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Trading 101

Trading 101: Chart Patterns, Part 1

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Arguably the most well-known part of technical analysis is the study of chart patterns. Even those not familiar with TA have seen double tops, double bottoms, head and shoulders formations, to name the most famous ones. These patterns are relatively easy to spot and give the illusion that it’s easy to spot a reversal in prices. Although some of the chart patterns have a pretty good track record, it’s very important to know their limitations, their background, and to use them as all other trading tools: to judge probabilities rather than to find The Holy Grail of trading.

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The Premise of Chart Patterns

Visualization is one of the key elements of technical analysis. This method uses the unique ability of our brain to spot patterns and build models by comparing a particular price chart to different historical price movements. On a basic level, traders use price formations because similar price movements tend to resolve similarly, mostly because crowds tend to react to similar situations in a similar way. Looking at charts as the “log” of crowd behavior helps us to understand why the price history can help us in gauging the state of the market, and spotting the current “mood” of the participants, and most importantly the balance between buyers and sellers.

On the flip side, your mind can play tricks with you as well; you might see patterns when there is none, or even worse, use what you see to confirm what you already decided unconsciously. Psychologists call this confirmation bias, and it’s one of the most notorious enemies of traders and investors alike.

So while visualization is a huge help for traders, especially experienced ones, always treat chart patterns with a grain of salt. They are not magical tools, but in the good hands they can boost your returns and help you in spotting great trading opportunities while protecting your capital.

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The previously discussed support and resistance levels can be viewed as the most basic (and some of the most reliable) chart patterns. As a general rule, simplicity is very helpful in technical analysis—overcomplicating your charts will generally lead to confusion. Also, on a complicated chart, you will definitely find some confirmation, no matter that you want to buy or short the given asset.

The Types of Chart Patterns

There are several possible factors to group the vast number of chart formations, but we will use the most practical one, the role of the pattern in the trend. This way, you will be able to look at the formations as part of the ongoing price movements, not just isolated things. Context is always very important when dealing with chart patterns, as, for example, a “double top” looking pattern can have significantly different importance in a downtrend or at the end of a multi-year advance.

We will use the following groups:

  • Consolidation patterns
  • Continuation patterns
  • Reversal patterns

These groups already have some overlap between them, as, for instance, some continuation patterns could be consolidation patterns as well, but in practice it’s more important to know the usual consequence of a formation than to have nice and tidy groups.

Consolidation Patterns

Consolidation patterns in the WTI Crude contract, 4-Hour Time-Frame

We already saw that the price of financial assets isn’t always moving up or down, it also drifts sideways for long periods. When you notice a neutral short-term trend in an ongoing long-term move, it’s called a consolidation pattern. Consolidation patterns are brief “stops” in the trend which don’t change the basic structure of the move.

As you can see on the chart above the trend remained intact and the break-outs from the patterns gave great opportunities to enter the move. Also, it’s easy to see that these patterns often correspond with the swings that we already discussed. The reason that we use this grouping is that some swings will qualify as consolidation patterns, but others might mean entirely different things for the trend.

Consolidation patterns usually emerge in strong trends and last only for a brief period of time (5-10 candles on the given time frame). The names of these patterns usually simply refer to something that is similar to the pattern, wedges, flags, triangles, pennants, and rectangles (trading ranges). We will look at these in detail later on when discussing continuation and reversal patterns.

Continuation Patterns

As soon as the ongoing consolidation pattern starts to break the structure of the underlying trend, violates the trend-line for example, we talk about a correction that could form a continuation or a reversal pattern, depending on the outcome. We have to stress again that the shape of the pattern is no magical forecasting tool, rather a hint on the probability of the outcome, but with experience and disciplined trading, this edge can be turned into significant and stable returns.

First, we will look into formations that are primarily continuation-patterns.

Triangles

Consolidation (red), and continuation and reversal patterns (black) in the S&P 500, 30-minute Time-Frame

Triangle patterns are probably the most common ones, and they can simply be described as compression patterns, periods where the price action in the asset is limited to smaller and smaller ranges as the time goes by. This corresponds with the decline in volatility, and with less and less short-term trading opportunity in the pattern. These factors usually lead to declining volumes (as short-term traders look for other assets) and, lately, algorithms compressing the price even more.

