Cryptocurrency; Trading Strategies Part #1 — The Foundations

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Think | Plan | Manage | Execute

A lot of people concern themselves with buying bottoms and selling tops in the crypto market, which is fine because the profits are fantastic but this takes skill, timing, a little bit of luck and a whole lot of time staring at charts. In light of this I would question how enduring any solution to the above is.

For those that don’t have the “midas touch” — getting into the market is not necessarily the biggest problem, it’s getting out that usually causes most of the issues.

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Simple Forex Chart Patterns

Traditional charting has a concept of waiting for confirmations, observing rejection/support levels and identifying patterns that usually play out a certain way.

It means in most cases you miss out on the beginning of the moves and jump out before the encore, but you still get the opportunity (it’s not guaranteed)to make money. More importantly it means there is a life outside of trading which creates the environment where longevity can be found and more opportunities taken over time without suffering burn-out or over trading.

In order to achieve this we need a few things though, this is where we are required to put some effort in and do some work.

Here are some of the pitfalls of trading without clear goals:

  • Lack of discipline
  • Over-trading
  • Cutting winners short
  • Riding losses

Sound familiar?

 

So we need to find something to put that confidence back into the decision making process so that action can be taken regardless of your emotions.

The external influence, the background noise and the feeling in our gut, it all needs removing and replacing

But what with?


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A plan of action designed to achieve a long-term or overall aim

Something that is specific to yourself, tailored to your needs and works for you, around you;

A Trading Plan

This is your foundation as a trader, you stick to it because it’s essentially a contract with yourself.

It replaces instincts with logic that is designed to remove our most fallible parts and allows us to enter into a transparent contract with ourselves that is based on systematic occurrences that can be replicated regardless of time, mood or internal compass.

Investopedia describes it as;

“…. a systematic method for identifying and trading securities that takes into consideration a number of variables including time, risk and the investor’s objectives”

Whilst it might not be necessary to have a pan to make a profit (not consistently anyway) in terms of measuring performance and therefore profitability over a period of time, it’s imperative. Your plan is just one part though, you also need a strategy, this sits at the core of your trading activities.

Your strategy should encompass;

  1. A clear set of guidelines or rules
  2. A commitment to yourself (learning/development/investment)
  3. A system for identifying (set ups) /executing trades (both in and out)
  4. Targets (not only monetary) and ultimately goals
  5. How many £’s, $’s or Satoshi’s you want to risk per trade and in total throughout your trading pursuit — Position Sizing

Remember — Around 90% of new traders fail, being able to breakdown why a trade didn’t work out is a key part of your development and will help you stay in the 10%. Understanding these failures and mitigating them for next time is all part of your education, don’t worry the market makes you pay for this so its all fair.

Understanding……; It’s key to a lot of things here

  1. Your risk — can you afford to lose what you are risking without impacting you lifestyle?
  2. How do the markets work? What are the drivers? Why do they even move?
  3. Yourself and what sets you apart, but also how to leverage this for results
  4. There are no certainties so plan to lose every time, the trade will look completely different focusing on what you stand to lose rather than seeing only gains.
  5. Plan B — what to do if things continue to go wrong?

A trading strategy should define your goals and the means to achieve those goals. It needs to be rigid enough so that it can be repeatedly followed but also dynamic so that it remains relevant.

Understanding your goals as a trader is fundamental to creating your trading strategy and writing your trading plans.

We can describe this simply as framework or internal contract with yourself that sets out your rules of engagement when interacting with the market. It replaces your emotion fueled reactions with pre-determined actions based on market behaviour and conditions.


Trading Types

Different types of trading activities suit different personalities and circumstances. Whilst you don’t need to label yourself you should at least understand the time frames you want to trade. This will help with setting the strategy and indeed your Plan B, your exit strategy as it were.

What Flavour are you?

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Some examples of commonly accepted trading styles

It’s important to understand what type of trader you are first and then build a strategy around that e.g. If you work full time and trade in your spare time as a hobby then you are unlikely to be suited (or be flexible enough in approach) to day trading or swing trading.

Understanding this is not paramount to making money but having a basic working knowledge of how best to leverage your time does help dismiss certain activities that would otherwise cloud your vision in the short term.

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There is more than one way to approach market analysis

Whilst for the purpose of the below we will concentrate on Technical Analysis, it is important to recognise that other forms of analysis can be applied to both traditional and crypto markets.

Fundamental Analysis — This focuses on understanding an assets fair price through scrutinising the balance sheets, business plans and roadmaps and understanding the value proposition that is on offer — essentially what problems are being solved and therefore infer a value. This can then be applied to the current price to understand if an asset is under / over valued and is therefore a buy / sell accordingly.

