Have no prior experience, but want to learn how to trade crypto markets?
Bought some bitcoins and not sure what to do with it?
You’ve come to the right place!
Here’s a complete guide to trading cryptographic currencies such as Bitcoin, Ethereum & other Altcoins, tailored to suit both beginners and advanced traders, whether you’re familiar with or new to blockchain and cryptocurrencies.
This tutorial includes topics ranging from an introduction to Bitcoin and how it relates to trading, various types of markets and trading instruments in crypto, the three types of market analysis approaches, namely technical analysis, fundamental analysis, and sentiment analysis, high probability trade setups, and finally tips on how to develop an effective trading strategy.
We hope that this article teaches you how to approach trading cryptocurrency markets such as Bitcoin and Altcoins, provides you with valuable, practical, and effective insights that are easily understood and applied, and enables you to develop a profitable trading strategy that is tailored to your personal requirements and risk appetite.
The full outline of the contents is as follows:
- What is Bitcoin?
- How to Trade Crypto: A Historical View of Bitcoin Prices
- How to Trade Crypto: Introduction to Bitcoin & Cryptocurrency Trading
- Cryptocurrency Exchanges: Spot Markets, Margin Trading, Futures, Options, Indexes
- How to Trade Crypto: Market Analysis Approach
- Fundamental Analysis: Classification
- Fundamental Analysis: Data & Models
- Fundamental Analysis: Scoring Methods & Factors
- Technical Analysis: Introduction
- Technical Analysis: Basics
- Technical Analysis: Candlestick & Chart Patterns
- Technical Analysis: Advanced Tools & Indicators
- Technical Analysis Framework: Market Environment
- Technical Analysis Framework: Market Structure & Crash Cycle
- Technical Analysis Framework: Mass Market Psychology & Emotional Cycle
- Sentiment Analysis
- Trading Strategy: Introduction
- Trading Strategy: Trade Setups
- Trading Strategy: Trading Plan (System)
- Trading Strategy: Risk Management
- Trading Strategy: Creating an Effective & Profitable Trading Plan
What is Bitcoin?
Before we get into trading, let’s go through the basics of what Bitcoin actually is, and explore the rationale behind it’s existence.
Peter Van Valkenburgh (https://twitter.com/valkenburgh) explains it succinctly in this 2 minute video:
Unlike in the early days, there are now plenty of articles and resources available on the Internet to quench your curiosity. A quick Google search about “What is Bitcoin?” will yield over 393,000,000 results. Here are some readings you can look to:
- Wikipedia: https://en.wikipedia.org/wiki/Bitcoin
- P2P Foundation: https://wiki.p2pfoundation.net/Bitcoin
- Investopedia: https://www.investopedia.com/terms/b/bitcoin.asp
- Bitcoin.org: https://bitcoin.org/
If you haven’t, I highly recommend reading the Satoshi whitepaper, which can be found here: https://bitcoin.org/bitcoin.pdf.
This is the first post where the magic began: https://p2pfoundation.ning.com/forum/topics/bitcoin-open-source.
In Satoshi’s own words:
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible.
It’s time we had the same thing for money. With e-currency based on cryptographic proof, without the need to trust a third party middleman, money can be secure and transactions effortless.
Bitcoin’s solution is to use a peer-to-peer network to check for double-spending. In a nutshell, the network works like a distributed timestamp server, stamping the first transaction to spend a coin. It takes advantage of the nature of information being easy to spread but hard to stifle.
The result is a distributed system with no single point of failure. Users hold the crypto keys to their own money and transact directly with each other, with the help of the P2P network to check for double-spending.”
Bitcoin is often referred to as Digital Gold, making it not a far-fetched proposition to compare it to physical gold. These two markets tend to work in similar fashion, from the point of view that Bitcoin may be seen as an alternative “safe haven” asset or commodity in times of economic crises, much like gold. This was demonstrated in April 2013 when Bitcoin rose to over $200 over a short period of time during the Cyprus financial crisis, and also in the more recent tensions between Iran and USA during which we saw Bitcoin rise from $7,000 to $10,000 in early 2020 alongside gold. In fact, proponents of Bitcoin would argue that Bitcoin is a better form of money than compared to physical Gold, especially in the 21st century, in terms of fungibility, transportability, and divisibility.
As we head into a digital era, it makes sense that we need some form of digital money.
But will Bitcoin be the go-to form of money as we inevitably head into a cashless society? Will Bitcoin be here to stay? That’s for you to decide.
Regardless of whether or not you believe in Bitcoin’s future, there’s a way to speculate and earn a profit whether price goes up or down.
How to Trade Crypto: A Historical View of Bitcoin Prices
“Just like any world-changing market or technology, Bitcoin has gone through several crash and boom cycles in its history. It’s the normal process of “price discovery”, or finding the fair market value of a new asset.”
– Chris Dunn
Here’s a little history lesson about Bitcoin’s price since inception. Bitcoin has been through several price bubbles, characterized by exuberant buying into a parabolic price structure, and eventually correcting back down quickly and crashing over 80% from the peak over a short period of time.
Over the last 12 years since Bitcoin was created, it has gone through 3 notable bubbles, first when it climbed from under $0.01 in early 2010 to $32 in July 2011 before the bubble burst, sending price on a downtrend for 5 months and hit a low of $2 in November 2011. Our second bubble came in 2013 with the first leg coinciding with the Cyprus bailout incident, where we saw prices break above the previous high of $32 to about $260 in April 2013, followed by a second leg that peaked at $1,200 in November 2013, before crashing all the way down to around $160 in January 2015.
Finally, the most recent bubble saw Bitcoin peak at $20,000 in December 2017, before dropping 84% over the next 12 months and bottoming out at $3,150. This low came in December 2018, and prices consolidated within the $3,000-4,000 range for 3 months, before rallying to $14,000 in the following 3 months. We then saw it fall back down to $6,400 over 6 months, consolidating between the $6,000-8,000 range for 2 months before rallying to $10,000 today.
Will this time be different?
Bitcoin turns 12 years old in 2020. Based on the Bitcoin algorithm that determines its fixed money supply and schedule of distribution, the amount of coins that are added into the network halves approximately every 4 years, or more accurately, every 210,000 blocks with each block estimated to take 10 minutes. The next supply halving is estimated to happen in May 2020 (source: http://bitcoinclock.com/).
With the halving just 2 months away, and if history repeats itself, we may be in for an exciting ride for the rest of 2020 and 2021. Here’s a visual of how the Bitcoin price has fared around the time of the last 2 halvings compared with the upcoming one.
By most measures, we are currently in a Bull market for cryptocurrencies as a whole. Will there be a 4th Bitcoin Bubble, bringing prices back above $20,000 and beyond? And could it happen in 2020-2021? How high will we go this time? In my opinion, we’re currently at the foot of a major bull market waiting to erupt, so take full advantage of this opportunity as such opportunities only come once-in-a-lifetime.
How’s the next bubble going to play out? Nobody really knows. But here’s my guess anyway.
How to Trade Crypto: Introduction to Bitcoin & Cryptocurrency Trading
Buying Bitcoin opens up the doors to trading – Bitcoin itself is a tradable asset against the USD and other currencies. As a result, being involved in Bitcoin naturally introduces one to trading markets, because from the offset, the price volatility creates the need for users to make a bitcoin purchase at a favourable target price. Therefore it is crucial that you learn the basics of trading and arm yourself with the necessary skills to maintain or even grow the value of your investments.
What is Trading? From Chris Dunn’s book, Bitcoin: How To Trade It For Serious Profit, I compiled what I think is the most important and applicable concepts that you ought to know for trading Bitcoin and cryptocurrencies, which can also be applied to trading any other market.
“Trading is about making emotionless decisions to buy or sell an asset based on probabilities. Just like a casino knows the odds are in their favour, professional traders use strategy and risk management to tip the scales in their favour.
Trading is a zero sum game. Every trade has two investors taking opposite positions on the price — one on buys, the other sells. Because of this, someone is bound to lose.
When two people agree on a price, a trade is executed and the market valuation is set. Usually buyers set orders lower than people who want to sell. This creates 2 sides of an order book between buyers and sellers. When there are more buyers than sellers the prices goes up, and when there’s more sellers than buyers the price goes down.
The constant exchange of prices forces the market into periods of equilibrium followed by bursts of volatility.
Many people think the only way you can make money trading Bitcoin is to buy low and sell high. But that’s only half the equation! You can long, or you can short. When you long, you’re betting that the future price of Bitcoin will be higher than your original position. So you’re BUYING Bitcoin. When you short, you’re betting that the future price will be lower than your position. So you’re SELLING first with the goal of buying back at a lower price in the future.
Find the trend early. At any given time, the market is only doing one of three things: trending, channeling, or breaking out. Markets don’t go straight up and down. A trending market is when a market is stair-stepping up or down. The easiest type of trade for most people to take is a “trend trade”.