Triangles can be symmetrical, ascending, or descending, depending on the angle of the lines that make up the pattern. Although all triangles are primarily considered continuation patterns, their success rate varies from asset to asset. As a general rule, a move out of the triangle in the direction of the prevailing trend is considered a more reliable signal. Also, symmetrical triangles are less reliable in both declining and rising trends, while ascending triangles give better signals in uptrends while descending triangles in downtrends. If you notice an inverse triangle (or megaphone pattern,) where volatility is rising, be careful, as it is a usually bearish pattern that is not just hard to spot in real-time, but also very tricky to trade.

Rectangles or Trading Ranges

These patterns are also very common and appear on every time-frame and every stage of trends. They are bordered with short-or long-term horizontal support and resistance levels. In practice, short-term trading ranges (consolidation patterns) are reliable both in up and downtrends, but longer-term ranges are less useful in downtrends, despite being reliable in uptrends. We will go into details in our next article on pattern-based strategies.

Reversal Patterns

Double Tops and Bottoms

Giant daily double top in the S&P 500 at the end of the 2003-2007 bull market

These very famous patterns are closely connected to swing-analysis, as they are based on swings that fail to hit new highs or lows in an ongoing trend. By definition, a double top pattern forms in an uptrend if two upswings “top-out” at, or almost at the same level. These two tops set up a horizontal resistance line, while the swing low of the first swing will be the level of the so-called “neckline”.  This level is very important (as you might remember from our swing-trading lessons), as if the second swing penetrates that level, a “lower low” will form, confirming the weakness in the trend.

A very common misconception regarding double tops (and bottoms), is that if you have the two tops, you already have the pattern formed. In contrary, a double top is only confirmed if the price falls below the neckline, end closes below it (basically hits a lower low).  Also, a double top without an uptrend or a double bottom without a downtrend doesn’t exist. In fact, these patterns are more reliable on longer timeframes (such as daily charts) because they represent more stable market dynamics.

All in all, while double tops and bottoms are actually very reliable patterns, the misuse of the definition often leads to counter-trend positions, as traders enter into consolidation patterns against the trend, without confirmed weakness and a valid formation.

Triple and Multiple Tops and Bottoms

Similarly to the double tops, these formations occur when the price of an asset fails to surpass a prior high or low, but with these patterns, this happens on multiple occasions. As a general rule, triple and multiple tops are way less reliable patterns, even if the “neckline-break” occurs. A lot of times these will prove to be rectangle continuation patterns with a failed break-out or break-down, making them rather suspicious trading tools. Also, in connection with this, remember that in uptrends resistance levels (and in downtrends support levels) should be treated weaker and weaker if they are tested multiple times, as the underlying trend is more and more likely to continue.

Head and Shoulders and Inverse H&S Patterns

Daily Inverse Head and Shoulders Reversal in Oil (USO ETF)

These patterns are very close to double tops and bottoms, but with a twist; between the two similar swing highs or lows (the shoulders) there is third slightly higher or lower swing that is called the head. Head and shoulders patterns are even more reliable than double tops, as they point to imminent weakness in the trend, as the price breaks the neckline (the first of the three swing lows) even before re-testing the first swing high.

With these patterns the same rules apply as with double tops and bottoms; they should be preceded with a distinct trend, and they are only confirmed when the neckline is broken.

Now that we got to know the most common chart patterns and the theory behind them, we will dive into trading strategies based on them, while learning some very important details that could make all the difference in real-life trading, so stay tuned.

Important: Never invest money you can't afford to lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here.



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3 Comments

3 Comments

  1. Presnus

    May 31, 2017 at 8:11 am

    Where is part2?

    • Mate Cser

      May 31, 2017 at 3:43 pm

      Hi Presnus, part two will be posted around the weekend, I will let you know here in the comments!

  2. elminv

    June 7, 2017 at 1:35 pm

    Hi Mate,

    Thanks for all the info, great read. What software would you recommend to do trend lines etc?

