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Crypto trading has become very popular recently with billions of dollars traded on spot exchanges over 24 hr periods. In June 27th of this year, 43 billion USD traded in a 24 hr period setting a new all-time high. Crypto trading is the buying and selling of Bitcoin, Ether, and other digital assets with the aim of generating a profit. In simple terms, you want to buy low and sell high – unless you’re short selling, but more on that later.
As a trader, you look for volatility and price action and the sizeable volatility in the crypto markets make it very attractive from a trading perspective. The world of CryptoTwitter is full of traders offering insights and sharing charts and opinions on which way the market is going.
There are different types of trading, depending on the strategy, risk appetite and time horizon of the trader. For example, there’s scalping, day trading, swing trading, and position trading. Scalping and day trading sits at the extreme end of the investing spectrum from the conventional buy-and-hold wisdom. As the name suggests, day trading involves buying and selling within the same trading day. Swing trading is based on identifying swings in price that take place over a period of days.
Crypto day traders now compete with algorithmic high-frequency traders (or bots) and institutional investors. For most people the best strategy is to buy-and-hold, better known as HODL in the crypto world. That said, if you are looking to get into crypto trading, here’s some advice.
- Paper trade to start out
- Don’t trade with emotions
- Don’t overextend yourself
- Keep it simple. Price and volume are enough information to get started.
- Be consistent with whatever strategy you have.
- Have a profit-to-loss ratio. It may sound obvious, but take trades only where the profit potential is greater than the risk.
- Avoid FOMO – Fear Of Missing Out
- Ignore the FUD – Fear, Uncertainty and Doubt.
- Always DYOR – Do your Own Research
Trade setup and exit
To get started you’ll need an account with an exchange. Take a look at our article here comparing some of the best trading exchanges. You’ll want an exchange with enough volume in the trading pair you’re looking to trade. You can check out the volume of the pair you want to trade on coinmarketcap.
So when do you enter into a trade and how do you execute once you’ve decided the timing is right? The trigger is important and very specific to the trading strategy you follow. It’s a price point on the chart where you want to enter the trade to buy or sell. We’ll look at some triggers below based on chart patterns and indicators.
Once you’ve decided to enter a trade you then execute an order to buy or sell on the exchange. You can use a limit or market order. Market orders are when you take the price on offer in the market and your trade is executed immediately ( you pay a premium for this as you are a “taker”). Limit trades, on the other hand, involve setting the price you want to execute and this order sits on the order book waiting for the price ( in this case you’re a “maker”). The order book is a list of buy and sell orders for a specific asset and is normally visualized with a depth chart. Some trading strategies revolve around analyzing this order book, but order book manipulation is something to be wary of. Spoofing, wash trading and layering are more common on crypto exchanges.
Leverage, Stop-Loss and Take Profit
When you’ve decided on the trade type and the price you can then select the amount of leverage. Not all exchanges offer leverage and the amount of leverage varies from 1x all the way up to 100x. For more on leverage and margin trading check out our article here.
The next part of the trade setup is a stop loss. A stop-loss helps you manage the rick on your trade; something many greenhorn traders will fail to do. It’s advisable to set a stop to limit losses, but there’s both pros and cons. An obvious risk with crypto stop losses is when volatility causes the price to swiftly drop and trigger the stop loss, only to bounce right back again. This is often manipulated by large holders or “whales” as discussed here.
The next thing to consider when setting up your trade is when you want to take profit. Strangely, something a lot of people forget to consider when they’re starting out. Automatically setting a take profit order allows you to set a target profit price and once reached you exit the position. A trailing stop loss can also be used to exit profitable trades. If using a trailing stop loss, you won’t know your profit potential in advance.
Below is an example of a BTC buy trade setup with 5x leverage on Kraken exchange.
Some basic patterns
Looking at trade patterns is analogous to searching for constellations in the night sky. It’s not always obvious and is often open to some interpretation as evidenced by the recent descending vs symmetric triangle debate.
Resistance & support
The concepts of support and resistance are undoubtedly two of the most discussed attributes of technical analysis and important concepts to understand from a crypto trading perspective. Once an area or “zone” of support or resistance is identified, it provides valuable potential trade entry or exit points. The more times the price tests a support or resistance area, the more significant the level becomes. A good example is the $10k BTC price, which acted as a resistance level for months.
A concentration of sell pressure will force the price level to act as a barrier, except this time it will act as a ceiling rather than a floor; commonly referred to as resistance. Similarly, a concentration of buy pressure at a certain price will prevent the price from falling any further, creating a temporary floor known as support. Market psychology plays a major role and If people were rational, these support and resistance levels wouldn’t work in practice.
To create horizontal support or resistance lines, simply connect the highs or lows of candlestick wicks over a time horizon.