Reading the Markets. Price charts are very simply the visual representation of the actions of all market participants. In other words, there’s no magic behind the bars moving up or down. Rather, the driving force behind price moving up and down is the buying and selling actions from all traders. Sometimes, market prices show signs of a general trend. A bull market happens when prices progressively increase, and a bear market shows a steady decline in value. The movement in price is generally referred to as price action. Looking at the swings in price and interpreting it for patterns is called technical analysis.
New traders should learn the ropes first before trying to grow their accounts with leverage. Also, you shouldn’t trade with money you can’t afford to lose.”
Cryptocurrency Exchanges: Spot Markets, Margin Trading, Futures, Options, Indexes
There are over 1000 exchanges where you can buy and sell cryptocurrencies today. Here’s a list of the top exchanges in the world, with an overview comparing the types of products/markets they provide:
|Exchange||Spot Markets||Margin Trading||Futures / Derivatives||Options||Indexes|
* Cryptocurrency trading is a risky business. Listing these exchanges is not an endorsement, and any deposits to these exchanges is done at your own risk. Not your keys, not your coins!
You may not have heard of the last 3 exchanges, but I’ve added them to the list as they’re relatively popular “micro-cap” exchanges, meaning they list smaller/newer coins that you wouldn’t be able to find on the big exchanges.
Although Exchanges are the most popular platforms for buying & selling cryptocurrencies, there are also several other outlets for doing so, such as:
- P2P marketplaces: localbitcoins.com, hodlhodl.com
- Instant exchanges: Shapeshift, Changelly
- Exchange protocols: KyberSwap, Uniswap
- Decentralized exchanges: DeversiFi, Bisq
- Wallets: Crypto.com, Edge
- OTC (Over The Counter)
How to Trade Crypto: Market Analysis Approach
Now that we’ve gotten the introduction and history lesson out of the way, let’s jump back into learning about how to trade crypto. Firstly, how do we approach trading the cryptocurrency markets?
There are generally 3 types of market analysis approaches, namely:
- Fundamental Analysis
- Technical Analysis
- Sentiment Analysis
Some traders prefer to use just one approach, while others use a combination of two or all three analysis approaches. Find the one that suits you most.
In the following sections, we’ll go through each of these 3 approaches and explain how they apply to trading cryptocurrencies.
Fundamental Analysis: Classification
What are the fundamentals of cryptocurrencies, and what are the factors that affect its price, popularity, and success?
To date, there are more than 5000 different cryptocurrencies. In this section, we cover a few methods of classifying them.
While there are countless methods available, there is no ‘best’ way to classify cryptocurrencies. Note that this list is non-exhaustive and may not even be accurate, and you should DYOR to find a method that suits you best.
These are the more popular consensus mechanisms used across most cryptocurrencies:
- Proof-of-Work (POW) (various algorithms)
- Proof-of-Stake (POS)
- POW/POS Hybrid
- Delegated Proof-of-Stake (DPOS)
- Byzantine Fault Tolerance (BFT) – Delegated (dBFT) or Practical (pBFT)
- Directed Acyclic Graph (DAG)
- Zero-knowledge Proofs (ZKP)
There are also various other innovations by different blockchains e.g. Proof-of-Asset (DigixDAO), Proof-of-Transfer POX (Blockstack), Gossip Protocol (Hedera Hashgraph).
Here are some resources for you to read up on if you’re interested to understand the technical details of these mechanisms:
- Proof-of-Work Wiki
- Vitalik Buterin: What PoS is and why it matters
- Delegated Proof-of-Stake
- A DAG-Based Cryptocurrency Framework
- Understanding Blockchain Fundamentals, Part 1: Byzantine Fault Tolerance
- Zero-Knowledge Proofs, Explained
- 9 Types of Consensus Mechanisms That You Didn’t Know About
- Security / Asset
Digging deeper into this, we can further segment types by using the Web3 Tech Stack as a framework.
|Types of Crypto Assets||Function||Examples|
|Currencies||Currency||Bitcoin, Litecoin, Zcash|
|Layer 1 Platforms / Smart Contracts||Ledger||Ethereum, EOS, Polkadot, Tron, Algorand, Tezos, Blockstack, Cosmos|
|Layer 2 Solutions / Middleware||Scalability||RSK, Celer Network, Matic Network, ChainLink|
|Layer 3 Protocols / Infrastructure||Interoperability||Kyber Network, 0x, Augur|
|Application Layer||Applications||Steem, Nectar|
- Interoperability and Connectivity: Unlocking Smart Contracts 3.0
- Layer 3 Is for Interoperability
- The Need For Layer 3 on the Internet of Value
- Five Layer-1 Blockchain Options for DeFi to Watch in 2020
- Blockchain in 2019 will be all about the middle-layer protocol
- Chainlink — The Missing Piece To The God Protocol
- Three “Second Layer” Blockchain Solutions to Keep an Eye On
- Layer 3: Creating the Blockchain Market Infrastructure at Light Speed using Defi
This framework proposed by Untitled INC classifies tokens in 5 dimensions — Purpose, Utility, Technical Layer, Underlying Value, and Legal Status — and cover 4 archetypes — Cryptocurrency, Tokenized Asset, Tokenized Platform, and Token-as-a-share.
It is notable that two dimensions — Issuance Approach and Supply Structure — were excluded from their framework.
An example of which coins fall under each dimension is shown in the image below.
Blockchain Ecosystem by Function
Finally, Josh Nussbaum of Compound, mapped out the Blockchain Project Ecosystem (pictured below) and identified several broad categories or functions that can be used to classify cryptocurrency projects. Read his detailed post on Medium here.
Fundamental Analysis: Data & Models
The fundamentals of cryptocurrencies are quite different from how you would analyze traditional stocks and asset classes. However, there are also some similarities to things like P/E ratios, while there are also completely new data points to consider such as on-chain data.
Firstly, we have raw and processed data that stem from the mining and ledger activities of Bitcoin that can be considered. These include things like:
- Block Details – such as block size and transactions per block
- Mining Information – such as hashrate and difficulty
- Network Activity – such as number of transactions per day and transaction value
- Wallet Activity – such as number of wallets/users
A good resource for tracking such activity is this Blockchain Charts & Graphs page.
Secondly, we also have currency statistics, such as circulating supply, market capitalization, and trading volume, which can be found on websites such as Coinmarketcap.
Thirdly, there has been a lot of progress in data analysis models that have popped up in recent years as more people apply those used in legacy markets to cryptocurrencies, combining both the raw/processed data with currency statistics. Some of the notable ones include:
- Stock-to-Flow (S2F) Model
- Network Value to Transactions (NVT) Ratio, also covered here and here
- Market-Value-to-Realized-Value (MVRV) Ratio, also covered here and here
- Hash Price
- Difficulty Ribbon
In the same way you would conduct fundamental analysis on Bitcoin, you can do the same for other cryptocurrencies by using data such as the number of unique addresses, transaction value, hashrate and mining cost. Alternatively you can also use valuation ratios such as network value to transactions (NVT) and market value by realized value (MVRV). Read this Crypto Fundamental Analysis article for more details.
On-chain data is also useful for the purpose of fundamental analysis, such as by tracking frequency of transactions to determine network activity, or looking out for large amounts of coins moving in and out of exchanges.
While developer activity, such as the number of commits on a project Github repository can paint a useful picture on how active and how much progress their developers are making.
Fundamental Analysis: Scoring Methods & Factors
You can also use a rating scale to score cryptocurrencies based on several categories. In doing so, there are several critical factors to consider, including but not limited to:
- Technical Specifications, including Issuance Approach & Supply Structure
- Liquidity (and whales)
- Branding & Marketing
- Accounting & Legal
- Community, Management & Team
- Supply & Demand
- Industry/ Institutional Banking
- X Factor
At this point, you might be wondering, so how are all these factors related to trading cryptocurrencies? As a guideline, you should stick to only trading altcoins that have “strong” fundamentals, especially if you’re new to the game. By scoring your target altcoins on the factors above on a score of 1 to 10 and adding them up, you get an overview of how your target coin fares fundamentally against other coins.
Several token review websites such as TokenInsight and ProofOfReview provide detailed qualitative reports on selected cryptocurrencies whereby they rate coins based on several factors, not unlike the factors mentioned above, that you can reference for your fundamental analysis. Coingecko also has a more macro-level quantitative scoring method where they consider well over 50 factors.
Technical Analysis: Introduction
Fundamental analysis provides you with a framework for understanding how a cryptocurrency fares against other alternatives, but will not be able to tell you if it is a good buy or not, or more importantly when to buy/sell them. Prices are constantly moving up or down. Make no mistake; no matter how great the fundamentals of a cryptocurrency is, you will still need to fall back on charts and technical analysis to determine your trade entries and exits.
