example, have to figure out whether or not the success or failure of their investments should be measured with the crypto itself or with the fiat currency used for the purchase. If you’ve ever wondered which one is best to measure your investment, the best answer is that it depends on how you purchased these cryptocurrencies in the first place. The options on buying into a particular asset are to either use fiat currency or to use another crypto to get in. The following are likely scenarios for both methods.
Using Fiat to Buy-In
If you buy into the market using fiat then that currency is the benchmark to use in measuring your gains or losses. Doing this makes things a bit more straightforward.
If you decide, for example, to buy $1,000 worth of Bitcoin and we assume that the current price is $8,000 then what you get is 0.125 BTC. This would mean that if there is a 100% increase on Bitcoin and it’s now valued at $16,000 then you now have 0.25BTC at $2,000 making you an extra of at least $1,000 if you decide to dump your entire wallet balance.
This is the easiest and most straightforward way to measure the success or failure of your investment but it would mean that you only stick to cryptos that let you buy with fiat.
Using Bitcoin to Buy-In
This method is also not difficult but a bit less straightforward than the previous. The entire market currently has at least $2,000 different assets and for the most part, you can’t buy in with fiat. Most of them would require you to buy in with another crypto first, like Bitcoin. If you use this option and you’re to properly measure your investment with an asset you used Bitcoin to buy, then the only way to measure either your success or loss is using the current Bitcoin value. Because of the market volatility, once you’ve made the purchase, you cannot use the value of Bitcoin at the time of purchase to calculate this.
Let’s say you buy Bitcoin at $X and then use it to buy an altcoin at $Y per coin. If after a while the value of the coin becomes $2Y, then normally it would be considered a good investment because you have at least doubled your funds. However, if BTC becomes $4X during the same time, then you have lost considerably regardless of the $2Y your altcoin is currently worth. This is because leaving your funds in Bitcoin would have given you more profit and the mere fact that you used up your Bitcoin to buy something that didn’t also quadruple in value, made you a loss. This is the proper way to use Bitcoin as a benchmark for measure loss or gain if you used Bitcoin to make the purchase.
Final Thoughts on Using BTC (Satoshi) Ratio Metrics
Knowing the right benchmark for measuring your investment is very important. When dealing with crypto bought with Bitcoin, it helps to use Bitcoin as a benchmark. Not only can you easily tell if you’ve made a profit or loss, but it can also help you decide whether it’s better to leave your funds in Bitcoin or even buy into a different altcoin if there’s one that has done considerably better than BTC.
Biggest Cryptocurrency Mistakes Traders Make When Getting Started
As you can see, entering the world of cryptocurrency can be like visiting the Land of Oz – once you step through that door, everything is different even if you are accustomed to traditional markets and conventional wisdom. Let's cover costly mistakes virtual currency investors make when starting out trading their favorite digital assets.
If you're a crypto trading rookie, you'll learn all too soon that you're not in Kansas anymore, so here are ways to avoid the top 5 mistakes new traders often make.
1. Don't Diversify Too Quickly
You might have been told never to put your eggs in one basket when it comes to your investment portfolio, but in the world of cryptocurrency trading, it's absolutely possible to have too much diversification, and much too soon.
The reason you need to slow your roll in this circumstance is that the digital currency landscape right now is that it's kind of akin to the Wild West – there are so many altcoins out there now that it's almost impossible to know which ones are legitimate and which ones aren't.
The trick is to do your research and choose widely-distributed coins with high market capitalizations and trading volumes that have shown their longevity. Start with Bitcoin, of course, but then just choose one or two altcoins at first until you've got some experience under your belt.
2. Don't Spend Too Much Time Trading
This sounds counterintuitive, but it's entirely possible to end up making less profit by constantly trading. New crypto traders can often become so passionate about the digital currency markets that they spend every waking moment watching price fluctuations and trying to find the perfect trade, but doing so can be utterly exhausting in a hurry.
You need to temper that passion with wisdom. The crypto markets are so active that even if you miss what looks like one amazing opportunity to profit, they'll be five or ten more down the line just waiting for you. Trading while you're fatigued can lead to stupid mistakes because you're thinking emotionally instead of logically.
3. Don't Panic
The altcoin scene is incredibly volatile. This can create a lot of uncertainty in the heart of a novice trader, and that can all-too-easily generate feelings of panic and fear in your gut – which is the worst emotional state to be in while trading.
Just as trading while you're fatigued from spending too much time watching the markets can be disastrous, making trading decisions because you're feeling panicky about your investment can be a terrible choice. While there's nothing wrong with trusting your gut, never make a decision based on panic and fear.
