Technical analysis in cryptocurrency trading
Effective application of technical analysis in cryptocurrency trading
In 2019, cryptocurrencies can be called the most popular financial instrument. The high volatility of tokens creates a good potential for super profits. The decentralized nature and lack of regulation of the digital financial industry allows market makers to effectively apply the “Pump & Dump” strategy, which is quite famous on Wall Street. In other words, significant capital turnover allows large traders to manipulate quotes in order to make a profit. Such activities are illegal in terms of the stock and commodity markets, however, on decentralized sites, market makers constantly use such strategies. This is possible due to ineffective regulation or lack of it.
Among other things, high volatility creates the potential for high profits in the cryptocurrency market. The cost of cryptocurrencies can change during the day up to 50%, thanks to which everyone can significantly increase their capital. For a stable income on the pricing of altcoins, it is not enough to register on a specialized exchange and make a deposit. Successfully trading tokens, like any other derivative asset, requires an effective strategy.
This article explores a proven system for making money on altcoin pricing and provides practical advice based on personal experience. The knowledge gained after acquaintance with the material can be put into practice even by novice traders.
What is important to know for successful altcoin trading?
Trading cryptocurrencies is significantly different from money management in the OTC market. When working with charts of currency pairs, traders use technical and computer analysis tools. These methods are useless when trading altcoins. The pricing of cryptocurrencies is extremely difficult to lend itself to standard analytical methods, however, there are still ways to make a stable profit from trading with these instruments. Before proceeding to their consideration, you should pay attention to the characteristic features of the dynamics of altcoin pricing:
- For cryptocurrency charts, impulses of a wide range are characteristic, that is, the price can instantly change by several tens of points.
- Altcoins are not prone to corrections. There are quite effective trading systems based on corrective movements. If the chart of a currency pair or stock travels a significant distance in one direction, then the probability of a short-term movement against the main trend is close to 90%. This is confirmed by statistical data.
The screenshot shows a segment of the chart of the GBP / USD pair with the H1 period, on which 2 price impulses of a significant range are formed. Note that each price jump is followed by a correction, the maximum value of which can reach 50% of the momentum. There is one important condition for the formation of a correction – the range of the jump should not be less than the average daily volatility of the asset (for the GBP / USD pair, this value is 120 points).
For cryptocurrencies, the formation of a correction is not typical. Pay attention to the segment of the BTC / USD pair chart, on which 2 price impulses are formed:
The likelihood of a correction forming after a price jump on cryptocurrency charts is approximately 50/50. Consequently, an effective strategy for making money on pullbacks, which can be successfully applied when trading Forex, turns out to be useless when working with altcoins.
- When trading cryptocurrencies, it is unacceptable to use oscillators due to the high percentage of false signals. To analyze such assets, it is much more efficient to use standard, trend indicators (Bollinger envelope, moving averages, and others).
- When analyzing token charts, it is useless to use the Price Action candlestick analysis system.
- Wide spreads, the range of which can reach 100 pips, especially in conditions of increased liquidity.
- Changing trading sessions does not have any effect on altcoin pricing dynamics.
The decentralized nature of the cryptocurrency market and the lack of regulation create all the conditions for large trading participants to use the Pump & Dump strategy. As practice shows, mainly new and little-known tokens are subject to this.
Proven method to successfully trade altcoins
The most important feature of cryptocurrency pricing that anyone can use effectively in trading is the frequent formation of price impulses. To make money on this, it is important to place trade orders in a timely manner in the direction of the jump. For this, it is recommended to use pending Buy Stop and Sell Stop orders.
To place orders, you should wait for the formation of at least 5 candles formed in the same price range. Such “patterns” are displayed on the BTC / USD chart almost daily.
In the screenshot, 2 signals for placing pending orders are marked with a marker.