    Thanks
    E

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Education

Research an ICO (Initial Coin Offering) Like a Pro – Insider Information

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I usually write about Altcoins investing and trading. Right now I wanted to spill the beans on how I research an ICO. If you are not familiar with an ICO, it is a coin offering an altcoin does to raise funds to build the product or to expand their company/reach.

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Instead of doing an IPO as most traditional companies do, a lot of companies are now going ICOs. Why? Many reasons but I would say the top 2 are the fact that millions of dollars are being raised in a short amount of time as investors are trying to be a part of the new altcoin launches in order get in on the ground floor. The second reason is that investors that take part in an ICO do not own actual equity in a company, they are essentially just giving the company money in order to launch their product. In traditional IPOs, investors would actually own a small or large percentage of a company when they invest possibly giving them voting rights as well as actual company ownership.

Now I want to jump right into how I analyze and research an ICO. While some people start with the technology or the idea itself, I have to admit that I start with the ICO token metrics. First, calculate market cap to make sure they are not overvaluing themselves compared to other ICOs or existing altcoins.

Determine the Market Cap of the ICO:

  • Calculate the token price with this formula ETH Current Price/Num Tokens per ETH
  • Now multiply Token Price * Number of Tokens in Circulation (tokens sold in crowdsale + presale)

This is the company market cap roughly if the ICO sells all available tokens during the crowdsale. Take this market cap and compare it to the top 100 altcoins to see how the coin compares. If the market cap equals $30,000,000 then they would need to grow to $90,000,000 in order for you to make 3x your investment. Now go to Coinmarketcap.com and see what companies have the same market cap as this ICO. Ask yourself: Is this ICO as good as the existing altcoin and is it or should it be worth the market cap they are trying to achieve with the ICO launch.

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Now that you have determined that the market cap is good and that the altcoin has the potential to make you 3x – 5x your initial investment it is time to move on.

Read the Whitepaper:

Ask yourself these questions: Is the technology unique? Can this company survive/thrive without doing an ICO? What is the purpose of the token in the company ecosystem? Are they just creating a coin to profit in this ICO craze or does the coin serve an important purpose? How will the coin increase in value, is it based only on hype on exchanges or is it from it being used as a utility in the company? Does this company have competitors that may make this one irrelevant?

Research the Team:

First off, is the legitimate? Do they really exist on Linkedin, etc. You would be surprised how often the team members can be faked. Read the linkedin description to see if the team member is full-time with the ICO and if the ICO is even mentioned at all.

Research the ICO Advisers:

Are the advisers relevant to the ICO or are they just a shiny attention grabber? If you see the same adviser on multiple ICOs then their credibility/value to the ICO diminishes greatly.

Determine Level of Hype:

Don’t underestimate this step. An easy way to get a feel for hype and popularity is to google the name of the ICO. See how many mentions are in the google search results. Make sure you use exact matches such as quotes in the google search so that you don’t get results for the word ‘the’ or something generic. How many times are they mentioned on social media? The best way to do this is to go to buzzsumo.com and type in the name of the ICO. This will give you a results list showing content and mentions on Facebook, Linkedin, Twitter, Pinterest and how many times the content pieces were shared. Go to the ICO website and search for the websites, social media and chat programs where they interact. Some of the most popular are Slack Channel, Telegram Chat, Twitter, Bitcointalk.org, Reddit.com.

Check out their existing product and code:

For this step you don’t have to know programming or anything like that. You will just want to go to their Github.com account as this is where they will store the code for their project. You can see how often they update their code and how active they are developing. Also, do some research on their past products if they are an existing business that is just expanding by offering an ICO.

Research similar altcoins:

Go to Coinmarketcap.com and CryptoCompare.com and study similar coin charts. Of course, every company is different but you just want to get a general feel for the potential. Right now ICO investors are leaning towards investing in Protocols and Platforms such as 0x, Kyber and Raiden. Ideas that are needed to propel blockchain and cryptocurrency forward.

Good luck researching ICOs and may you see 3x – 100x returns. CryptoDayTrader, over and out…

Featured image courtesy of Shutterstock. 