4. Don't Fall For Scams
The natural inclination for crypto investors is to identify a new altcoin with the potential for growth, invest heavily when it's still inexpensive to do so, and then reap the rewards when the value increases. That being said, the altcoin market is growing so quickly that many new digital currencies hitting the market might not be good long-term investments.
It might be galling to be cautious when it comes to investing in new altcoins as they hit the market, but doing so shields you from being involved in a scam in the making. Being screwed by a pump-and-dump scheme – something that happens all too often in the world of cryptocurrency – can keep you from watching your investment disappear overnight.
Even worse are proprietary altcoins that are available only through a closed system. These coins – usually pre-mined by the company that created them – are only tradeable within this company's closed system, and are extremely susceptible to value manipulation. Be exceedingly cautious before investing in one of these types of altcoins.
5. Don't Select The Wrong Exchange
Just as the number of altcoins hitting the market is growing exponentially, the number of cryptocurrency exchanges that you can trade these currencies on is also increasing.
The problem is that not every new exchange is created equal; new and untested exchanges could turn out to be a nightmare in the event they don't honor withdrawals or become inaccessible at the wrong time.
Begin your crypto trading career with long-standing, well-respected exchanges that support a wide number of already established digital currencies. While it may seem like you're missing out on an opportunity by doing this, keep in mind that the ability to reclaim cryptocurrencies from unknown, untrusted companies can be next to impossible.
Watch Your Step & You Won't Fall
The world of cryptocurrency trading is by turns exciting, exhilarating, and terrifying. You don't want to end your crypto trading career before you've even gotten started, so ensure that you take conservative risks until you've garnered some more experience.
Novices can easily fall through the cracks of this highly complex world, especially when it comes to altcoins – and missing these pitfalls is even more likely if you're inexperienced. However, these five tips should help you navigate these murky waters and come out the other side without losing your shirt. This leads us up to our next point in the pecking order.
Cryptocurrency Investment Advice – Top 4 Trading Questions To Ask
Aside from giving a full investment disclaimer that nothing on this website should constitute as financial advice or professional investment consulting, let's jump right into this portion of our industry-leading cryptocurrency trading strategy guide. Anytime you are planning on investing in a new form of cryptocurrency, there are four important questions that you need to ask yourself:
- Does the purpose of the company that is behind the currency make sense to me?
- Do I want to support the company that is behind the currency?
- Do I think other people will want to support the company that is behind the currency?
- Are there any perks to investing in this specific cryptocurrency?
Every form of cryptocurrency has its own unique flavor, by which I mean that every alt-coin has something about it that is special and unique. Many businesses have begun creating and using their own forms of cryptocurrency to help support investments into their growth and success. When dealing with these specific types of alt-coins, the company that’s behind them can be as important as the currency itself.
Let’s take a deeper look into the four questions for more details.
1. Does the purpose of the company that is behind the currency make sense to me?
At this point it is important to do your research and learn everything you can about the company that is offering this alt-coin. By trading in this specific alt-coin, you will actually be investing in the company. Because of this, it’s important to know exactly who you’re investing in and what the company is all about. You should be able to look at their website and locate in less than one minute all of the information necessary to determine who the company is, what their goals are, and how to become a part of it. If you can’t find that info easily, it may just mean that their online presence is poorly developed. However, it could also mean that they aren’t legitimate and you may not want to become involved with them.
Now that you know everything you need to about the company, you need to learn about the technology used in the alt-coins themselves. You don’t necessarily need to be a technological savant, but you will need to understand the basics of how cryptocurrencies work in order to do this. What does their blockchain consist of? What is the value of this alt-coin when compared to 1 Bitcoin? How easy is it to get one? It’s also important to figure out what the community surrounding the coin is like, because you what to make sure it is adequately decentralized.
If you can easily explain to someone else what the company is all about and what they stand for, you’re good to go on this step.
2. Do I want to support the company that is behind the currency?
If you don’t feel like you can really get behind the company and what their all about, then it might not be the best choice for you to invest in it. Whether it’s something you just don’t find interesting or it’s something you don’t believe has a good chance of success, both are a good indicator that you won’t make the best investment decisions when working with them.
On the other hand, if you can see yourself getting passionate about what they do, or at least see it as a clear improvement over the alternative, then it makes sense to invest in their success. The more you believe in what the company is doing, the more likely you are to make smart choices and you can trust yourself ot make the right decisions when investing in their cryptocurrency.
3. Do I think other people will want to support the company that is behind the currency?
This can often be hard for us to admit to ourselves, but just because we really like something doesn’t always mean that other people will. Unfortunately, when you are investing in a company’s future you need to know that you won’t be their only fan. If there is only a small group of people interested in the what the company stands for and hopes to achieve, it may not be enough for them to actually achieve success.