Price momentum and 100% correction. In such a case, you need to mark the opening / closing points of the impulse candlestick in the terminal, and in case of a 100% correction, place pending orders 1600 points below / above the boundaries of the formed price band. In the situation shown in the screenshot, the trading plan will look something like this:
At the borders of the formed channel, you will need to place pending Sell Stop and Buy Stop orders and wait for one of them to open, after which the second will need to be deleted. Placing safety orders is also mandatory. Stop Loss for each order will correspond to the opening point of the opposite one. Take Profit must be fixed and amount to 5% of the asset value at the time of the trade opening (only for the BTC / USD pair). For example, if at the moment of opening an order the BTC price is 10,000 USD, then the Take Profit value for Buy orders will be 10,500, and when opening a Sell deal – 9,500 USD. In the transaction considered in the screenshot, a Sell Stop order was activated, which was subsequently closed automatically with profit taking.
Flat. When forming a local sideways trend, the trading principle is similar:
To identify a trading signal, it is important to pay attention to the number of candles, which must be at least 5. All price elements must be formed within the same range. The example shows that a Buy Stop order was opened, after which the deal was closed by Take Profit.
The presented strategy has been tested on personal experience. With its help, even a novice trader will be able to earn up to 40% of the deposit every month, while observing the rules of money management (the risk for each transaction is no more than 10% of the capital).
Attention! The application of the considered method in practice is possible only when trading cryptocurrencies on specialized exchanges. When dealing with altcoin pricing CFDs through Forex brokers, this strategy is not safe to use. The fact is that in the user agreements of some companies there is a special clause, the conditions of which can deprive a trader of profit:
“The company reserves the right to cancel the client’s financial result if the value of the derivative financial instrument has changed by more than 10% within 1 hour.”
As mentioned earlier, cryptocurrency pricing is unregulated, which makes these assets highly volatile. There have been cases when the value of tokens changed by 80% during the day. With the previously mentioned trading condition, some brokers try to protect themselves from possible losses. It is important to remember that a conflict of interest is an integral part of working with CFDs. Therefore, to reduce non-trading risks to a minimum, it is recommended to trade altcoins through specialized exchanges.
Alternative method of trading cryptocurrencies
To increase the profit potential, you can use a more complex strategy based on the Fibonacci grid. It is important to wait for the formation of 4-7 price elements in a narrow price range and determine the local trend. Trading will be carried out with pending orders and only in the direction of the trend.
The screenshot shows a group of price elements, based on which it is possible to draw up a trading plan. Note that the local trend in this example is upward, therefore, you only need to place a Buy Stop order. Fibonacci levels are required to accurately determine the values of safety orders.
Important! If the local trend is upward, then the Fibonacci grid will need to be stretched from top to bottom, and in case of a downtrend, from bottom to top.
The grid should be stretched so that the local minimum corresponds to the level of 23.6 and the maximum to 61.8. The Stop Loss order will need to be set slightly below the 23.6 level, and the Take Profit should correspond to 100.0. The order opening point corresponds to the level of 61.8. It should be said that such trading signals on the charts of the BTC / USD pair are formed almost daily, and the order accuracy reaches 90%.
It is recommended to pay attention to one more example:
The circle marks a segment of the chart, the minimum / maximum of which was taken as the basis for drawing Fibonacci levels. Note that the local trend is downtrend this time, so stretch the grid from bottom to top. Trading rules are similar to those discussed earlier. Since the local trend is downward, you only need to place a Sell Stop order at the level of 61.8. As you can see, the deal was closed with profit taking. Closing an order with a loss is also possible under the influence of market noise, but this happens quite rarely.
The altcoin trading methods discussed in the article are effective and tested on personal experience, however, novice traders are strongly encouraged to familiarize themselves with the presented strategies on a demo account to gain the experience necessary for successful trading. It is also recommended to analyze the history of quotes for a period of at least 6 months. This will allow you to verify the effectiveness of the methods considered and assess the profit potential.
Important! The use of Martingale and averaging methods in combination with the presented strategies is not recommended.
The strategies mentioned are only recommended to be applied on the BTC / USD pair, as it is the leading high-cap altcoin. The use of the “Pump & Dump” strategy by large traders on such assets is impossible.
Anna Svetlova for Forex Ratings