As a general rule of thumb, news is just a distraction and usually already priced into the chart. However, this is not entirely true in cryptocurrency trading because most cryptocurrency markets are inefficient and information travels slower, compared to legacy markets.
Before going further, I’d like to ask you to drop any preconceived notions you have about trading. Forget all that you currently know about trading, and look at it from a fresh perspective.
Only two things can happen in a trade, either the price goes up, or it goes down. Simple as that, and everything else is just a matter of perspective. You will need to first decondition yourself from any prior understanding of trading, and undo any bad habits you have accumulated. The following chapters, especially about the technical analysis framework that I’m about to teach you is designed to decondition your mind to see price action and charts for what they simply are; a representation of human behaviour, while price is simply put; the perceived value of a stock by its market participants. Keep these very important points in mind as you read the remainder of the post.
With the right state of mind to maintain your discipline, a keen interest to learn the ropes, and the willingness to work hard and put in 100% effort, anyone, even you, will be able to become a profitable trader after learning and applying the concepts shared in this post.
If you’re new to cryptocurrency and/or trading, I highly recommend first sticking to only Bitcoin until you get more familiar with trading.
Altcoins are generally a high risk high reward market, more so than Bitcoin. Sure, there may be more to be made in Altcoins, but there’s also a higher chance the losses will be significantly bigger than if you only trade Bitcoin.
To demonstrate this point, let’s have a look at the recent run-up from the December 2019 bottom to the current high made in mid February 2020, comparing Bitcoin with Ethereum.
During this period, BTC went up 56% while ETH went up a whopping 133%. High risk, high reward.
Similarly, after topping out at over $10,000, BTC retraced 9%, while ETH retraced over 14% over the same period. Higher risk, higher losses!
That said, if you’re relatively new to this market but still wish to trade altcoins, here are some general guidelines:
- Trade altcoin markets that have significant volume. With altcoins, trading volume is a must. As a rule of thumb, don’t trade an altcoin market that has a 24 hour volume under $10M, or up to $100M if you’re more risk averse. A market with little trading volume is easily manipulated by insiders, pumpers, and bigger traders. Stick to the liquid coins and you’ll have an extra layer of protection. Keep in mind that the less liquidity & volume a market has, the higher the risk associated with it.
- Trade altcoins that have a relatively big and active community.
- Trade altcoins that offer innovation over existing coins.
The altcoin market is one of the most inefficient markets out there, so there are many profit opportunities that you can take advantage of, but this also requires a large amount of time and effort to research and spot such opportunities.
When asked about how to know which coin to buy, when to sell it, or the classic “how to become a better trader”, this is my usual reply: It’s a combination of understanding the market crash cycle structure, learning about the different phases of the emotional cycle, analyzing price action, understanding price structures that represent various phases of a market cycle, such as accumulation, markup, distribution, and markdown, and finally technical analysis to determine entries and exits.
To keep things simple when learning technical analysis, you should start by looking at 2 things only, price action (candlesticks or others), and volume. And of course, context is always important, e.g. what coin, what is the situation of the development and new projects, the macro environment etc. I will discuss these technical analysis frameworks and tools in this and the following chapters.
Instead of simply memorizing things like candlestick and chart patterns and using indicators blindly, try to first understand the underlying dynamics behind price movement, and what affects price action in the first place. The key to understanding this is to consider the market from the point of view that price is driven by market participants and nothing else.
Along these lines, I recommend reading Price Action Breakdown by Laurentiu Damir as an introduction to not only price action and support and resistance, but more importantly for his insight into what actually creates these market structures and how supply, demand and human behaviour drives prices. It’s one of the most underrated trading books for beginners that I’ve read so far, a must read if you’re new to trading!
I also highly recommend checking out @CryptoCred’s Technical Analysis lessons, covering subjects from candlestick charts, to risk management, to trendlines, to various indicators such as Fibonacci, RSI, and simple Support/Resistance levels. You can find all his resources here.
Technical Analysis: Basics
While understanding market structure, crash cycles, and mass market psychology helps greatly on a macro-level by providing an overarching framework with which to approach trading (these will be covered in the following chapters), the technical analysis basics such as Support & Resistance, are critical on a micro-level, in the planning and execution phases of trading, for example to determine entry and exit prices.
So let’s start with the most basic concepts.
How do we determine a trend?
An uptrend is characterized by higher highs and higher lows, while a downtrend is characterized by lower highs and lower lows. Simple enough.
Applying this to the recent Bitcoin chart would look like this:
Candlestick and Bar Charts
A candlestick chart (also called Japanese candlestick chart) is a simple representation of price vs time, and is the most commonly used candle type. It shows 4 important pieces of information for that candle: open and close in the thick body; high and low in the “candle wick”. One candle represents one time-period for the chosen timeframe, e.g. if you’re looking at a “15 minute” chart, one candle represents 15 minutes of price action.
Candlestick charts show the same information as bar charts, and choosing between them is only a matter of preference if you prefer to see the thickness of the real bodies, or the clean look of bar charts.
Heiken Ashi Charts
Heiken Ashi (HA) charts differ from candlestick or bar charts, in that HA charts the average price moves, creating a smoother appearance. Because the HA price bars are averaged, they don’t show the exact open and close prices for a particular time period. Because HA charts take into account the open, high, low, and close of previous candles, they can be used to spot market trends and predict future prices. There is a tendency with HA for the candles to stay red during a downtrend and green during an uptrend, whereas normal candlesticks alternate color even if the price is moving dominantly in one direction. Hence HA charts provide more clear highlighting and confirmation of current trends.
Price charts always come with price on the Y-axis, and time on the X-axis. Each candle represents the time interval that is chosen, which can range from 1-minute to 4-hours to 1-day to 1-week or even longer intervals.
The lower the time interval chosen, the higher the resolution of price. In the image below, you can see that on the 4-hour chart, price may look like it’s going straight up, but on a lower interval you will see it actually alternates between up and down.
There is no best timeframe to use in trading, as it is largely dependent on an individual’s trading style and personality. However, in creating an effective trading strategy, it is common practice and highly recommended to use multiple timeframes in your analysis, which we will discuss in a later chapter.
Support & Resistance
Support & Resistance lines are used by traders to refer to price levels on charts that tend to act as barriers, preventing the price of an asset from getting pushed in a certain direction. Support is a price level where a downtrend can be expected to pause due to a concentration of demand. Resistance zones arise due to a sell-off when prices increase.
Although support & resistance lines are one of the most basic tools in trading, it is imperative that you learn it well. At first, the explanation and idea behind identifying these levels seem easy, but as you’ll find out, support and resistance can come in various forms, and the concept is more difficult to master than it first appears. Note that they are not just at a single price point, but generally cover a zone or area.
Once an area or zone of support or resistance has been identified, it provides valuable potential trade entry or exit points. This is because, as a price reaches a point of support or resistance, it will do one of two things — bounce back away from the support or resistance level, or violate the price level and continue in its direction — until it hits the next support or resistance level.
Notice how old major support and resistance areas will still be relevant when price reaches those levels again after some time. Also, when a resistance (support) level gets broken through, it will often act as a new support (resistance).
As a general rule of thumb, support and resistance zones become more significant if the levels have been tested regularly over an extended period of time. However, it is also more likely to break if tested multiple times.
Volume is another important aspect of a chart and price action. It represents market interest in a particular stock, and higher volume relative to other trading periods usually represents higher volatility. Volume and breakouts also come hand in hand, so it is crucial you understand both concepts. To learn more, visit Investopedia’s page about Using Volume To Improve Your Trading, and Tradingsim’s 4 Simple Volume Trading Strategies, and learn about how to trade breakouts with Babypip’s short tutorial.
Trendlines are easily recognizable lines that traders draw on charts to connect a series of prices (highs or lows) together. The resulting line is then used to give the trader a good idea of the direction in which a coin’s price might move.
Understanding the direction of an underlying trend is one of the most basic ways to increase the probability of making a successful trade because it ensures that the general market forces are working in your favor.
Downward sloping trendlines suggest that there is an excess amount of supply for the coin, a sign that market participants have a higher willingness to sell an asset than to buy it. Conversely, an uptrend is a signal that the demand for the asset is greater than the supply, and is used to suggest that the price is likely to continue heading upward. When a downward (upward) sloping trendline is present, you should refrain from holding a long (short) position; a gain (drop) on a move higher (lower) is unlikely, when the overall longer-term trend is heading downward (upward).
Trendlines are essentially sloping support and resistance lines (as opposed to horizontal).
Read more about how to trade trendlines here.
Technical Analysis: Candlestick & Chart Patterns
Candlestick patterns can give you an indication of how buyers and sellers behaved during the period of the candle. However, keep in mind that you should be concentrating more on the information that all of these candlesticks can give you, instead of just blindly buying/selling whenever you see one.