Technical Analysis — Takes into account a view of current and historic price often with accompanying indicators such as volume or oscillators to show momentum / trend in an effort to project / predict future price levels that price could trade into.

Sentiment Analysis — With the rise of social media and access to key data streams. Understanding sentiment has become a whole lot easier, applying that knowledge to the market is as difficult as it always was. Using a combination of platforms such as Twitter or Facebook where people freely share their opinions you can quickly build a picture, a personal compass for sentiment. Added to this Google analytics and the wealth of data it holds around searches, website visits etc sentiment is much more accessible than it once was.


Cryptocurrency Trading Strategies

There are numerous options in this space ranging from fully mechanical to those that are almost entirely discretionary. It is also important to understand that there are many mechanisms by which to make money in the cryptocurrency market, below is a sample of those opportunities on offer outside of trading;

  • Arbitrage
  • Staking
  • Lending
  • Providing Liquidity
  • Buy the Dip and Hold (Long term DCA and Hodling — more aligned to investing IMO)

Having said this, trading is by far the most popular activity in this space not least because the opportunities and instruments to choose from are so extensive. However that could change dramatically with the implementation of scalable and multifaceted Decentralised Finance (DeFi) options. But lets leave that for another time and explore the world of trading in more detail looking at the most popular styles that are employed.


Trend Following

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Position traders will follow the trend. Identifying that trend through candlestick pattern recognition or utilising momentum oscillators (chart indicators such as RSI, MACD or ADX are a few) to identify reversals and potential bid / offer locations.

Positions are normally taken for a numbers of days weeks and built up over time — often referred to as dollar cost averaging (DCA). Complexity can be added in such strategies to increase the impact of compounding utilising local highs / lows to get in and out.

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Trend Following: How to Make a Fortune in Bull, Bear and Black Swan Markets” by Michael Covel

A book that focuses more on the mentality of the traders that made a fortune from following the trend.

There is a simple idea behind it, you follow the trend until it bends, that’s it really. The execution of that simplistic approach is where most come unstuck.


Swing Trading

This type of trading sits somewhere between day trading and trend following both in terms of the holding period but also in its mechanics. Some consider swing traders to be fundamentalists utilising news and financial results as some of the influences for position management. It would also be true to say that swing traders can (and do) use technical analysis to structure their trades.

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Buy low & sell high — a simple concept when mastered can be a very powerful trading strategy

The swing aspect is less aligned to the traders behaviour and more to do with the short term movements of any given trading instruments e.g. stock. The term refers to the movement of price over a short period of time where it experiences a shift / change. This is why it is linked to the fundamentals — i.e. news or earnings as they can sometime influence an assets behaviour over a short period.

A swing trader will look to capitalise on said events where volatility is heightened. This volatility can be deduced from technical analysis alone using Support and Resistance concepts or Pivot Points and hence can also be linked solely to technical analysis.

“show me the charts and I’ll tell you the news.” Bernard Baruch


Day Trading

Like Ronseal, day trading is just that. Activities, speculation and trades are concluded within day (in most cases). Traders look to take advantage of daily movements around key market horizons, whether that be open times / closing times or cyclical events detailed on an economic calendar;

  • earnings
  • Non Farm Payroll
  • OPEC meetings
  • Interest rate announcements from central banks / reserve

Linking to crypto these events could be likened to XRP’s SWELL conferences or forks that used to be popular as did the ICO seasons of cycles past.

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These days its main net launches or product upgrades as well as liquidity mining and total value locked metrics that seems to get the fear of missing out ripe in the air.

On that note Airdrops have also proved lucrative for some in the past 12 months.

It would be true to say that all trading styles are impacted by these events to some extend but due to the nature of within day trading it becomes key to understand and work around these events to reduce risk where applicable but equally find opportunities or an edge.

Day trading can also be conducted from a technical standpoint looking for interactions, much like swing traders, around key pivot points or support / resistance levels. Or indeed paying close attention to patterns as they develop.


Scalping

With connotations of a surgeon when scalping traders need to be very accurate with entries and protect their gains at all costs. Activities are centered around small price movements and works on the rule of many. Trades can be held in line with their plans for secs through to hours but rarely span a day.

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Pips make prizes!

It is by far the most intensive approach so scalpers need to be very consistent and follow their strategies / plans to the letter, one loss could wipe out a days work in seconds so risk management is of the highest priority because as a scalper draw-down doesn’t just come with stress as a downside there is also considerable opportunity cost to consider.

To be continued…..

In part 2 we will concentrate on the tools / indicators that have proved popular in the crypto space and how they have developed to keep pace with this new 24 / 7 market.

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