The example above shows how support and resistance can act as a barrier for price moving higher or lower. However, the price of financial assets generally trends upward or downward, so it is not uncommon to see these price barriers change over time. This is why understanding the concepts of trending and trendlines is important when learning about support and resistance.
Standard uptrend lines are drawn between higher lows in an uptrend. Similarly, the standard downtrend line is a line drawn between lower highs in a downtrend. Generally speaking, it is advisable to wait for three confirmed points of contacts before you start putting further attention to a trendline.
Moving average support and resistance
Notice how the price of the asset finds support at the moving average when the trend is up, and how it acts as resistance when the trend is down. This is because moving averages often act as dynamic support and resistance levels. It’s dynamic because it’s constantly changing depending on recent prices. These are often used as a guide by traders, but just like any other support or resistance they eventually break.
The Bull Flag
Flag pattern consists of two main components: the pole and the flag. A bull flag pattern is a chart pattern that occurs when an asset is trending upwards (as shown in the trend lines). It’s a flag pattern because when you see it on a chart it looks like a flag on a pole and since we are in an uptrend it is considered a bull flag.
It is sometimes confused with a pennant, which is a slightly different trading pattern formed by successive highs and lows that narrow over time. The bull flag is rectangular in shape and not triangular like the pennant.
There’s also bear flag which is essentially the same in reverse. Bull flags and bear flags do not always perform as expected and can create a trap known as a “false breakout” when price breaches the boundary of the flag and quickly retraces.
Common strategy involves buying when the price breaks above the consolidation pattern, accompanied by high volume. A stop loss is placed below the bottom of the consolidation pattern.
Next up, let’s take a quick look at the popular triangle patterns. Triangles fall under the category of continuation patterns and Bitcoin price was locked inside one of these patterns for the past few months. There was some debate on whether it was a descending or symmetrical triangle, but the breakout confirmed it as descending.
The lower line of the triangle or lower trendline represents support on the chart. Regardless of where they form, descending triangles are always considered bearish patterns. In terms of trade entry, experts generally look for volume at the breakout and confirm the entry signal with a closing price outside the trendline.
Three basic Indicators
Let’s have a look at three popular indicators that traders use.
We mentioned moving averages already, but let’s look at how they are used as indicators.
The SMA, or simple moving average is a technical indicator for determining if an asset price will continue or reverse a bull or bear trend. An SMA is calculated as the arithmetic average of an asset’s price over some period. The SMA is enhanced as an exponential moving average (EMA) that more heavily weights recent price action.
One of the main things to watch out for with moving averages is what’s referred to as a crossover – when two moving averages lines cross over each other. A golden cross is considered a bullish sign and it occurs when the 50-day moving average rises above 200-day moving average. A bearish crossover occurs when a short-term MA drops below a long-term MA. This happened at the time of writing as you can see in the diagram below with the 50 day MA crossing over the 200-day.
Moving averages are based on historical data and tend to lag price. Hence, bearish crossovers have limited predictive powers at best and often end up trapping sellers on the wrong side of the market.
More on MAs here.
MACD, short for moving average convergence/divergence, is one of the most popular trading indicators used. It is defined as a trend-following momentum indicator that shows the relationship between two moving averages of an assets price. The MACD is calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA. The result of that calculation is the MACD line. A nine-day EMA of the MACD called the “signal line,” is then plotted on top of the MACD line, which can function as a trigger for buy and sell signals. Traders may buy the crypto when the MACD crosses above its signal line and sell – or short – the crypto when the MACD crosses below the signal line. Short selling occurs when an investor borrows a security and sells it on the open market, with the intention of buying it back later for cheaper.
Moving Average Convergence Divergence (MACD) indicators can be interpreted in several ways depending on the strategy you follow.
More on MACD here.
Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. It helps you evaluate if a crypto asset is overbought or oversold
The RSI moves between zero and 100. Traditionally the RSI is considered overbought when above 70 and oversold when below 30. As you’ll see below the RSI recently dropped below 30 indicating that the market is oversold.
There are no guarantees when using RSI or any other indicators. Just because the indicator shows as oversold does not mean the price is set to rise so use RSI along with other techniques and not in isolation.
This was a very simple beginners introduction to the exciting world of crypto trading. For more info on trading, you can contact us.
For more information on the art of technical analysis, we suggest you read more and practice with paper trades. Recommended reading is “Technical Analysis of the Financial Markets” by John J. Murphy.
For more on what trading platform to use check out our review of some of the best day trading platforms.
This content is not financial advice and should not form the basis of any financial investment decisions nor be seen as a recommendation to buy or sell any good or product. Trading cryptocurrency is complex and comes with a high risk of losing money, particularly if you trade on leverage. You should carefully consider whether trading cryptocurrencies is right for you and take the time to learn how trading works and decide how much money you are prepared to lose.