Candlestick patterns are generally more reliable when used on higher timeframes, such as on 1-day candles. Also, candlesticks by themselves do not provide a price target. Instead, traders will need to use other methods, such as indicators or trend analysis, for selecting a price target or determining when to get out of a profitable trade or cut your losses.
There are too many different candlestick patterns to list here, so we will only highlight a few important ones and ones that have a relatively high success rate.
Single Candlestick Patterns
- Spinning Tops & Dojis
A candle with a spinning top and doji by itself is neutral. It shows indecision between the bulls and bears and it is telling you that the market can go either way. They should be interpreted in relation to the candles preceding and immediately after it, for example in the morning star and evening star pattern, which will be discussed later.
After a strong price advance or decline, spinning tops and dojis can signal a potential price reversal, if the candle that follows confirms.
- Hammer & Shooting Star
Whenever you see a hammer it shows that there is enormous buying power coming in at this level. As the session started it was a complete bear market, price easily made a new low, suddenly bulls stepped in and started to buy, pushing price all the way up. Thereby it is a strong reversal signal.
The same goes for a shooting star candle, only this time in an uptrend. It was a bull market, price made a new high, bears started to sell and pushed the price lower.
By definition, the hammer has a higher close than open price, while a shooting star has a lower close than open price. However, this is not as important as the long wick in the direction of the trend, showing that buyers/sellers stepped in attempting to stop the trend from going further.
- Inverted Hammer & Hanging Man
An inverted hammer is essentially the same as a shooting star, except that it appears in a downtrend. Similarly, a hanging man candle has the same structure as a hammer, except that it appears in an uptrend.
Although the inverted hammer is generally depicted as a downtrend reversal candle, while the hanging man as an uptrend reversal candle, I wouldn’t recommend trading these candlesticks as they can also interpreted as a continuation signal rather than reversal. For example, in a downtrend, an inverted hammer can also be interpreted as showing that buyers tried to step in, but were quickly pushed back down by the sellers back to near the open price.
Dual Candlestick Patterns
- Bullish/Bearish Engulfing
The bullish engulfing pattern is a two-candle reversal pattern. It is characterized by a red (down) candle followed by a larger green (up) candle that eclipses or “engulfs” the smaller first candle. It indicates that buyers have overtaken the sellers and are pushing the price up more aggressively than the sellers were able to push it down, indicating that buyers have gained control and that there could be a strong up move after a recent downtrend or a period of consolidation..
The exact opposite is true for a bearish engulfing candlestick pattern.
Engulfing patterns are most useful following a clear trending market as the pattern clearly shows the shift in momentum to the opposite side. If the price action is choppy, even if the price is rising/falling overall, the significance of the engulfing pattern is diminished since it is a fairly common signal.
Since engulfing patterns are typically high-volume events, finding confluence with volume and other indicators can often lead to favorable trade entries.
- Tweezer Bottoms/Tops
Tweezer patterns are reversal patterns and occur when two or more candlesticks touch the same bottom (top) for a tweezer bottom (top) pattern. Tweezer bottoms (tops) are considered to be short-term bullish (bearish) reversal patterns.
You can recognize a tweezer bottom when the first candle shows rejection of lower prices, while the second candle re-tests the low of the previous candle and closes higher.
This indicates that sellers pushed price lower and were met with some buying pressure, and on the second candle, the sellers again tried to push price lower but failed, and was finally overwhelmed by strong buying pressure. This can be interpreted as the market having difficulty trading lower after two attempts and is likely to head higher.
The exact opposite is true for a tweezer top candlestick pattern.
- Inside Bar
An inside bar is a candle that’s “covered” by the prior candle. It indicates that there’s reduced volatility in the markets, and is coiling up for a big move in either direction. It is a breakout pattern, but it can be both a continuation or reversal. It is generally more reliable in trending markets and you should avoid using this signal in choppy sideways markets.
You can also have multiple inside bars, which is more reliable than just 2 candlesticks as it shows a longer period of consolidation. When you see multiple inside bars together, it is a strong sign that the market is about to make a big move soon.
Triple Candlestick Patterns
- Morning Star & Evening Star
These are the characteristics of an evening star pattern:
- The first candlestick is a bullish candle, which is part of a recent uptrend.
- The second candle, called the star, has a small body, indicating that there could be some indecision in the market.
- The third candlestick acts as a confirmation that a reversal is in place, as the candle closes beyond the midpoint of the first candle.
The star is the first indication of weakness as it indicates that the buyers were unable to push the price up to close much higher than the close of the previous period. This weakness is confirmed by the candlestick that follows the star. This candlestick must be a bearish candlestick that closes well into the body of the first candlestick.
The reliability of the evening star is enhanced by the extent to which the body of the third candlestick penetrates the body of the first candlestick, and if the third candlestick has very little or no lower wick. In addition, volume should also be considered as the pattern is more reliable if the volume on the first candlestick is lower and the volume on the third candlestick is higher.
The exact opposite is true for a morning star pattern.
- Three White Soldiers & Three Black Crows
The three white soldiers pattern is formed when three long bullish candles follow a downtrend, signaling a reversal has occurred.
For the pattern to be considered valid, the second candlestick should be bigger than the previous candle’s body. Also, the second candlestick should close near its high, leaving a small or non-existent upper wick. To complete the pattern, the last candlestick should be at least the same size as the second candle and have a small or no wick.
The three white soldiers candlestick pattern suggests a strong change in market sentiment. When a candle is closing with small or no wicks, it suggests that the bulls have managed to keep the price at the top of the range for the period. Basically, the bulls take over the rally throughout the period and close near the high of the period for three consecutive periods. In addition, the pattern may be preceded by other candlestick patterns suggestive of a reversal, such as a doji.
The exact opposite is true for a three black crows pattern.
- Three Inside Up/Down
This is a confirmed Harami pattern. The first two candlesticks are exactly the same as the Harami, and the third candle is a break and close outside of the inside bar pattern and represents confirmation.
- Bullish/Bearish Three-Line Strike
A three line strike pattern is similar to an engulfing pattern, except that the last candle engulfs not just 1 but all 3 preceding candles.
The bearish three-line strike is made up of three strong bearish candles that close progressively lower followed by a final “strike” candle. The strike candle is bullish and opens at or lower than the third candle but closes at least above the open of the first candle.
The bearish three-line strike is commonly said to be a bearish continuation pattern, but testing shows that it acts as a bullish reversal 84% of the time.
A bearish three-line strike pattern preceded by a bullish candlestick is called a Rising Three Methods pattern, which is a bullish continuation pattern.
The exact opposite is true for a bullish three-line strike pattern.
Chart patterns are the bread and butter of any technical trader, and you should train your eyes and mind to spot these patterns, understand what they mean, and know how to act accordingly. Instead of thinking about patterns as a way of determining whether price goes up or down, think of chart patterns as regions of consolidation, whereby breaking outside of the pattern can lead to a sustained breakout with volume. Always let price action tell you what to do, rather than predict where the price is going ahead of time. If your position goes underwater, make sure to follow your trading rules and cut your losses when they go beyond your threshold, as laid out by the parameters of your trading rules and strategy.
Note that there is no certainty that chart patterns will always play out, but merely represent a relatively high probability of success. As with candlestick patterns, chart patterns should be used in confluence with other methods, such as indicators or trend analysis, for better results.
There are too many chart patterns to list them all here, so we will just be picking some that have a relatively high success rate. We will discuss continuation patterns and reversal patterns, and briefly introduce harmonic chart patterns.
Continuation Chart Patterns
- Ascending/Descending/Symmetrical Triangle
The ascending triangle is a trend continuation pattern, where you see higher lows into resistance. When you see the market making higher lows into resistance, it tells you that sellers are getting exhausted and the buyers are in control.
The exact opposite is true for the descending triangle pattern.
A symmetrical triangle (also called a pennant) is also a continuation pattern, though it has a lower probability of success, and oftentimes evolves into a different pattern such as a channel or rectangle. This is because the market making both lower highs as well as higher lows indicates a sign of indecision, and that neither buyers or sellers were able to take control.
- Bull/Bear Flag
The bull flag pattern is a continuation pattern formed in an uptrend, representing a period of consolidation after a strong momentum markup.
The consolidation consists of smaller range candles compared to the earlier trending move, representing a “weak” pullback, and typically the tighter the range the stronger the breakout.
The exact opposite is true for the bear flag pattern.
- Cup & Handle
The cup & handle is a bullish continuation pattern that marks a consolidation period followed by a breakout.
As the name implies, there are two parts to the pattern: the cup which is formed after an advance and looks like a rounding bottom, and the handle which is formed when a tight trading range develops near the peak of the cup. The smaller the retracement in the handle, the more bullish the breakout is likely to be.