It’s important for you to look at the company objectively and determine whether they truly have an offer that will appeal to their target market. If they don’t solve the right problems for the right people, they’re not likely to come out on top.
If you can see a good number of other people getting excited about what the company offers for the same reasons that you are, then you may be on track with something that is worth your time and investment.
4. Are there any perks to investing in this specific cryptocurrency?
This question has less to do with the company offering the cryptocurrency and more to do with how they ar offering it. Many companies will want to incentivize use of their specific alt-coins by including perks for purchasing them or advantages in the market. You need to determine if there is something about using the coin itself that is better for you than using other types of alt-coins.
Some alt-coins offer launch specials when they are first released, or bonuses to trade values when trading between specific types of cryptocurrency. Others offer incentives for being a part of their community, such as interest that accumulates based on how many of the alt-coins you have in your wallet. Not all communities offer any sort of incentive at all, so researching what may or may not be on offer can help you to decide if the investment will be beneficial for you.
Last Pointers for Cryptocurrency Investing Advice
No matter which company’s cryptocurrency you’re looking to invest in, it’s important that you have answered all four of these questions before you make your decision. You should only move forward if you can firmly answer “Yes” to each question.
For many forms of alt-coin, the only thing most people worry about is the monetary value of the coin itself and the tech or coding that it runs off of. However, it’s important to remember that many of these alt-coins are investment tools for specific companies, and as such, the success or failure of the company is closely tied in with the value of the cryptocurrency itself.
Cryptocurrency Trading Strategies – Legit Profitable Investment Tips?
Bitcoin trading is a new concept. Ten years ago, “cryptocurrency” was a foreign word. Today, cryptocurrencies have a market cap of over $100 billion USD.
Despite that enormous market cap, there are few good tutorials on bitcoin trading strategies. Today, we’re going to help by listing some of the introductory things new bitcoin traders need to know before they begin.
Understanding the Nature of the Bitcoin Market
The first and most important thing you need to know about bitcoin is that people aren’t really treating it as a currency right now. Sure, you can spend bitcoin at a growing number of places around the world. People have bought houses with bitcoin. Some people have contactless bitcoin debit cards they can spend anywhere in the world.
However, most investors aren’t treating bitcoin as a currency: they’re treating it as a financial commodity that might provide a return on investment.
The value of bitcoin comes from its potential uses. Bitcoin completely bypasses traditional banking institutions. It removes third parties – with all their fees and slowdowns – from the financial system. It broadcasts transactions to the network (the blockchain) in a transparent way.
Like many unknown commodities, bitcoin is subject to price volatility. Some investors see this as an opportunity, while risk-averse investors want to stay away.
Bitcoin isn’t just an unknown commodity: it will always be an unknown commodity. Bitcoin doesn’t have the fundamentals that investors typically use to analyze an asset. Most stocks or bonds can be analyzed based on some trait of the instrument. Stocks have P/E ratios and dividends, for example, while bonds have return percentages. Bitcoin has no fundamentals that can be easily measured.
Bitcoin trading occurs on exchanges. These exchanges accept your fiat currencies (like USD and EUR) in exchange for a cryptocurrency (like BTC). These exchanges maintain a liquid pool of bitcoin, allowing users to withdraw their bitcoin at any time. Investors who wish to trade on that exchange can deposit bitcoin into their personal wallet on the exchange, or make a wire transfer to the exchange’s bank account. The exchange notices this transfer, then credits your account.
At that point, you can begin trading. You can submit market or limit orders. The orders will be filled as soon as your buy/sell order can be matched to a corresponding one. Most exchanges only offer this limited structure for placing orders. However, a growing number of exchanges now allow more complex orders, including the option to go long/short on a stock and to employ leverage.
You’ll find that different exchanges cater to different markets. Today, most countries have at least one cryptocurrency exchange specializing in their own currency. There are exchanges that can accept New Zealand Dollars in exchange for bitcoin, for example. Other exchanges are known for certain pairs. Bithumb, for example, has particularly strong liquidity in the ETH/KRW (South Korean Won) pair at the moment (and it’s easily the most popular cryptocurrency exchange in Korea).
CoinMarketCap.com has a ranking of the top bitcoin exchanges by their 24 hour volume. Anything in the top 50 allows for good liquidity. However, you can also sort the list by specific currency pairs – so if you want to trade in a more obscure cryptocurrency, you can find the market with the best liquidity.
Bitcoin Trading Technology
Most bitcoin traders make their own trades manually – just like you would execute ordinary trades. However, bitcoin trading technology has improved by leaps and bounds over the past few years. Today, automated bitcoin traders use algorithms to analyze the market, then adjust their portfolios as necessary.
