How to Trade Bitcoin Better
Bitcoin trading is very volatile and sometimes very confusing. Traders can improve some aspects of their trading by timing their exit levels better. And also by observing chart patterns that can indicate possible reversal levels. It’s easier to apply these concepts and trading tips on the daily chart, then down to the 4 hour or 1 hour chart. Short term charts such as 5 minute or 10 minute charts cannot provide accurate information. This is because when volatility is too high and large traders make Bitcoin move very fast, you need at least few hours for the markets to return to normal liquidity levels.
False trading signals arise from misusing various theories, using the charts while having an open trade on (confirmation bias), and from lack of experience. Many types of support and resistance theories usually fail to work. While Fibonacci trading theory seems to work too well, so as to fit all kinds of charts. This makes Fibonacci theory look right, no matter what the market does next.
I also see various information sources on Bitcoin trading, and I suspect that most of them are pushing an agenda, so as to make the market move lower from time to time. So they can get in at a cheaper price. Traders need to be careful and not to trade on news stories and events. If a real event happens and Bitcoin price falls as a result, it will be better to wait for few more hours or days until the market consolidates. In many cases, the market tends to move higher or lower, in a series of legs, very often you will see a uptrend trend for example, consisting of 2 legs.
By measuring the first leg, you can anticipate with much more accuracy where the next leg will stop, at which point you will have to get out. The same applies to a down trend during a bear market, but Bitcoin is currently in a bull market, so you can expect to see this pattern more on the upside.
It’s not easy to figure out how far Bitcoin will fall when you have a series of down days. Fibonacci theory doesn’t provide an answer to this, because very close to each price target there will be one more Fibonacci number, and one more target. So this is not very useful, even though it looks to work in hindsight…
I have found that LSS pivot numbers work much better than Fibonacci theory, and they do work on the daily and weekly charts. They provide 3 price levels of reaction, levels where price is likely to either lose a lot of momentum and reverse, or go through with increased momentum. LSS pivots are a kind of narrow-pass test for market price. If the market is really strong it will pass, if not it will stop and reverse. So it’s not exactly support and resistance theory, but more like a tool for anticipating where to get out or to open more trades.
Trading Volume Theory
Trading volume is an indicator, yet traders are divided as to how they should interpret trading volume. The old school of thought dictates that rising price should be supported by rising volume, and that lack of trading volume is a sign of weakness. But the more modern school of thought takes things further by arguing that if trading volume keeps on increasing smoothly for many days, it eventually signals a reversal. This is because as trading volume reaches extreme levels the market runs out of buyers or sellers, and therefore it has to reverse.
So for a few days of rising trading volume, both schools of thought agree that this helps confirm the market trend. But after more than 3-4 days, continued rising volume is seen differently by these two schools of thought. And I have found that it is indeed the case, after 3-4 trading days, in order for the market to continue to move with conviction and strength, it’s better for trading volume to break the smooth rising pattern and become volatile.
Trading volume is not a very good indicator, but from time to time you will see patterns of smooth rising volume. And these patterns are warnings that market price is about to reverse, for at least few days. The daily trend may not reverse.
As you can see on the above chart rising volume indicates trend exhaustion and market price has to reverse for new buyers and sellers to come into the market. A market cannot have only buyers, or only sellers, it needs both.
Of course with every new high level that is reached, Bitcoin’s trading volume has to increase. But the market is forced to correct lower for few days, no matter what the trading volume was. You just need to watch out for uniform buildups of trading volume, where volume increases smoothly with each day. And this is when after few days, further increasing volume is no longer supportive, but rather an indication of the market needing a short term break.
You can use the trading volume charts of your platform, all Bitcoin trading platforms provide some kind of daily volume data. Just be sure to only apply this observation on the daily charts.
Other indicators that can be used on Bitcoin are patterns of symmetry, similar to the legs of a trend, where the in-between consolidation period may be much longer. Symmetries can still exist. Other chart patterns such as flags and price channels are also very powerful. These tend to be more accurate than indicators such as moving averages, MACD or RSI. Flags and channels work quite well on the daily chart, and provide a much better window into market action.
You can also analyze Bitcoin’s price trend relative to Litecoin and Ethereum. You can use ratios to do this. The concept is the same as the one used in the Gold/Silver ratio by many investors and traders, it’s a long term indicator there. But in Bitcoin things are much more volatile and this ratio analysis can be used as a week to week indicator. If one market is lagging and another is leading the ratios will be distorted, but sooner or later they will have to revert back to their mean values.