Note that cups with very deep bottoms or “V” shapes show sharp reversals and should be avoided.
Reversal Chart Patterns
- Head & Shoulders
The regular head & shoulders pattern is defined by two swing highs (the shoulders) with a higher high (the head) between them. It is characterized by the highest volume on the left shoulder followed by the head, and finally with rising volume on the breakout. The two shoulders do not always have to be at the same price, but the closer they are to the same area the stronger the pattern generally becomes. Note that the neckline can also be a sloping trendline.
The point of entry is typically at the break of the neckline after the right shoulder, with a target of the same distance as from the peak of the head to the neckline.
The upside-down version is called the inverse head & shoulders pattern.
- Double/Triple Top/Bottom
The double (triple) top pattern is defined by two (three) nearly equal highs with some space between the touches. Generally, the wider the gap between touches the more powerful the pattern becomes.
The pattern is complete when price breaks below the swing low point created after the first high in a double (triple) top, and is considered a success when price covers the same distance following the breakout as the distance from the double (triple) high to the recent swing low point.
The upside-down version is called the double (triple) bottom pattern.
- Adam & Eve Pattern
The Adam & Eve pattern is a trend reversal pattern characterized by a sharp and deep first bottom on high volume (Adam). The market bounces and develops a more gentle correction, printing a second bottom (Eve) on lower volatility which is more rounded and wider.
- Diamond Top/Bottom
The diamond pattern is a trend reversal pattern. Price action starts out as a broadening pattern, where the peaks are higher and the troughs are lower. It then changes to where the peaks are lower and troughs are higher. Connecting the peaks and troughs will form a diamond.
An important feature of a diamond top (bottom) pattern is that the volume corresponds with the size of the trading range, increasing as the price rises (declines) and the range peaking near the high (low) price point. The downward (upward) trend that follows this is an indication of reduced enthusiasm amongst traders about the market. This narrowing range in the second half of a diamond pattern can be represented by a descending resistance level and ascending support, which is a critical breakout point. Traders should look out for this line to be crossed before accepting that the trend is going to change.
As with any chart/candlestick pattern, the risk of false breaks can be reduced by confirming the reversal trend by using other indicators, such as a stochastic momentum indicator pictured below (point X).
- Swing Failure Pattern (Stop Runs)
The swing failure pattern (SFP) is a very common pattern in Bitcoin and cryptocurrency markets, and one that gives a very high reward/risk ratio trade. It is caused by big traders looking for large liquidity to fill their orders by hunting stop-losses and baiting breakout traders.
An example is shown in the image below which formed the December 2019 bottom on BTC/USD, including an explanation of how it is formed as well as how to trade it.
Harmonic Chart Patterns
Harmonic price patterns are those that take geometric price patterns to the next level by utilizing Fibonacci numbers to define precise turning points. At the root of the methodology is the golden ratio, or some derivative of it (0.618 or 1.618). The golden ratio is found in almost all natural and environmental structures and events; it is also found in man-made structures. Since the pattern repeats throughout nature and within society, the ratio is also seen in the financial markets, which are affected by the environments and societies in which they trade.
Harmonic patterns are much more advanced than simple candlestick or chart patterns above, and we will not go through them in detail here. For more information, read about harmonic patterns on Investopedia and Babypips.
For an exhaustive list of candlestick and chart patterns, check out the Encyclopedia of Chart Patterns by Thomas Bulkowski, and The Pattern Site.
Technical Analysis: Indicators & Advanced Tools
In general, there are 4 types of indicators:
- Trend indicators – measure the direction and strength of a trend by comparing prices to an established baseline
- Momentum indicators – identify the speed of price movement by comparing the current closing price to previous closes
- Volatility indicators – measure the rate of price movement, regardless of direction
- Volume indicators – measure the strength of a trend based on the volume traded
In the table below, you will find examples of indicators in each of these 4 categories.
|Type||Indicator||Leading or Lagging|
|Trend||Moving Average (MA)||Lagging|
|Moving Average Convergence Divergence (MACD)||Lagging|
|Momentum||Relative Strength Index (RSI)||Leading|
|Volume||On-Balance Volume (OBV)||Leading|
|Volume Rate of Change||Lagging|
We will not go through how each of these indicators are calculated and what they do, as there are plenty of resources you can find online and in books about them. Have added hyperlinks to Investopedia for each of them for your easy reference.
Instead, we will discuss how to use some of these indicators at the end of this post, in the trading setups section.
Next, we’ll highlight 4 useful tools you can use to add to your technical analysis tool belt.
Fibonacci Retracement & Extension
Fibonacci ratios are common in everyday life, seen in galaxy formations, architecture, as well as how some plants grow. Therefore, some traders believe these common ratios may also have significance in the financial markets, since prices are driven by market participants.
The fibonacci retracement tool can be used to establish profit targets or estimate how far a price may retrace to. They are drawn from a range low to high, and mark out price levels of possible importance at the 38.2%, 50%, and 62.8% levels.
While fibonacci retracements are useful for determining levels within a range and are typically used to make a case for entering a trade, extensions are useful in determining price targets when price breaks out of the range and typically used in determining where to take profits.
Retracement and extension levels signal possible areas of importance, but should not be relied on exclusively. They are much more reliable when found to be in confluence with other levels such as strong resistance and support levels.
Watch these videos to learn more:
Divergences occur when price and momentum indicators such as RSI do not agree with each other in trending markets. An example of this is when prices make a higher high in an uptrend but the momentum indicator does not, which we term a regular bearish divergence.
Divergences happen because prices continue to move in the direction in the trend, but its momentum is slowing down, i.e. prices are changing at a slower rate than before. Hence, when a divergence is spotted, there is a higher probability of a price retracement.
The Chuvashov’s Fork is made up of two trendlines in the direction of the trend, where the first trendline is steeper than the second.
Price breaking and closing below an upward fork provides a sell signal in an uptrend, and breaking and closing above a downward fork provides a buy signal in a downtrend. It indicates that the steep advance (first trendline) is losing strength (second trendline) as it runs into a strong supply/demand zone, and price is starting to turn around (breakout).
The C-fork is a highly effective pattern despite its simple appearance, often giving a relatively early signal for entry.
Wyckoff focuses exclusively on price action. Earnings and other fundamental information were simply too esoteric and imprecise to be used effectively. Moreover, this information was usually already factored into the price by the time it became available to the average speculator. Before looking at the details, there are two rules to keep in mind. These rules come directly from the book, Charting the Stock Market: The Wyckoff Method, by Jack K. Hutson, David H. Weiss and Craig F. Schroeder.
Rule One: Don’t expect the market to behave exactly the same way twice. The market is an artist, not a computer. It has a repertoire of basic behavior patterns that it subtly modifies, combines and springs unexpectedly on its audience. A trading market is an entity with a mind of its own.
Rule Two: Today’s market behavior is significant only when it’s compared to what the market did yesterday, last week, last month, even last year. There are no predetermined, never-fail levels where the market always changes. Everything the market does today must be compared to what it did before.
Instead of steadfast rules, Wyckoff advocated broad guidelines when analyzing the stock market. Nothing in the stock market is definitive. After all, stock prices are driven by human emotions. We cannot expect the exact same patterns to repeat over time. There will, however, be similar patterns or behaviors that astute chartists can profit from. Chartists should keep the following guidelines in mind and then apply their own judgments to develop a trading strategy.
Wyckoff Price Cycle
According to Wyckoff, the market can be understood and anticipated through detailed analysis of supply and demand, which can be ascertained from studying price action, volume and time. As a broker, he was in a position to observe the activities of highly successful individuals and groups who dominated specific issues, and was able to decipher, through the use of what he called vertical (bar) and figure (point-and-figure) charts, the future intentions of those large interests. An idealized schematic of how he conceptualized the large interests’ preparation for and execution of bull and bear markets is depicted in the figure above. The time to enter long orders is towards the end of the preparation for a price markup or bull market (accumulation of large lines of stock), while the time to initiate short positions is at the end of the preparation for price markdown.
Wyckoff Market Cycle
Before making a trading or investment decision, chartists need to know where the market is within its trend. Overbought markets are at risk of a pullback and positions taken with overbought conditions risk a significant drawdown. Similarly, the chances of a bounce are high when the market is oversold, even if the bigger trend is down. Selling short when market conditions are oversold can also result in a significant drawdown and adversely affect the risk-reward ratio.
Wyckoff: Accumulation, Breakout, and Markup
Wyckoff notes that an uptrend starts with an accumulation phase and then enters a markup phase as prices move steadily higher. There are five possible buy points during the entire uptrend. First, aggressive players can buy on the spring or selling climax. This area offers the highest reward potential, but the risk of failure is above average because the downtrend has not yet reversed. The second buy point comes with the breakout above resistance, provided it is confirmed by expanding volume. Chartists missing the breakout buy point are sometimes given a second chance with a throwback to broken resistance, which turns into support.
