Cryptocurrencies, Bitcoin, Ethereum, Litecoin, … You probably heard of it lately on tv, social media or somewhere. After 3 years of “Bear Market”, we are finally retesting ATH (all time high) area that is around 20k USD. It is an exciting moment for us Crypto Traders!
Today I’m here to share with you different Analysis on how you could potentially become profitable in the field. This paper might get long, I will do my best to provide an efficient and understandable study of my trading Workflow + some basic advices.
Important things to know before investing in Crypto
- Do your own research (DYOR)
I see a lot of people online following famous traders thinking that if they have been profitable they will be profitable again but this is wrong, being a successful trader does not mean you only have green trades in your portfolio, we are humans and has humans we do mistakes. Forecasting the market is something complicated that we traders are trying to master, and failure will always be in your path for glory. Doing you research will help you understand the potential value of what you are investing in. Blindly following trade is like playing casino.
- Cryptos are risky
We now have +5000 different cryptos available on different exchanges and it is certain that not all of them will succeed, in fact only a few will survive. Despite stories of investors making millions, investing at an inopportune time can result in rapid and extreme losses. For example, back in late 2017 BTC rocketing to new highs made a huge impact on many social media, TV and more. They were creating a Fear of missing out on this opportunity and most people invested in the range ($16,000 — $19,800 Per Bitcoin) and four a year later, In December, Bitcoin price dropped in the range ($3,100 — $4,100 per Bitcoin). Not a Funny investment. On the other hand, Bitcoin has been profitable for a lot of people, but before entering this market you must understand this risk. Don’t forget initial price was $0 Per Bitcoin.
- Investment based on emotions
Asset class bubbles have occurred over and over again throughout history. From the Dutch tulip bulb mania in the 1600s to the dot-com bubble in 2000, it’s not uncommon for popular assets to be bid up by enthusiastic investors. Fear of missing out (FOMO), can cause investors to jump on the cryptocurrency investing trend at the wrong time. Estimating your risk is important at any time I’ve seen many traders lose money because they were driven by their emotions. This is one of the key rules in investment decisions, greed and fear are your enemy. Emotional investing can be profitable, but it is mostly luck. Establish a Strategy and stick to it.
- Beware of frauds and scams
The value of cryptocurrencies keeps on fluctuating, which represent its volatile nature which is due to hypes, speculations, and even the pump and dump schemes. If you are going to invest in cryptocurrencies, these are some things you need to be aware of.
Mostly, the coins with low market caps use tactics such as displaying the fake coin value or making false promises to the investors to sell their stocks at a higher price. Be aware of such schemes to avoid losses.
- The risk to leave your Crypto on exchanges or corrupted wallet
Unfortunately, I have learned this the hard way, hackers on internet are everywhere, it is their playground. I got hacked 2 times. The first was on Cryptopia.com 14th January 2019, at that time I was investing into Mothership protocol. At that time, it was a profitable and exciting project with much room to grow. 32 million MSP tokens were stolen on Cryptopia exchanges. This event caused the death of Mothership Protocol. A great project gone to waste because of hackers. Second hack was an issue of private key on an online wallet. The website called Blockchain.com . In this case, the type of attack involves exploiting a flaw in the key refresh process: hackers can compromise the validation process, which in turn allows them to extract users private keys. Many Bitcoins have been stolen with this technique.
Recommendation: it’s simple, if you invest a considerable amount of money you have to think about your security such as hardware wallet or Cold storage wallets. But don’t forget losing your private = losing your money. Be cautious.
- Only invest what you can afford to lose
I think this is pretty straight forwards but still you might be thinking NO RISK, NO REWARD. But no don’t go sell your house to invest all in crypto and then possibly end up homeless. If you have a family to handle don’t only invest what you can lose etc. I think that’s human to think this way.
My Workflow as a Trader in Crypto
The point of investing money is basically allocating resources with the expectation of generating a profit from this investment. There are many possibilities on how to invest your money, where to invest etc. For this paper I am going to try explaining different strategies that I have been using in the last 4 years (scalping, ICO’s investment, leverage trading, stacking, Fundamental Analysis and Technical Analysis). The one that made me most profitable in this “emerging” market is trading related to Technical Analysis and I will try to explain it as clearly as possible.
