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A Beginner's Guide to Cryptocurrency Trading Strategies (Volume 2)

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2022-07-29
A Beginner's Guide to Cryptocurrency Trading Strategies (Volume 2)

In technical analysis, it is important to know that the answers will never be "yes" or "no" because only the crystal ball can perfectly predict the future. Obviously, and fortunately or unfortunately, we do not know what will happen from one day to the next. On the other hand, it is certain that technical analysis allows us to say at a given moment: "here are the signals we see at the moment and here are the most realistic probabilities". The evolution of prices and markets via support and resistance breakouts allow us to have more or less confidence in the rise or fall. The idea is therefore to spot movements and trends before anyone else in order to take maximum advantage of them. The next "stops'' in prices can be anticipated, not exactly, but this allows us to optimize our gains. Beware, any bet can also result in losses. The supports give us an indication but for example, the day we are at $100,000 on BTC if we retrace to $70,000, what does that mean? The end of the bull run? Or instead, will it mean that we consolidate to go to $150,000? The only thing that is certain is that by that time, the lines we have built that were our Supports and Resistances as well as our price channels will have changed, so we will have to work on new bases. It is also important to note that for Bitcoin, as with other cryptos, it would not be healthy to do a x2 price level every week, so when we consolidate a price via retracements, the psychology of the markets can be healthy as it allows for lower minimum prices than previous ones in the majority of cases. Two of the keys will always be patience and rigor.

In this second article about the basics of trading for beginners, we will continue to learn about the major studies that need to be done in order to get a good start in technical analysis and trading.

See also: A Beginner's Guide to Cryptocurrency Trading Strategies (Volume 1)

Some words of lexicon

Reload Zone (RLZ) / OTE (Optimum Trade Entry): a price zone that allows you to enter a position with a very interesting RR (risk/reward) ratio due to its large retracement.

RR (Risk/Reward): a calculation that simply reflects how much you are willing to risk versus how much you expect to gain. Traders who want to survive over the long term look for trading strategies that have higher gains than losses per trade. The higher the winnings relative to the losses, the more the trader can outweigh the losses and stay positive. It's all about putting the odds on your side statistically. Thus it is preferable to enter trades with a RR higher than 1, the top being to enter a position with a RR higher or equal to 2.

Best time to buy

Here we always take examples with rather long timeframes in order to address all beginner traders. So let's take the example of a trader on a monthly scale. As mentioned in our article vol1, it is more interesting to enter when we have stacked several red candles than several green candles in order to optimize its RR.

A fairly basic but formidable strategy is that of buy and hold and therefore accumulation.

This consists of buying regularly and not selling. This way, during a downturn, you strengthen your existing positions. On the upside, you take advantage and ride the wave because you have already accumulated previously.

There are new ones that everyone is talking about and watching. Generally speaking, the less optimistic people are, the more you have to buy. The less you hear about cryptos or the more negative news you hear for several months, the less people are interested or selling out of panic, the more you want to buy and accumulate. There is a famous phrase: buy the rumor and sell the news. Remember that there are different categories of traders and that the institutional market mainly drives the market. And when everyone observes a level, it is not only the retail market and small holders who strengthen their positions but also whales.Sometimes a key level may be broken and the euphoria creates a runaway movement. Eventually, there may be some technical truth, but with everyone following closely, dreams can become reality. We could even go further and say that we should be wary of resistances as much as support since, as we just said, everyone has their eyes on them and so do the professionals. This is also what the market makers do, the liquidity providers, and they know exactly where the most liquidity and the most orders are positioned. This is true for buy orders as well as for sell orders and explains sometimes big green candles that push the market up, like red candles that pull the market down. These market manipulations, whether intentional or not, often hit home because traders don't have time to cut their positions and are very quickly liquidated after a strong upward or downward movement. So, another tip for beginners is to start with reasonable amounts and leverage that allow you to manage your trading unemotionally and 100% rationally. As is often the case, the biggest winners are often those with the most money, so not usually the novice traders.

As you can see, it is possible to learn a lot just with support and resistances. If we think about it a little bit, if we have "eaten" it and if we have seen the curves, then we can understand a lot because it tells the story of speculation and therefore of trading.

Indicators

Volume

The volumes are the transcription of the purchases and sales but on a histogram. So in fact, it is interesting to couple the candlesticks (which we saw earlier) with "its power". The volume represents the conviction of the market in a way. And when we see a big move of a big candle with huge volume, then we can easily conclude that at that moment the market has made an important decision, either to recharge or to unload.

A Beginner's Guide to Cryptocurrency Trading Strategies (Volume 2) image 0

Volume can help us know if after a strong move, it is followed by the majority of the market or not.

RSI (Relative Strength Index)

Let's now look at a second level of tools and start with the RSI (Relative Strength Index).

This indicator informs us about "overbought" and "oversold" situations. When we are in bullrun, we are very often in "overbought" and therefore above the 70 of RSI, the signal of exceeding this level is a kind of prediction of a potential correction to come.

The RSI is an indicator between 0 and 100 and has a median life zone between 30 and 70.

Our reading is quite basic because for a more advanced user, just as it is possible to analyze the Japanese candlesticks and the figures that the Japanese candlesticks represent for a particular asset, it is also possible to study the RSI in detail. This kind of analysis is very technical and worthwhile for those who want to go much further. This will allow us to identify trends, the most known being the "divergence" concerning the RSI.

Bollinger bands

The Bollinger Bands give us indications about the bounds. This indicator is particularly interesting for a beginner because it is easily interpreted visually. The Bollinger Bands have a propensity to spread as the price moves either up or down. As the bands tighten and go "flat" then we understand that volatility is being reduced and that we are preparing for a much more explosive move. This is an adaptive trend.

Moving averages

The moving average (MA) is a simple technical analysis tool that smooths ou t price data by creating a constantly updated average price. The average is taken over a specific period of time, like 10 days, 20 minutes, 30 weeks, or any time period the trader chooses.

Conclusion

This allows for a good little reading and some signals. We have to remind you: don't consider that when two curves cross and because you read something in an article that the price of an asset will go up or down, it is far from being that simple. The majority of traders are not good short-term traders and even though in cryptos there can be some lucky ones, remember that it is over the long term that most gains are made. In two months, it happens to see the price of BTC divided by two as well as black swans that were not supposed to affect Bitcoin like the covid crisis that finally affected it because there was a panic movement. It is a market that is very human, very much driven by FUD (fear, uncertainty doubt) and FOMO (fear of missing out), so the fear of missing the train, but also a bad mood that can be brought by some criticism. When everyone is scared, there is often negative feedback that will encourage the bears. These are some very simple concepts.

You, beginner traders, will have to make mistakes in spite of analysis in order to learn your lessons. So remember to pay yourself as much as possible because the market will.

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