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Cryptocurrencies

Make More Profit with Proof of Stake Altcoins – Ultimate Guide

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Here is a list of all coins that are Proof-of-Stake. Some of these coins get very little volume but I wanted this to be an extensive list of all coins that are proof-of-stake. The value of these type coins is that you can buy and hold any amount of the coin and you will get paid interest each year for holding them in an active wallet. The more coins you have, the more you make. Long story short: Buy the altcoin, hold the altcoin, make money from holding it each year.

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“Proof of Stake is a type of algorithm by which a cryptocurrency blockchain network aims to achieve distributed consensus. Unlike Proof-of-Work (PoW) based cryptocurrencies (such as bitcoin), where the algorithm rewards participants who solve complicated cryptographical puzzles in order to validate transactions and create new blocks (i.e. mining), in PoS-based cryptocurrencies the creator of the next block is chosen in a deterministic (pseudo-random) way, and the chance that an account is chosen depends on its wealth (i.e. the stake).”- Wikipedia

I will highlight some of the more profitable and well-known proof of stake coins and include a link to their website. This is meant to be an exhaustive list of all PoS coins as of 2017 and will be updated as new coins get added.

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  • AcesCoin (ACES)
  • AcesCoin (AEC)
  • Aegis (AGS)
  • Aero Coin (AERO)
  • Algo.Land (PLM)
  • Allsafe (ASAFE)
  • Ammo Rewards (AMMO)
  • ArchCoin (ARCH)
  • Ardor (ARDR)
  • Asia Coin (AC)
  • Atmos (ATMS)
  • Avatar Coin (AV)
  • AvonCoin (ACN)
  • BattleCoin (BCX)
  • BattleStake (BSTK)
  • BigUp (BIGUP)
  • BitBay (BAY)
  • BitCurrency (BTCR)
  • BitHIRE (HIRE*)
  • BitLuckCoin (BTLC)
  • BitMoon (BM)
  • BitOKX (BITOK)
  • BitVegan (VEG)
  • BitVolt (VOLT)
  • BitcoinTX (BTX*)
  • BitluckCoin (BTCL)
  • Bitradio (BRO)
  • Bitshares (BTS)
  • Bitz Coin (BITZ)
  • BlackCoin (BLK)
  • Blackstar (BSTAR)
  • BlitzCoin (BLITZ)
  • Boats and Bitches (BNB*)
  • BonesCoin (BON*)
  • CAIx (CAIx)
  • CabbageUnit (CAB)
  • Cardano (ADA)
  • CheckCoin (CXC)
  • Clickcoin (CLICK)
  • CoffeeCoin (CFC)
  • Coin to the Future (BTTF)
  • ColossusCoinXT (COLX)
  • CoolCoin (COOL)
  • CoralPay (CORAL)
  • CraigsCoin (CRAIG)
  • Creatio (XCRE)
  • Crowdwiz (WIZ)
  • Crypti (XCR)
  • CryptoCircuits (CIRC)
  • CryptoJournal (CJC)
  • CryptoPennies (CRPS)
  • Cryptokenz (CYT)
  • CybCSec Coin (XCS)
  • Dash (DASH) – Website: https://www.dash.org/ – Annual Return: Approx 7.5%
  • DeOxyRibose (XNA)
  • Decent (DCT)
  • DeltaCredits (DCRE)
  • Diggits (DIGS)
  • DigiCube (CUBE)
  • Digital Bullion Gold (DBG)
  • Draftcoin (DFT)
  • Dropcoin (DRC)
  • EGOcoin (EGO)
  • Ebitz (EBZ)
  • EbolaShare (EBS)
  • Exclusive Coin (EXCL)
  • Extreme Sportsbook (XSB)
  • FaucetCoin (DROP)
  • FazzCoin (FAZZ)
  • FindCoin (FIND)
  • FlyCoin (FLY)
  • Forever Coin (XFC)