Fundamental Analysis (FA)
Fundamental analysis attempts to measure a security’s intrinsic value by examining related economic and financial factors including the balance sheet, strategic initiatives, microeconomic indicators, and consumer behavior. Basically, Fundamental analysis looks at the fundamentals of an asset, or in other words, every aspect of an asset that contributes to its overall value.
This is a well-known strategy when investing in mature market such as the stock market. It is different when analyzing Crypto markets since this market is completely different and also Decentralized. When looking at fundamentals in crypto I find that the key points are:
- Identify projects you believe have a strong chance of success
- Look at the team behind this project are they active
- Past experiences of the team
- Investors involved in the project
- GitHub being updated frequently
- Presence on social media (twitter, Medium)
- Influence on prices depending on News
- Trying to realize the potential future value of assets is key
- Read the whitepaper, Roadmap, Partnerships, Real world use case, Regulations, Market cap, Price history, Target Market, Competitor comparison, Liquidity and Volume
Fundamental are clearly interesting in certain markets but from my point of view in the crypto world Technical analysis is working just fine. Since the cryptocurrency market is highly volatile, you need to have a strategy to guide your trading. Many crypto traders turn to technical analysis to help them create their strategies. This type of analysis can give you insight into the past movements of cryptocurrency, helping you predict where it might head in the future.
Technical Analysis (TA)
To truly understand how to use technical analysis in your trading, you must be aware of what it means. Technical analysis involves using real-world data to try to predict the future of the market. It involves looking at past statistics of the cryptocurrencies in question, including factors like volume, market cap, daily volume, market sentiment behind price, identify patterns and trends to predict next potential moves. I will talk about the main Technical indicators to help you make a decision as well. Some key points:
- Quickly respond to market change
- Quickly make a trading decision
- Fast accessibility to trading tools (combining various indicators)
- Visualize supply / demand
- Charts provide a clear picture of market action
- Patterns identifiable on charts, use of pattern to guide buy and sell decisions
- Inexpensive, Beginner access to chart is free or relatively inexpensive
- Flexibility and adaptability depending on what kind of trader you want to be (timeframe)
- Basic principles are easy to understand
Technical is what make me believe my investment is worth it, I can have a clear strategy and predict different scenario. Depending on which scenario is playing out, I can cut the loss, take gains at established target or breakeven and analyze again with different point of views. When I see a chart I already have an idea of what might happen and how could I potentially profit from this move while with Fundamentals (FA) I might waste too much time on an asset that is not worth my time. Technical gives a quick idea of what might happen while Fundamental takes times.
- What are Triangles in TA
A triangle is a continuation pattern on a chart that forms a triangle-like shape. Triangles are similar to wedges and pennants and can be either a continuation pattern, if validated, or a powerful reversal pattern, in the event of failure
- Market Cycles
Market Cycles are very important to understand. Market cycles are a long-term price pattern used when technically analyzing price of cryptocurrencies, stocks or fiat currencies. The theory of market cycles is incredibly relevant in cryptocurrency, with Bitcoin’s price succinctly completing a full cycle no less than five times in its ten-year history.
Wallstreet Explanation of what are market cycles.
Another great example of market cycles on this market is the market cycle king $DOGE. Doge coin had many market cycles and Technical Traders love trading it since it’s creation. From a TA trader point of view this is the kind of trading opportunities we are looking for even if the Fundamentals for this coin are based on completely nothing which of course increases the risk, but we’ve had many cycles already. Market cap ($404,249,725 USD) and daily volume ($46,623,794 USD) are still incredibly high.
Use this image to visualize market cycles.
- Patterns on Technical Analysis
This is the interesting part, I will explain some of my favorites trading patterns, the one I like trading most. I will explain by providing Theorical and Real examples.
- Bullish Patterns
o Ascending Triangle
One of my favorite patterns to trade. A bullish pattern that most of the time ends up playing well. In this pattern you have to look for same highs on Resistance and Higher lows on Support (minimum 2). Little chart to help you understand visually.
Example of a Crypto I traded Recently with this pattern.
XHV/USD on Bittrex. (December 13, 2020)
bought the Breakout and now my position is up 24.37% (see graph Below).
o Bullish Pennant
Interesting pattern that you encounter in Bullish continuation Pattern. It is formed after a large movement on the upside what is happening during the pennant pattern confirmation is defined as consolidation period with converging trend lines. (lower highs on Resistance higher lows on Support).