This means that if I were trading Bitcoin, and I saw Bitcoin leading too much ahead of Ethereum, I would rather sell Bitcoin and buy Ethereum for a while, but adjusting the trade size wisely so that overall risk is limited, just in case I get the timing wrong. And the ratio takes longer to return back to its normal value. Ideally, I would in this case sell BTC with a CFD contract, and buy real Ethereum at the same time. And I could further hedge my CFD trade with a long term Bitcoin investment, so that all risk on the short CFD trade is offset for at least several days or weeks.
Ratio analysis can be confusing, and whole trick is knowing when to expect a ratio to change from its normal value. But if the ratio is really true, it will show up again and again. In the case of Bitcoin, Ethereum and Litecoin, I expect that these ratios will be revealed in the next few months.
Trading Bitcoin through CFDs
Trading Bitcoin and other major cryptocurrencies through CFDs makes trading more affordable, but one needs to know how to manage money correctly. So that the margin requirements are met at all times. This is where you can apply some basic tricks to evaluate open losing trades. Bitcoin seems to conform to some interesting theories, such as probability analysis by counting trading days, and also to swing trading theory.
More often than not, if an open day trade on Bitcoin takes more than around 25 minutes to show a profit, it’s a sign that it will turn into a losing trade. On the daily chart, you can count 2 to 3 days, as a rule of thumb. If the trade fails to become substantially profitable you should get out as soon as the time limit is reached. Because if you stay in the market longer, the probability is much higher now, that the trade will become a loser. And it may be a temporary loss of only 2 more days, but why take the risk.
Swing trading analysis looks at the daily chart, its highs and lows, and it can identify whether the trend is really up or down. There are several variations of this theory, but it’s quite a good theory because a trend may be deceptively up, even when price is below the 10 day moving average. Or even when a previous low has been breached. Swing trading theory qualifies certain kinds of highs and lows as being swing reversal points, many other highs and lows are ignored.
For example, a swing high or low, is not taken into account unless there has been 3 days of rising or falling action. And a single day is considered as being up or down, only if both the high and the low of that day are different than the previous day’s high and low. This is where many traders get it wrong, because they use other types of simple swing trading theory, which yields too many false signals.
You can actually see this principle in action, on the daily chart. See that most small declines and advances in price, usually last 3 trading days. These are 3 large range trading days, where price moves more and more in one direction with each day. This is the basis principle of swing trading theory, and the counting of selected trading days is how it works.
Swing trading theory is very relevant to CFD trading because it provides much more accuracy and avoidance of false signals. On the other hand, moving averages and indicators such as MACD tend to be completely wrong, especially simple moving average crossovers can be totally wrong. They can give a buy signal when swing trading theory shows a sell signal, or a false buy signal. Moving averages have some limited predictive power, because they do reveal some buildup of momentum. But in general they cannot be used to trade profitably.
In the case of trading Bitcoin through CFDs alone, traders need to know that Bitcoin is in a long term up trend, moving averages will not warn you when the market is about to make a correction lower. What can warn you about such sudden declines is swing trading theory, extreme buildups of trading volume, and various chart patterns of symmetry. So when you know that the second leg of a symmetry pattern has been reached by Bitcoin, it’s time to get out of your long CFD trade, right away. The market may continue higher for few more days, but it’s all an illusion as further rallying action will be wiped off soon after.
The Investor Greg Forum provides more insightful articles into unconventional trading methods, as well as classic trading methods that work. CFD trading provides some huge hidden benefits, which can really enhance all kinds of trading. In the case of Bitcoin, most traders face problems, such as not having enough funds to make huge investments in the real Bitcoin market. And this limits their exposure to the market. CFDs can offer leverage and unparalleled liquidity for very good swing trading strategies. And this is especially true to ratio based strategies among the top 3 cryptocoins.
Remember that not having an open trade, is actually a trade in itself. If you want to trade CFDs on Bitcoin, Litecoin and Ethereum, but you never want to hold short CFD trades. Because you fear a potential surprise price spike. You can still trade CFDs only on the long side, while not taking a trade at all on the market you are supposed to go short. Simply by adjusting the timing of your trades, you can implement a trading strategy where you only buy one CFD contract on one cryptomarket, while being flat on the other cryptomarket. Then you can reverse the setup, open a long CFD trade on the previously flat cryptomarket. And close and take profit on the CFD trade on the other cryptomarket. If the market you wanted to go short on, does go down, you will buy it at a lower price. And this is equivalent to having taken a short CFD trade, but in reality you are not taking any leverage related risk.