This year has been hell for crypto trading hasn’t it? We started the year at $17k+ BTC but at the time of this writing, BTC has declined for 11 straight months and is popping its head over $4k sporadically like a ground hog in February.
Is the long cold crypto winter over yet? Hardly, in fact we’re looking at least another year of declines that will be constant and steady punctuated with a few rallies.
So does this mean it’s time to cash in our chips and go home? Honestly, the bottom here looks to be a long trend centered around $2000, with a range for 2019 of $4k to $1.5k. I’m expecting the 52 week low to be $1100 a year from now. That’s a lot of red ink on the charts. There will be much wailing and gnashing of teeth.
Don’t expect this trend to break until the 4th quarter of 2019 and it won’t be immediately obvious it broke when it does. Q1 2020 will likely be the first time we start to see the beginnings of a rally eventually getting back to current levels.
So yes if you’ve got weak hands, now is the time to cut your losses. If however you don’t mind spending an hour or two per day doing real work and don’t mind doing a little math, you can see regular daily gains between 1% and 10% with an average of around 4%. How would you like to double your money between now and 4th quarter of next year despite the rest of the world bemoaning the cryptopocalypse?
Still with me? Great!
The truth is you can make money in any market up or down. In fact the only time you can’t make money is when the market is flat.
There are obviously different goals depending on market direction. In a down trend, your focus should be on accumulation. Ideally you’re trying to accumulate free coins. You do this by purchasing when the trend is in the lower 2 standard deviations below the simple moving average, then selling at 1 standard deviation above the SMA.
In an up trend your focus should be on maximizing profits on the coins you accumulated previously. You do this by purchasing between the moving average and 1 std deviation. You maximize profits by spreading your sales out above 1 std deviation above the SMA. This generates a consistent healthy profit no matter what the market has been doing in the long term. In other words it’s easy to profit in an up market, you just want to get in while you can and try to get out somewhere near the top.
That doesn’t work in a down market. In a down market you have to pull back and look for a longer trend where it’s trading in a range instead of downwards, then trade that trend. In either case, you also have to be cautious, because a trend break whether up or down can be disastrous.
So my first recommendation, always trade with a stop loss. If your exchange doesn’t offer a stop loss, a viable alternative is to run a monitoring program to monitor your assets and cash you out the moment the trend your trading in falls.
It can be as simple as checking every few minutes and making sure your assumptions are still valid. In fact that’s all I do. I have a little program I whipped out in 30 minutes to check the order book and if current bid < daily low, then we cancel all open orders and sell everything at best bid * 0.9. This allows me to be the first to jump ship and preserve cash when the market turns against me. This is almost always a strong indicator of a much bigger slide, so in the end even though I’m selling at a loss, when the bottom finally hits I can trade with much more coins than before and that makes it easier to claw back my losses.
Now there are 4 things you need to do in order to trade with any sanity.
- Trend Detection
- Trend Confirmation
- Buy/Sell indicators
- Profit Taking tools
The first thing you need to do is to find a trend. I define a trend as any period of time for which the last close is above or below the SMA or Simple Moving Average. As long as the close remains above SMA we are in an uptrend. If the close falls below the SMA then we are in a down trend. Finding a trend is as simple as zooming out on the chart. Start with 1m candles, zoom all the way out, look for a graph that looks like it has some range to it but isn’t sharply up or down. For this article we’re going to focus on up trends, but downtrends are the same, the main difference is in how you spread your trades.
When the monthly trend is overall down, but the shorter trends are showing some upwards momentum then it’s a matter of confirming the trend. For this I like to use the Moving Average Convergence Divergence or MACD. The MACD weights a shorter time frame with a longer time frame. So we have a window of time a moving average and if the shorter time frame is up and the longer time is up then you’ve confirmed the trend.
For example, I trade daily, so I use 1 minute candles for an hour window of time, then I use 5 minute candles for 8 hours.
If they are both up, then I know that this is a time frame I want to plan for.
That’s where the Buy/Sell indicators come in. I use RSI and Bollinger Bands. They are simple, easy to calculate, easy to use and combined they provide a very solid basis for trading.
RSI or Relative Strength Index, is which is simply (100 – (100/(1+(ups / downs)) this provides a range between 0 and 100.
In general, when it’s showing 30 or less it is time to buy because the trend is oversold and likely the price will rise soon.
When it’s showing 70 or more, it is time to sell because the trend is overbought and likely the price will fall soon.
RSI by itself is a liar. In a strong uptrend the market will just ignore RSI and so you are selling below the peak and leaving money on the table. Downtrends are worse, in a strong downtrend the market will again just ignore RSI, but now you’re overpaying for your coins and it will be difficult to offload them later without a loss.
This is why I don’t buy or sell at market based on RSI. Instead I use Bollinger Bands to determine my pricing and I just use RSI to help me determine overall if I’m going to buy or sell that day. RSI is most useful at the daily level and looses validity on shorter time scales.
Bollinger Bands are extremely useful. They show you where 1 standard deviation is away from the EMA or Exponential Moving Average. This means if you place a buy order on the lower band and a sell order on the upper band you can expect both sides to fill eventually.
BB also lets us know how volatile the market is. Volatility is important because if you can’t get into and out of a position profitably including fees, then you’re just stuck.
You can take the trend high, multiply it by the fee percentage your exchange charges and if the 1 std deviation represented by the band is higher than the fee then you can safely trade that trend whether up or down and earn a profit. In fact the only time you can’t make money in the market is when the volatility is too low. Up or down only affects how you spread your orders for maximum profit, it doesn’t really change the strategy overall.
OK so now you’ve got everything you need for a clean simple trading strategy. If you do this daily, you’ll find that most days there is enough volatility to let you profit that day. You just need to know how to spread your prices in order to maximize profits and minimize the potential for loss.
How you spread prices depends entirely on the Bollinger Bands and the market direction. If the monthly trend is overall down, you need to trade close to the margins on your bands. That means place your buys on the lower band directly, but don’t put everything there. If the bands shift suddenly you want to be in position to pickup the cheaper coins. So what I do is to place 80% of what I plan to buy that day at 1 std deviation away from the bottom, then 80% of the remainder at the next std deviation, etc until my order size is the minimum size for the exchange or I run out of liquid cash.
Selling is the same but in reverse. 80% at 1 std deviation, and 80% of the remainder at 2 std deviations etc.
The next thing I do is to cancel any outstanding orders the next morning. If they didn’t fill they aren’t going to and the more money you have liquid, the longer you can stay in the game. Remember it only takes 1 day with a 20% gain to make up for 14 days of losses, but you have to make sure you don’t lose your shirt during those 14 days.
By keeping this religiously, most of the time I hit at least one buy and one sell daily. With average spreads of $100 USD that means earnings of $50 per side per BTC in play. This works out to a little over 1% daily.