Once the markup stage is fully under way, chartists must then rely on corrections, which can form as consolidations or pullbacks. Wyckoff referred to a flat consolidation within an uptrend as a re-accumulation phase. A break above consolidation resistance signals a continuation of the markup phase. In contrast to a consolidation, a pullback is a corrective decline that retraces a portion of the prior move. Chartists should look for support levels using trend lines, prior resistance breaks or prior consolidations. Alternatively, Wyckoff also looked for support or reversal signs when the correction retraced 50% of the last up leg.
In fact, this schematic was seen in the recent Bitcoin bottom in November to December 2019, and played out perfectly with an upside breakout that started in January 2020 and gained more than 28% the recent peak of $10,500. This was mapped out to a T by @caprioleio:
Wyckoff: Distribution, Breakdown and Markdown
A downtrend starts with a distribution phase and then enters a markdown phase as prices move steadily lower. Note that Wyckoff did not shy away from shorting the market. He looked for opportunities to make money on the way up and on the way down. As with the accumulation and markup phase, there are five potential selling points during this extended downtrend. First, a lower peak within a distribution pattern offers a chance to short the market before the actual support break and trend change. Such aggressive tactics offer the highest reward potential, but also risk failure because the downtrend has not officially started. The breakdown point is the second level to short the market, provided the support break is validated with expanding volume. After a breakdown and oversold conditions, there is sometimes a throwback to broken support, which turns into resistance. This offers players a second chance to partake in the support break.
Once the markdown phase begins in earnest, chartist should wait for flat consolidations or oversold bounces. Wyckoff referred to flat consolidations as re-distribution periods. A break below consolidation support signals a continuation of the markdown phase. In contrast to a consolidation, an oversold bounce is a corrective advance that retraces a portion of the prior decline. Chartists can look for resistance areas using trend lines, prior support levels or prior consolidations. Wyckoff also looked for resistance or reversal signs when the correction retraced 50% of the last down leg.
The Wyckoff Market Cycle is a very powerful and practical tool that you can use to improve your macro-level understanding of markets and price action. If you’re interested to explore the Wyckoff theory further, check out Stockchart’s introduction and tutorial to the Wyckoff Method, this detailed Stockcharts tutorial on Wyckoff Market Analysis, and also the idea of “Distribution Power Waves”, an extension of the Wyckoff Cycle, which focuses more on wave analysis, much like that of accumulation and distribution analysis.
Technical Analysis Framework: Market Environment
The first thing to know about your trading environment is determining what the macro trend is. Are we in an overall bull or bear market? For example, late 2013 and early 2014 was a hotbed for altcoin pumps, as Bitcoin was leading the charge in the bull market then. Thereafter, BTC went into a 1.5 year decline which led to the downtrend extending into altcoin markets as well. And the same thing happened in 2016 to 2017, followed by the bear market in 2018. In the same way, we’re currently in an environment similar to that of early 2013 and 2016, and as this BTC bull market plays out, we should continue to see a sustained pump across altcoin markets until the macro bull market ends, even though this will not happen in straight line up but in smaller waves of markups and retracements. In this light, take note of how major media outlets portray a particular cryptocurrency, and consider how it will affect the market, so that you can analyze on a broad scale how healthy a market is.
An important consideration for cryptocurrency trading is to understand how environmental conditions affect a market. Events happening in the world affect Bitcoin prices to some extent, such as when China’s President Xi announced their support of blockchain technology sent Bitcoin shooting up 40% over 2 days in October 2019, while the US-Iran tensions from the assassination of Qassem Soleimani in January 2020 can be argued to have provided fuel for Bitcoin to start its recent rally.
Technical Analysis Framework: Market Structure & Crash Cycle
As discussed in the technical analysis introduction chapter, perspective is everything, and I highlighted the importance of concepts such as market structure, crash cycles, market psychology, fractals, and the environmental conditions, as a framework for analysing charts and price action. Indicators alone are not enough, and it is crucial to understand the macro trend and environment, and this can be understood better by learning about crash cycles and market structure. IMO, this is one of if not the most important governing framework behind TA, and we’ll discuss this in greater detail in this chapter.
Firstly, learn about the anatomy of a Market Cycle and the Crash Cycle, so that we can identify a pump before it happens, and know when the party has ended, and potentially profit from it.
The second important concept is Market Structure, and being able to identify the price action and patterns that are unique to each of the various phases of trading, including accumulation, distribution, markup, markdown, breakout, consolidation, retracements, corrections, etc.
To understand the basics of market structure, start by learning how to identify patterns and support/resistances that make up market structure. One good resource is Jason Stapleton’s video about Learning to Understand Market Structure.
The third important concept to understand is the driving force behind price movements. “Whales” is a term used to represent individuals or groups with large amounts of funds used for trading, and sometimes also take on the role of a “Market Maker (MM)”. Whales play a big part in any trading ecosystem, and are also present in the Bitcoin market and even in Altcoin markets. They contribute to a large portion of the trading activity, decide how high or low prices go, and also decide when the market will move and in what direction.
Armed with the knowledge of how whales conduct themselves in the market, and the technical analysis framework they use to manipulate the markets, you can profit by identifying smart money and analyzing their intentions. Therefore, it is imperative that you know how whales operate in the market, and you can learn a good deal from our dear friend Wolong in his eBook about “The Game of Deception” that is trading.
Another useful resource is this library of video tutorials by The Inner Circle Trader, commonly known as ICT. His in-depth videos cover everything a trader needs to know about conducting himself in the market, ranging from the basics of trading and forming a strategy, to technical analysis tutorials from the market marker’s perspective.
How do I know if a pump is over or if it is still not done? Here’s my two satoshis worth:
You can never predict for certain exactly where it’ll top. In fact, you should never try to predict it baselessly, but rather you should let the price action tell you the answer. When pumps end, it’ll always look like the euphoria to the complacency stage of the crash cycle. The key here, is to look out for high volume price action. If the dip between euphoria and complacency stages has a bigger volume bar, than compared to the euphoria top volume bar, then it might be wise to start looking for an exit. Of course this is just a general guideline that only considers one aspect of a trend reversal, when in reality many more factors contribute to it. That said, this is still one of the key ways to determine that a bullish market has exhausted.
Another thing to look out for is that the more parabolic (going much higher in a shorter period) a move, the closer it is to the end of the trend, which usually ends with a “blow off top”. Taking Bitcoin’s last cycle top as an example, it took 6 months to go from $1,000 to $3,000, another 3 months to get to $5,000, two months to get to $8,000, and finally another one month to get to $20,000.
Technical Analysis Framework: Mass Market Psychology & Emotional Cycle
Trading is very simple; the price goes up and it goes down, that’s it. However, while you can go to 9 different math experts and they can all tell you the answer of 1+1=2, you will never be able to get a uniform answer from 9 different trading “experts” about whether price is going up or down. Why do you think that is? Every trader has their own strategy and trading rules, resulting in very different analyses of the same chart. To take an example from The Matrix, “it’s not the spoon that bends, it’s you that bends.” Why do I say that perception is everything? Charts are simply a representation of human behaviour, and price is the perceived value of a stock by the market participants. Always take this at face value and put all your perceptions and emotions aside, so that you can plan and execute your trades objectively, instead of allowing emotions and the comments of other people to affect your trade.
Trading is a zero-sum game, that is, for one to win, someone else has to lose. It’s also worth knowing that all markets are manipulated in some form, and like Wolong said, this is all but a game of deception. Whales are present in every market, which also makes “whale watching” and “following the smart money” a viable strategy for trading any kind of market. Why is Mass Market Psychology and all of this relevant? Because there’s only one thing common among all markets — people.
The Pareto Principle, also commonly known as the 80/20 rule, applies to many aspects of trading. For example, 80% of traders end up losing money, 80% of the wealth is held by 20% of the participants, and 80% of profits should come from just 20% of your trades. In a similar fashion, I agree that trading psychology + risk management are the 20% which is responsible for 80% of trading success. This principle can also be applied to your trading strategy, where you should aim to eliminate 80% of your trading losses by avoiding emotional or impulse trading, day-trading during important news-release times and chasing entries. Read more about the Pareto Principle and how it applies to trading here.
Here are some great videos about mass market psychology and trading:
- Mass Psychology in the Markets: Part 1
- Mark Douglas – MIND OVER MARKET (Full length Interview)
- Mastering Trading Psychology (With Jared Tendler)
- Forex Trading Psychology The Secret of Getting a Winning Psychology
“You can think of it as bull trends take the stairs up, and bear trends take the elevator down. One’s slow and steady, the other is quick and violent. These predictable moves in the market are mostly created by human emotion. Fear is stronger than greed. People get greedier and greedier as the price moves up, but are quick to panic at any sign of danger. Because of this, markets tend to give back their gains in a fraction of the time it took for the bull market to play out. There is no single “right way” to identify the trend, but the two most important factors are price action and volume. Price action is another word for analyzing the movement of price on a chart. Volume refers to the amount of Bitcoins traded during that price bar. For a trend to be considered healthy, there needs to be steady price action with increasing or maintained volume.