Typically, these companies keep their trading strategies a well-guarded secret. Some companies allow you to purchase their bitcoin trading system, then let it make trades on your behalf.
Unfortunately, bitcoin trading is kind of like the Wild West. Some companies will lure in newbie investors with promises of doubling their bitcoins in 90 days. In reality, automated bitcoin traders shouldn’t guarantee any profits.
Remember that Most Traders Lose Money and Quit Within a Year
Whether you’re day trading stocks or you’re trading cryptocurrencies, most traders will lose money and give up within a year.
However, there are a small number of traders who can earn consistent profitability – even in markets as unpredictable and volatile as cryptocurrencies.
Touching on the Brutal Irony of Cryptocurrency Trading for Investors
Closing Crypto Trading Thoughts: The Brutal Irony Of It
Through the worlds of social media, it's almost become a rite of passage that we, at some point in our time online will be approached by one of a veritable legion of ‘Introducers'. Along with making themselves a general nuisance to those on either platform, they falsely peddle their ‘access' to a range of Bitcoin traders, along with espousing their ‘special offers' from a wide range of amateur Over the Counter (OTC) trading desks.
One thing that we'll find ultimately is that they contain far more hot air than the do contacts, and that their ‘trading desks' ultimate strategy boils down to just calling wholesale markets and peddling their bootleg marketing strategies within the bitcoin ecosystem.
It's one of the true, and very incredible ironies that comes from this industry, especially when we take into consideration some of the underlying objectives set out back in 2008 by Bitcoin – which is to provide as clean a shot between two peers, and, as a result – remove the middlemen – which getting rid of unnecessary friction laden costs within the financial world.
Fast forward ten years down the line, and who are we seeing as a persistent and acutely annoying body that has surprisingly grown in spite of this objective? Middlemen. It's irony at its worst, therefore, that we see far more bitcoin trading being conducted by middlemen than from the world of traditional finance. It's because of this that, instead of seeing trading costs decrease over time, we have seen them climb even higher, actually outstripping non-digital asset trading.
Now, before we delve further into the world and ridiculousness that has come to be known as the market structure of what we now know as the crypto trading market. It's important to illustrate the fact that I am one of those that has their flag thoroughly flying for the future of cryptocurrencies and blockchain technology. As a result, I am fully on board with seeing cryptocurrency revolutionize the marketplace that we see, often in our peripheral vision, while Blockchain revolutionizes everything else.
One of the reasons why I think that cryptocurrencies have this potential is because of my own thinking when it comes to cryptocurrency exchanges, and how it can work to really simplify the process, supplying clients from all across the world with the same asset which can be immediately paired with any currency or commodity in the world, including against stablecoins.
It is with this kind of potential in mind that we can easily see the niche that the middlemen in the market had, steadily start to erode into an antiquated tool of the past, due to them only being able to operate wherever their geography confines them to, or wherever regulations force them to adhere to and serve.
But in order to be a true believer in this, we have to identify the fact that, for being one of the very rare products that espouse a path to eradicating these middlemen, it has fast become one of the markets in which middlemen are the most prevalent.
Hypothetically, if we had one investors that was being ‘represented' by one of these ‘introducers,' and that same introducer was able to ‘win' thanks to their successful procurement of that one investor. This very same ‘winner' then goes on to contact five OTC desks in order to do what he refers to as ‘Sourcing liquidity' on behalf of their client.
Once they've made a choice on the desk, that desk goes on to contact three additional market makers, from which it can choose one to instigate the trade.
Once this market maker has been selected, it then provides its chosen client with a set price, after doing its own research on where they believe that they can trade this kind of order. The transaction is then completed with the aforementioned client, with the market maker managing to trade out their position through this exchange.
One of the major and glaring issues that come with this kind of trading model is that it's very much like a telephone game. And, as a result, is a highly inefficient, time-consuming system. This kind of system also means that there is a commission based spread taking place across four counterparties, which makes no sense and is rife with price gouging.
What makes this whole system increasingly worse is the fact that each of these entities, from ‘introducers' to the Over the Counter Desks and even Market Makers contacted through this whole exchange are fully aware of the existence of this kind of order. What this means is that the price agreed to by the investor needs to be agreed upon and subsequently acted upon by all parties, meaning that, often, by the time that these trades are set up, the market value has fluctuated negatively or positively, putting a great deal of the cost on the investor.
While we may resign ourselves to thinking that this option is the only one to make when looking to invest in bitcoin, it is really not the case. There are some good options out there for budding investors interested in trading in bitcoin and looking to do it with as much efficiency as possible.