Recent Trade Example
XRP/BTC on Binance (November 23, 2020)
bought the Breakout position went up 59.82% (see graph Below).
o Cup & Handle (C&H)
A cup and handle price pattern on a security’s price chart is a Technical Pattern that resembles a cup with a handle, where the cup is in the shape of a “u” and the handle has a slight downward drift. This kind of pattern are long to form, we are talking weeks here maybe even years.
AGI/BTC on Binance (August 13, 2020)
After successful breakout of the Handle, price +250%.
Price is now back at initial price (Proof of the importance of market cycle and taking profits)
- Bearish Patterns
o Descending triangle
Strong pattern. A bearish pattern that most of the time ends up playing well. In this pattern you have to look for same Lows on Support and Lowers Highs on Resistance. Little chart to help you understand visually.
Real Trade example, some traders might disagree with this, but we had a consolidation phase on XBT chart that to me looked a lot like a Descending triangle in many ways.
BTC/USD on Bitmex
Consolidation phase from (February 6,2018 -> November 14, 2018)
This short was a potential 47%.
o Bearish Pennant
Interesting pattern that you encounter in Bearish continuation Pattern. It is formed after a large down movement what is happening during the pennant pattern confirmation is defined as consolidation period with converging trend lines. (lower highs on Resistance higher lows on Support).
Lumen/BTC (December 15, 2020)
This might end up in a pennant no trade yet.
o Inverted Cup & Handle
the inverted handle is a follow-up to an inverted cup. The inverted handle retraces the initial move, but not to the level of the original trend. Once you see a retracement in the form of an inverted handle of the original inverted cup pattern, setting a stop loss while selling the trend could be a potential trade idea. The cup is always larger than the handle. The handle can be formed with a Bull Flag or with a Pennant.
Real trade example
EOS/BTC on BITFINEX (end of February 2018)
Potential massive short From (0.001124 to 0.00545 = >100%)
- Reversal Pattern
o Double Top
A double top is an extremely bearish technical reversal pattern that forms after an asset reaches a high price two consecutive times with a moderate decline between the two highs.
Real Trade Example
XTZ/USD traded on KRAKEN (Formation February to March 2020)
From the second top price decreased by 60%
o Double Bottom
A double bottom looks like a W on a chart. it describes a change in trend and a momentum reversal from prior leading price action. The twice-touched low is considered a support level. Let me show you a graph it’s pretty straight forward. This pattern can also be called “W Bottom”.
Real trade examples.
BAT/BTC on Binance (November 15, 2020).
This trade was closed with a +40% on investment.
Bat is now making new lows.
o Head & Shoulders
A head and shoulders pattern is a chart formation that appears as a baseline with three peaks, the outside two are close in height and the middle is highest. In technical analysis, a head and shoulders pattern describes a specific chart formation that predicts a bullish-to-bearish trend reversal.
Real trade example.
XBT/USD Traded on BITMEX (January 2020 — march 2020).
This successful Head and Shoulder pattern ended in a 50% drop for Bitcoin.
Can you see it?
o Inverted Head & Shoulders
The exact same pattern of a Head and Shoulders pattern but in the opposite direction (from bearish-to-Bullish). Theory below.
Real Trade Example
o Rising Wedge
The Rising Wedge is a strong bearish pattern that begins wide at the bottom and contracts as prices move higher. This price action forms a cone that slopes up as the reaction lows and reaction highs converge (higher highs on Resistance and higher highs on Support). This pattern can also be identified on Bearish patterns.
Real Trade example
EUR/USD (March 19)
Price downwards from 1.38 (breakout) — 1.17 (Bottom)
o Falling Wedge
The Falling Wedge is a strong bullish pattern that begins wide at the top and contracts as prices move lower. This price action forms a cone that slopes down as the reaction highs and reaction lows converge (lower highs on Resistance and lower lows on Support). I love to trade this as much as the ascending triangle. This pattern can also be identified on Bullish patterns.
Real Trade example
XRP/BTC on Bittrex (June 2015 — mid March 2017)
A massive Falling wedge with 860% gains in 10 days followed by 3000% in 55 Days.
I don’t like the project myself but big money is involved in this coin and we can’t deny this fact.
I will stop here for this Second paper. Third paper will be focused on indicators and how to benefit from them.