  • FreeCoin (FRE)
  • Fuel2Coin (FC2)
  • FuturePoints (FTP)
  • GAIA Platform (GAIA)
  • GPU Coin (GPU)
  • GameBetCoin (GBT)
  • Global (GLOBE)
  • Global Currency Reserve (GCR)
  • GlowShares (GSX)
  • GorillaBucks (BUCKS*)
  • GrexitCoin (GREXIT)
  • GrowthCoin (GRW)
  • HealthyWorm (WORM)
  • HeelCoin (HEEL)
  • HiCoin (XHI)
  • Horizon (HZ)
  • Iconic (ICON)
  • Incrementum (INC)
  • InvisibleCoin (IVZ)
  • Ionomy (ION)
  • KryptCoin (KTK)
  • LePenCoin (LEPEN)
  • Let it Ride (LIR)
  • Limited Coin (LTD)
  • LuckyBlocks (LUCKY) (LUCKY)
  • Lutetium Coin (LC)
  • MacronCoin (MCRN)
  • MaieutiCoin (MMXIV)
  • MapCoin (MAPC)
  • MasterMint (MM)
  • MintCoin (MINT)
  • Mojocoin (MOJO)
  • MudraCoin (MUDRA)
  • Nas2Coin (NAS2)
  • Nautilus Coin (NAUT)
  • Navcoin (NAV) – Website: http://www.navcoin.org/ – Annual Return: Up to 5%
  • Nebuchadnezzar (NEBU)
  • NEO (NEO) – Formally Antshares, Website: https://neo.org/ – Annual Return: Approx 5.5%
  • NeosCoin (NEOS)
  • NeuCoin (NEU)
  • Neurocoin (NRC)
  • NewInvestCoin (NIC)
  • NoLimitCoin (NLC2)
  • Noocoin (NOO)
  • NuBits (NBT)
  • NuShares (NSR)
  • NukeCoin (NUKE)
  • Obsidian (ODN)
  • OkCash (OK) – Website: https://okcash.org/  – Annual Return: 10%
  • OldSafeCoin (OLDSF)
  • OmiseGo (OMG)
  • Opair (XPO)
  • OptionCoin (OPTION)
  • PSIcoin (PSI)
  • PandaCoin (PND)
  • PayCoin (XPY)
  • Persistent Information Exchange (PIE)
  • Phreak (PHR)
  • PIVX (PIVX) – Website: https://pivx.org/  – Annual Return: Approx 4.8%
  • PokeChain (XPOKE)
  • PostCoin (POST)
  • Power Ledger (POWR) – Website: https://powerledger.io/Annual Return: Not Sure
  • PrimeChain (PRIME)
  • Prizm (PZM)
  • ProCurrency (PROC)
  • Pulse (PULSE)
  • PureVidz (VIDZ)
  • QTUM (QTUM)
  • QoraCoin (QORA)
  • Quantum Resistant Ledger (QRL)
  • RadicalCoin (RADI)
  • Radium (RADS)
  • RadonPay (RDN)
  • Ratio (RATIO)
  • Red Pulse (RPX) – Website: https://coin.red-pulse.com/Annual Return: 5%
  • RenosCoin (RNS)
  • Resumeo Shares (RMS)
  • ReturnCoin (RNC)
  • Ride My Car (RIDE)
  • Rise (RISE)
  • RoyalCoin (ROYAL)
  • RoyalCoin 2.0 (RYCN)
  • Rubies (RBIES)
  • RubyCoin (RBY)
  • SARCoin (SAR)
  • SelenCoin (SEL)
  • ShortyCoin (SHORTY)
  • Signatum (SIGT)
  • SkullBuzz (SKB)
  • Specie (SPX)
  • Spectre (XSPEC)
  • SportsCoin (SPORT)
  • Squall Coin (SQL)
  • Stakecoin (STCN)
  • Stakers (STA*)
  • Stakerush (STHR)
  • SteamPunk (PNK)
  • Steps (STEPS)
  • SterlingCoin (SLG)
  • StorjCoin (SJCX)
  • Stratis (STRAT) – Website: https://stratisplatform.com/ – Annual Return: .5 – 1%
  • Subscriptio (SUB*)
  • TeamUP (TEAM)
  • The Vegan Initiative (XVE)
  • TrashBurn (TBCX)
  • TrickyCoin (TRICK)
  • TrumpCoin (TRUMP)
  • Turron (TUR)
  • UPcoin (XUP)
  • Ubiqoin (UBIQ)
  • Ucoin (U)
  • Ultimate Secure Cash (USC)
  • Universe (UNI)
  • Vcash (XVC)
  • Versa Token (VERSA)
  • Viral Coin (VIRAL)
  • WMCoin (WMC)
  • Wanchain (WAN)
  • WarpCoin (WARP)
  • WayCoin (WAY)
  • WealthCoin (WEALTH)
  • Wexcoin (WEX)
  • Wink (WINK)
  • XDE II (XDE2)
  • YobitVirtualCoin (YOVI)
  • ZeitCoin (ZEIT)
  • Zennies (ZENI)
  • deCLOUDs (DCS)