The key to being on the right side of the trade is to understand what the mass majority of people are thinking, and anticipate their next move. That’s where the money is made in trading. As Warren Buffett says, “Be scared when people are greedy, and greedy when people are scared.”
Sell when everyone else is Buying. Traders like to wait to buy into a market once the trend is already cut and dry. The only problem is this is normally when the trend is near its peak. The best time to sell Bitcoin or Altcoin is when the price has a parabolic spike upwards. Once a trend starts to get stronger and stronger, hype sets in and price reaches an inflection point where the amount of buying is unsustainable. Just like we see with exaggerated panics, over exuberant bullish trends also end with a strong reversal.”
With this information about mass psychology behind the market participants that you are competing with, you should now have a better understanding of the framework used to approach trading, be more well-versed in the structure of a pump & dump, and understand why and how price action is fueled by human behavior and their decisions.
Sentiment analysis is generally a secondary indicator, used to supplement your other strategies and signals, but are usually highly subjective. In sentiment analysis, the general rule of thumb is that the majority of the market is usually wrong (otherwise everyone would be making money), so you don’t want to be on the same side of the trade as the majority. Though don’t take this at face value; just because “everyone” is buying doesn’t mean it can’t go up further. Always remember that markets can stay irrational longer than you can stay solvent.
In this section, we go through a couple of sentiment tools that you can use to supplement your trading.
Crypto Fear & Greed Index
The Crypto Fear & Greed Index analyzes the current sentiment of the Bitcoin market and crunches the numbers into a simple meter from 0 to 100. It uses a combination of several factors in their weighted index, including volatility, market momentum, Twitter interactions, weekly surveys, Bitcoin dominance, and Google trends data.
The rationale behind doing so is that crypto market behaviour is very emotional. People tend to get greedy when the market is rising which results in FOMO. Also, people often sell their coins in irrational reactions to seeing red numbers. There are two simple assumptions:
- Extreme fear can be a sign that investors are too worried. That could be a buying opportunity.
- When Investors are getting too greedy, that means the market is due for a correction.
Sentiment Data Providers
Santiment calls itself your one-stop source for clarity in crypto. It enables you to track assets and spot trends using the most comprehensive on-chain, social and development data available. Their SanBase portal lets you compare 5 metrics at once, and you can choose between financial data, development data such as developer activity, social data such as a twitter score and social sentiment score, and on-chain data.
LunarCrush provides real-time cryptocurrency insights for Bitcoin and altcoins driven by artificial intelligence and machine learning. With a free account, you get access to 24h data for many coins about social volume, social engagement, sentiment, news volume and more.
Coingecko is a coin market ranking chart app that ranks digital currencies by developer activity, community, and liquidity. Their social data shows, for every listed coin, the number of Reddit subscribers, Twitter followers, Telegram users, and Facebook Likes, as well as an overall social score on the Gecko page.
Aggregated Derivative Exchange Data
Funding rates are an interest rate between traders who are long vs traders who are short. A positive funding rate means that longs are paying shorts, and implies that there are more open longs than shorts (a larger volume of open positions are bullish). While a negative funding rate means that the shorts are paying longs, and implies more open shorts than longs (a larger volume of open positions are bearish). The higher the funding rate, the more bullish the sentiment of traders, and vice versa. When funding flips from positive to negative (or the other way around), it implies that the trend may be turning around.
Bybt is a cryptocurrency futures trading & information platform, where you can find cryptocurrency futures Liquidation Data and longs vs shorts ratio, as well as Funding Rates.
Longs vs Shorts
BlockchainWhispers shows the BTC longs vs shorts data for Bitfinex and BitMEX, and the buy and sell orders sums for Binance.
BitmexResources shows real-time Bitmex statistics, including Open Interest, the gross value of open leveraged positions for XBTUSD and ETHUSD.
Below is a table summarizing how to interpret open interest alongside changes in price and volume:
Trading Strategy: Introduction
For the last part of this article, we’ll go through what makes up a trading strategy, and explain how you can devise your own strategy that is personal and profitable.
In developing an effective trading strategy, you will need to determine a style that suits your personal circumstances and preferences, understand your risk tolerance and learn how to manage your risk, and essentially find a perfect personality-strategy fit.
Where do we start?
There are generally four types of trading styles, namely Day Trading, Position Trading, Swing Trading, and Scalp Trading. A comparison between the styles, including the pros and cons of each, can be found in this article by ForexFactory.
Position trading is more suitable for traders who have longer time preferences or do not wish to be tracking their investments on a daily basis. This strategy largely revolves around spotting accumulation periods to buy in and trying to catch a large part of a trending market.
For more active traders, Swing trading, Day trading, or Scalp trading would be more suitable, where traders would get in and out of trades with much higher frequency.
You should also set reasonable goals and know what you want to achieve from trading, whether it is to earn x amount of money, or to be your own boss and set your own schedule. But don’t fall into the trap thinking that trading is easy money, because it most definitely isn’t, and in fact is probably one of the toughest jobs out there and requires tremendous discipline.
Here are some useful resources for getting started on creating effective trading strategies:
Trading Strategy: Trade Setups
Once you know what your personal preferences are, the next step is to find trade setups that are suitable for your trading style.
There are mainly two types of trading strategies, momentum strategies for trading breakouts and trends, and mean reversion strategies for ranging markets. In this section, we share some high probability trade setups for both types by combining everything that we have learnt so far.
Momentum Trading Setups
Momentum trading setups are useful when a market is trending. In momentum trading, you typically want to “buy high and sell higher”. But how does one determine the trend? And once you have identified the trend, how do you take advantage of the market volatility? Here are some trend trading setups that can be used to answer both questions.
A golden cross happens when the shorter moving average (e.g. 50MA) crosses above the larger moving average (e.g. 200MA). When the cross goes in the opposite direction, it is called a death cross.
A golden cross and death cross provides confirmation of a trend reversal, and is more reliable on higher timeframes such as a daily chart. For entries and exits, it is recommended to use a lower timeframe to determine them, or in combination with other setups.
You may choose to use the golden or death cross as a trade signal, but it can also work as a trend filter so that you can identify the trend and trade on the right side of the market. This means that in an uptrend, you’ll look to long only, and in a downtrend you’ll look to short only.
Identifying accumulation phases, characterized by long sideways after a downtrend, and then buying the breakouts is one of my favourite trade setups in the cryptocurrency markets.
If you were here in 2017, you would have probably heard of Verge (XVG) that went from less than 10 satoshis (actually even 1 satoshi at some point) to 2000 satoshis in a span of 7 months.
Nobody could have guessed that it would go up a couple of 100x when it first started its rally, but did you know that the market was in accumulation for about 1 year? XVG was range-bound under 7 satoshis before finally breaking and closing above the range resistance. When such breakouts occur, it signals the start of an uptrend, and usually the longer the accumulation period the stronger the trend.
In identifying such accumulation zones, it is important to consider the situation and trend of the macro environment, so you can more easily differentiate it from a distribution or continuation of a downtrend.
When price breaks out of the accumulation zone range high, you can enter either on the confirmed close of the breakout candle, or wait for a throwback into previous resistance.
Confluence of Price, Volume, and Open Interest
This is a great example by @MustStopMurad about using a confluence of price, volume, and open interest to confirm a breakout and the start of a strong trending market. Since his twitter post on the 13th of January 2020, Bitcoin’s price has increased 28% from ~$8,200 to the recent $10,500 peak.
Bollinger Band Squeeze
When the bollinger bands contract, it represents falling volatility and when the bands expand, they represent rising volatility. The rationale behind a bollinger band squeeze strategy is that periods of low volatility are followed by strong trending breakouts.
How to identify and trade this setup?
- Identify areas of consolidation identified by the squeeze or contraction of the bands
- Mark out the highs and lows of the range within the squeeze
- Enter on a confirmed breakout of the range coinciding with expansion of the bands
- Exit strategies may vary, explained in the next paragraph
The example below is only one way of trading this setup. Depending on your trading style, you may opt for an aggressive or conservative entry and use only the bands, or complement this system with additional validation indicators such as oscillators to gauge the momentum of the market. While your exits can be using a cross and close below the outer or middle band as shown in the image below, or with a combination of other indicators, or using a trailing stop.
Ichimoku Cloud Setups
- Cloud – Kijun Sen trading strategy
In this strategy, we enter the market when the price breaks out of the cloud, and closes above the cloud. This signals a new uptrend, and we will enter in the direction of the breakout in an attempt to catch the trend. We use a high timeframe (weekly) to reduce noise of fakeouts.