The best kinds of examples that we can see include a range of larger scale wholesale markets and market makers that have since developed and implemented a high-quality framework of systems for trading across a range of exchanges along with other market makers.
Along with this, there is a range of agent desks along with smart order routing systems which have since been established to support new and existing investors. While the presence of these kinds of services does inspire a greater level of confidence for those interested in investing, placing ourselves into their shoes, however, it is genuinely challenging to find out which trading desk is really the best for the needs of the individual investor.
In order to really help streamline your search as an investor. Here are some of the following questions you need to ask when looking at a specific trading company.
First – Is It Trading Against My Current Order Flow As A Matter Of Principal?
Example – Does It Take On The Opposite Side Of Trades Using Its Own Capital?
This is the first question simply because it is one of the most important ones that you need to be able to answer when it comes to the trading company that you're looking at. It tells you straight away whether you're looking at a company that has a proprietary trading desk or not.
Should the answer be a yes, it's not really a good or bad kind of answer, but there are some important factors, whichever way the question is answered – One of the positives is that you are going to likely be trading with an entity that doesn't have to pay some amount in commission to an intermediary entity.
But with this in mind, you should only look to conduct trades with them if they contact you first. The reason for this is because, while no intermediary is good, if they have a proprietary trading desk and are using their own capital, continuous trading on this desk will result in you paying more than at other platforms to spread the risk.
Alternatively, or in addition to this, you can take the alternative measure of getting in contact with multiple desks in order to really source your trade. The problem with this, however, is that you would then be leaking a great deal of information into the markets. And a good number of desks will occasionally ‘pre-hedge' their digital assets ahead of going ahead with the initial trade.
While this can give you a better understanding as to what price cryptocurrencies are trading for, but this can result in the very expensive activity of asset ‘frontrunning,' which can result in the price ramping up against your better judgment.
By comparison, if the desk that you researched does not take part in committing capital to trade, that is not strictly a good/bad thing either. This really depends on the kind of process and relationships that they have with their investors. If they're operating as some kind of agent with a system of ‘natural' counterparties that commit to these kinds of trades, or operate using a more sophisticated kind of trading platform, these can provide a great deal of value to all parties in involved.
When it comes to these ‘natural' counterparties, though, it is wise to be initially suspicious of those that claim to be operating within the cryptocurrency market, as these often turn out to be false more frequently than true.
Second – Where Exactly Do These Firms Source Liquidity From? How Do They Source It, And What Does It Normally Charge For This?
Is It A Charge Which Is Reflected As A Kind Of Commission? Or Is It Reflected In The Price Of The Investment?
One of the other important questions that you need to ask as well is where exactly your Over the Counter desk is getting its liquidity from exactly. One of the immediate red flags that you should be able to see is if this desk relies almost wholly on other OTC desks in operation – do not use it.
The logic is why would you want to use an intermediary desk in order to converse and pursue trades depending on what another trader would do when that same trader can deal with you directly? With this kind of system, you are effectively paying for a whole other desk that merely serves as a trading switchboard.
Along with this being wholly inefficient, along with time and money consuming system, it also means losing a great deal of control over the various orders you would want to pursue. Unfortunately for many of us, these desks are very commonplace and are actually the majority of OTC's that are in operation out there in the cryptocurrency market.
Lastly – What Kind Of Electronic Trading Tools Does This Company Make Use Of?
And How Does It Engage With More ‘Public' Markets?
If you have an OTC desk that makes use of either a combination of single exchanges or of Over The Counter desk systems, this can make for an extremely suspect system.
It's almost impossible for any trader, no matter how accomplished they are, or what kind of setup they have, to simultaneously make an acute assessment of all markets, while . also making a precise calculation of all the optimal pieces of a given order to send across to markets over the complete life of a single order.
One answer that you should be looking out for however is whether the desk has some kind of algorithmic trading system in place, one with the highest degree of connectivity possible, so as to give you the fast and accurate data.
This one is a pretty self-explanatory statement when it comes to other asset classes out there, but doesn't hold as true for the crypto market. With the presence of such tools within the trading world in existence, it's time for investors in the crypto world to take a far closer look at these pieces of software and begin to insist that agents make use of them as well.
In summary, it is high time that we begin to demand a far better quality of service from those crypto markets out there, rather than just settle for the current sluggish and inefficient system that we're getting. These same markets need to spend more time caring about obtaining the best possible kind of execution. And, as a result, making them and their investors a far greater level of returns while simultaneously improving the market.
Happy cryptocurrency trading bitcoiners! May the winning tides and long term bets on bitcoin pay off.