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Trading 101

Trading the News in Cryptocurrencies

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bitcoin news

Cryptocurrency trading shares many similarities with both forex and stock trading. All of these assets can be traded with a range of different trading strategies, using technical analysis, quantitative analysis, and fundamental analysis. In this article, we will focus on fundamental analysis and how you can succeed with cryptocurrency trading by trading the news.

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In the stock market, we all know how news can impact stock prices. This is especially true for penny stocks, where one corporate announcement can make a huge impact on the price. The same goes for forex, which is largely driven by fundamentals in the long terms and technicals in the shorter term.

Cryptocurrencies are ideal for news trading

One can argue that the cryptocurrency space is better suited for news trading than the stock or forex market is. The main reason for this is the lack of institutional traders, including high-frequency traders, in the crypto space. This is a space that is still dominated by retail traders, meaning you stand a much better chance at profiting from news releases by reacting in a quick and smart way.

So, what are some important things we need to consider when trading the news?

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  1. Is the news fresh? You need to evaluate whether the news is actually news or if it is already priced in by the market. Look at how the price moved ahead of the news release? Did the news just confirm an outcome that was already expected by the market, or did it bring new information to the table?
  2. Is the news of importance to the price of the cryptocurrency? Is it likely to impact the price over the long-term or is it a one-time boost?
  3. Is the coin liquid enough to be traded profitably in the short term? How many people are actually following this coin and related news?

Let’s take a look at how this can play out in a real-world scenario:

Phase 1 – The first leg: The news has just been released and the first reaction in the price is already seen. This is your first opportunity to take a position in the market to profit from. If momentum and liquidity is good, you can take your first position here.

Phase 2 – New buyers are joining the party: After the initial euphoria has settled, you will often experience a move in the opposite direction. This is expected, and happens because all the traders who were ready to buy right away already got their orders filled at this point. The market now needs new buyers to join in in order to continue to rise. And more often than not, that is exactly what happens. As the word of the positive news in your crypto asset spreads, more and more traders are joining in, extending the upward move in the price.

Phase 3: The swing trade opportunity: Medium to longer-term traders are now eyeing the opportunity to make money from this asset that is “in play,” instead of the boring stuff they are currently holding on to that is not making them any money. This type of trader is looking for longer-term opportunities in coins that are trending. Once an uptrend has formed, they look to enter as early as possible and ride the trend up.

How long should you hold the trade?

The trend will persist as long as new traders are jumping on this opportunity. Usually, trends act as self-fulfilling prophecies in the way that the longer the trend has lasted, the more people will hear about it and join in on it. When we finally reach a point where the sellers outnumber the new buyers, the trend ends and the cycle may repeat itself in the opposite direction.

One way to develop an estimate of how long the trend is going to last and setting a target price is by using Fibonacci extensions. You can also study previous trends in the asset and see if you can spot any pattern. In all asset classes, crypto included, trends move in waves that tend to repeat themselves.

Personally I prefer to hold on to the trade until the market has given a clear indication that the trend has ended. Usually, I will let this come in the form of price breaking through one of the moving averages, for example the 20 day moving average when trading on the daily timeframe. That way, I don’t have to second-guess when I should get out of the trade, and I also never change this rule once the trade is entered into. It’s not so important what strategy you choose for getting out of the trade, but it is very important that you do have a pre-determined plan for getting out and actually follow through with it.

These strategies work just as well for crypto trading as they do in the stock and forex markets. As the legendary trader Jesse Livermore said more than a hundred years ago:

“The pockets change, the suckers change, the stocks change, but Wall Street never changes, because human nature never changes.”

Featured image from Pixabay.

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