Our exit is signalled by price crossing the Kijun Sen (red) and closes below it.
We can see that the Kijun Sen (red) acted as a support throughout a majority of the trend, however by using this aggressive exit strategy, we would have been faked-out twice.
- Cloud – Chinoku Span – Tenkan Sen trading strategy
In this strategy, we use the same entry signal as the example before, when the price crosses the cloud and closes above it.
However, this time we use a more conservative exit signal, which is when the lagging green Chinoku Span crosses below the blue Tenkan Sen. Although the exit signal came much later (about 4 months compared to the previous example), we were able to ride out a large majority of the trend without getting faked-out even once.
Mean Reversion Trading Setups
In a sideways market, range trading setups work best. Typically you want to buy at support and sell at resistance, the good old “buy low, sell high”. Although the crypto markets are largely trending markets, ranges are also useful in periods of accumulation and distribution, and sideways consolidation zones between trends, as well as for identifying strong support and resistance zones.
Ranges are an important part of understanding Market Structure. In this section, we learn how to identify a range, and share some setups that work well in such environments.
Identifying a Trading Range
After a strong impulsive move in a trending market, we want to look for the first high in an uptrend (or low in a downtrend) and mark it out as the range high (low), and the first low (high) after a bounce as the range low (high).
High timeframe ranges are useful for determining strong resistance and support areas. This can be seen in the XBT/USD example below where an old (2018) range provided strong resistance and formed the 2019 peak.
Trading within a Range
After identifying a range, the best thing to do is to “buy low, sell high”. Generally, you want to buy when price reaches the bottom of the range, and sell at the top of the range.
As time goes on, prices coil up within the range, and volatility diminishes over time. Hence, it is common to see the first time price returns to the range high or low get rejected strongly. This provides high probability setups for selling the first bounce to the top of range, and buying the first bounce to the bottom of range. They also provide a relatively low risk trade as your stop will be just above the range high (or below the range low).
When price is in the top half of the range, you can say that bulls are in control, and if price is in the bottom half that bears are in control. When prices reach the mid range, you may want to look for buys above the mid range, and look for sells below the mid range.
Finally, after determining the range, you can look for trade opportunities on lower timeframes that are in confluence with your high timeframe bias.
Trading Range Deviations
Another high probability setup in range trading is looking for deviations to the range, where the range low or high is swept and it closes back within the range, forming a swing failure pattern.
For range deviations in Bitcoin, it is generally “safer” to trade only the first deviations where it is more common to have fake breakouts (fakeouts). As time goes on, the probability of a breakout out of range into a trending market increases.
In this example, we look for confluence with other tools such as the Chuvashov’s Fork to supplement the strategy.
Trading Range Breakouts
As more time is spent in the range, the directional bias of the market becomes clearer.
In the example below, range support was tested multiple times – a sign of weakness. Secondly, the range was formed during a downtrend, and there is a higher probability of a continuation. Thirdly, the descending triangle is bearish and shows that sellers are able to push prices lower with each subsequent bounce and that buyers are losing steam.
To confirm a breakout from range, it is best used when found to be in confluence with other factors. In this case, the confluence of environmental factors (the continuation of a downtrend) and chart patterns (descending triangle) to confirm the range breakout into a trending market was a strong signal to sell as soon as the weekly candle closed below the range.
Trading Strategy: Trading Plan (System)
Besides finding high probability setups to add to your trading system, there are also several other factors that you should consider to make your trading system complete, a set of rules that govern how you engage your trade setups and how you manage your trades.
A common strategy used to approach trading is to trigger fundamentally, and enter/exit technically. In other words, you should use fundamental analysis to filter out a basket of markets to trade, then rely on technical analysis to determine your entry/exit. To get a better idea, here are two short articles by Investopedia and FuturesIndexTrader.
Your trading system should be highly mechanical, and provide objective reasons for entering and exiting a trade, as well as rules for how you will manage your trade. This will help tremendously in overcoming your emotional tendencies.
It is highly recommended to use multiple timeframes to analyze the market, sometimes called a multiple timeframe analysis, top-down analysis, or a triple screen trading system. Read more about trading on multiple timeframes on Investopedia and Babypips. You start by using 2 or 3 different timeframes, the highest timeframe to get a better picture of the overall trend, the mid-term timeframe for finding your trade setups, and finally the short-term timeframe for determining and executing your trades. Resistance and support levels identified on higher timeframes will also be much more important than those identified on lower timeframes. When there is a confluence between your multiple timeframes, your trade signals become stronger, e.g. in a macro uptrend, you may choose to only buy and only when your lower timeframe also shows a bullish trend. Never be so focused on the short term trend that you forget about the long term or higher timeframe trend.
Finally, you may have heard the saying that “to be right too early is to be wrong”. Hence, timing should also be an important part of your trading strategy. Get out too early and you’ll cut your profits short, get out too late and you’ll end up giving your paper-profits back to the market or even worse end up with a loss. Markets are 99% watching/planning and 1% executing, so practice patience when trading, and wait for the “right time” to enter/exit a trade and you will be rewarded handsomely. Here’s a short article about timing your trades.
Trade setups provide rules for entering and exiting your trade. But how do you manage your trade while you’re in one? Overtrade and you could end up losing money even though you had the perfect setup play out, or cut your profits short by exiting too early. It is also quite common for traders to have prices come within a few cents of hitting their take profit target, only to see price reverse and come back all the way to their entry, thus giving back all their paper profits to their market. There are no hard and fast rules to trade management, which are mostly developed from experience. However, one way you could start is by monitoring your trades and moving your stop-losses up as the trade plays out, ensuring that you lock in your profits when the trade turns unexpectedly.
Trading Strategy: Risk Management
Risk management is by far the most important part of a trading strategy, yet one that is often overlooked and consequently why most traders end up losing money.
Pre-define your risk for every trade. It is essential that you determine your exits before entering a trade; know where your invalidation point is – the price at which your trade is wrong – and set your stop-loss there, as well as where your take profit points are. If you don’t, you will be consumed by emotions before you can devise a logical and evolving strategy as the trade is “live”.
This way, you will be able to determine your reward-to-risk ratio for every trade. A common strategy among traders is to only take trades that have at least a 2:1 reward-to-risk ratio, meaning that your take profit is $2 for every $1 risked. This means that you can actually win only 33% of your trades and still break even. However, know that your reward-risk ratio is a meaningless metric by itself and doesn’t give you your edge.
Risk up to 2% per trade and size your position accordingly. It does not mean that your position size is 2% of your portfolio, but rather, that you will lose 2% of your portfolio if your trade were to end up getting stopped out at a loss.
Of course, never trade with more than you can afford to lose, and never go all-in on a single trade!
Trading Strategy: Creating an Effective & Profitable Trading Plan
Emotions and psychology are kept at bay by combining a mechanical trading system with proper risk management.
Simple as this may sound, but your trading plan is useless if you don’t follow it! Hence, it is of utmost importance that you actually follow your trading plan. To do that, you will need to work on your discipline, or a set of rules and guidelines that will govern the execution of your plan. Stick to your trading plan, don’t chase the market, and remember that trading is a marathon not a sprint.
To that end, it is highly recommended that you keep a trading journal as you strive for continual improvement. This helps you to crystallize your thoughts during your trades, track your reasons for entering and exiting your trades, allows you to reflect on your actions, and more easily find the mistakes you’ve made so you can overcome them in the future.
Focus on not losing. To win at trading, as paradoxical as it seems, happens only after you’re able to come to the realization that it’s really not about focusing on making a winning trade. Instead, what really matters is NOT losing, or at least to minimize losses, and that’s your first step to winning.
There’s 4 possible outcomes for your trade:
- Small win
- Small loss
- Big win
- Big loss
Eliminate #4, and you will become a profitable trader.
With that, I have come to the end of my lengthy, but hopefully informative post about how to trade crypto, Bitcoin and Altcoins. We hope what we’ve shared will be useful for you, and that you’ll familiarize yourself with the concepts and tools, and eventually be able to apply them and make a profit trading anything from Bitcoin to altcoins, and even other money markets like forex, commodities, indices and penny stocks.
Thank you for taking the time to read to the end of this lengthy post! It was a pleasure to share our experience and knowledge about Bitcoin and Altcoins trading, and trust that we have sufficiently armed you with all the necessary tools and foundation to get you started on your cryptocurrency trading journey. All the best!
To conclude, here are some resources that have helped me tremendously in becoming a better trader, so make sure to check them out:
- Babypip’s beginner’s guide to forex trading
- Chris Dunn’s YouTube channel
- Jason Stapleton’s YouTube channel
- Mark Douglas’ YouTube video about market psychology
- David Driscoll’s YouTube video series about market psychology
- Wolong’s eBook The Game of Deception