In 2019, cryptocurrencies can be called the most popular financial instrument. The high volatility of tokens creates a good potential for super profits. The decentralized nature and lack of regulation of the digital financial industry allows market makers to effectively apply the “Pump & Dump” strategy, which is quite famous on Wall Street. In other words, significant capital turnover allows large traders to manipulate quotes in order to make a profit. Such activities are illegal in terms of the stock and commodity markets, however, on decentralized sites, market makers constantly use such strategies . This is possible due to ineffective regulation or lack of it.
Among other things, the potential for high profits in the cryptocurrency market is created by high volatility. The cost of cryptocurrencies can change during the day up to 50%, thanks to which everyone can significantly increase their capital. For a stable income on the pricing of altcoins, it is not enough to register on a specialized exchange and make a deposit. Successfully trading tokens , like any other derivative asset, requires an effective strategy.
This article explores a proven system for making money on altcoin pricing, and provides practical advice based on personal experience. The knowledge gained after acquaintance with the material can be put into practice even by novice traders.
What is important to know for successful altcoin trading?
Trading cryptocurrencies is significantly different from money management in the OTC market. When working with charts of currency pairs, traders use technical and computer analysis tools. These methods are useless when trading altcoins. The pricing of cryptocurrencies is extremely difficult to lend itself to standard analytical methods, however, there are still ways to make a stable profit from trading with these instruments. Before proceeding to their consideration, trader should pay attention to the characteristic features of the dynamics of altcoin pricing:
• For cryptocurrency charts, impulses of a wide range are characteristic, that is, the price can instantly change by several tens of points.
• Altcoins are not prone to corrections. There are quite effective trading systems based on corrective movements. If the chart of a currency pair or stock travels a significant distance in one direction, then the probability of a short-term movement against the main trend is close to 90%. This is confirmed by statistical data.
The screenshot shows a segment of the chart of the GBP / USD pair with the H1 period, on which 2 price impulses of a significant range are formed. Please note that each price jump is followed by a correction, the maximum value of which can reach 50% of the momentum. There is one important condition for the formation of a correction – the range of the jump should not be less than the average daily volatility of the asset (for the GBP / USD pair, this value is 120 points).
For cryptocurrencies, the formation of a correction is not typical. Pay attention to the segment of the BTC / USD pair chart , on which 2 price impulses are formed:
The probability of a correction forming after a price jump on cryptocurrency charts is approximately 50/50. Consequently, an effective strategy to make money on pullbacks, which can be successfully applied when trading Forex, turns out to be useless when working with altcoins.
• When trading cryptocurrencies, it is unacceptable to use oscillators due to the high percentage of false signals. To analyze such assets, it is much more efficient to use standard trend indicators (Bollinger envelope, moving averages, and others).
• When analyzing token charts, it is useless to use the Price Action candlestick analysis system.
• Wide spreads, the range of which can reach 100 pips, especially in conditions of increased liquidity.
• Changing trading sessions does not have any effect on altcoin pricing dynamics.
The decentralized nature of the cryptocurrency market and the lack of regulation create all the conditions for large trading participants to use the Pump & Dump strategy. As practice shows, mainly new and little-known tokens are subject to this.
A Proven Method of Successfully Trading Altcoins
The most important feature of cryptocurrency pricing that anyone can effectively use in trading is the frequent formation of price impulses. To make money on this, it is important to place trade orders in a timely manner in the direction of the jump. For this, it is recommended to use pending Buy Stop and Sell Stop orders.
To place orders, trader should wait for the formation of at least 5 candles formed in the same price range. Such “patterns” are displayed on the BTC / USD chart almost every day.
To identify a trading signal, it is important to pay attention to the number of candles, which must be at least 5. All price elements must be formed within the same range. The example shows that a Buy Stop order was opened, after which the deal was closed by Take Profit.
The presented strategy has been tested on personal experience. With its help, even a novice trader will be able to earn up to 40% of the deposit every month, while observing the rules of money management (the risk for each transaction is no more than 10% of the capital).
Attention! The application of the considered method in practice is possible only when trading cryptocurrencies on specialized exchanges. When dealing with altcoin pricing CFDs through Forex brokers, this strategy is not safe to use. The fact is that in the user agreements of some companies there is a special clause, the conditions of which can deprive a trader of profit:
” The company reserves the right to cancel the client’s financial result if the value of the derivative financial instrument has changed by more than 10% within 1 hour.”
As mentioned earlier, the pricing of cryptocurrencies is unregulated, which makes these assets highly volatile. There have been cases when the value of tokens changed by 80% during the day. With the previously mentioned trading condition, some brokers try to protect themselves from possible losses. It is important to remember that conflicts of interest are integral to dealing with CFDs. Therefore, in order to reduce non-trading risks to a minimum, it is recommended to trade altcoins through specialized exchanges.
Method of trading cryptocurrencies
To increase the profit potential, trader can use a more complex strategy based on the Fibonacci grid. It is important to wait for the formation of 4-7 price elements in a narrow price range and determine the local trend. Trading will be carried out with pending orders and only in the direction of the trend.
The circle marks the segment of the chart, the minimum / maximum of which was taken as a basis for drawing Fibonacci levels. Note that the local trend is downtrend this time, so stretch the grid from bottom to top. Trading rules are similar to those discussed earlier. Since the local trend is downward, trader only need to place a Sell Stop order at the level of 61.8. As trader can see, the deal was closed with profit taking. Closing an order with a loss is also possible under the influence of market noise, but this happens quite rarely.
Suri Dudela has been trading the futures and stock markets for over 13 years and is the author of Professional Chart Pattern Trading.
Various chart patterns such as “double top” and “head and shoulders” essentially give the same signals for a trend reversal at the end of the pattern. Considering that these models are the most common figures of technical analysis for almost all financial markets, we decided to consider in more detail the various options for their formation and some trading rules using them.
These patterns form when price fails to make new lows or new highs at significant previous levels.
Double Top and Double Bottom patterns are relatively reliable and easy to trade. When a pattern fails, it could signal the potential for a triple top or triple bottom pattern to form.
Double Top / Bottom patterns have several variations, and these variations involve different pattern recognition methods and trading rules.
Formation of Double Top / Bottom Patterns
In active markets, double top / bottom patterns occur when the market moves quickly to a peak or bottom, accompanied by high volume in the first stage. Without any warning signals, the market reverses and retraces to the key support / resistance level and after some consolidation rises / falls to the previous peak / bottom with less volume in the second stage. These two sharp moves form a double top / bottom pattern and signal a potential reversal of the previous trend. In most of these patterns, the two swing to peak or bottom should not be equal and one of the tops / bottoms can be higher or lower than the other.
The previous move before the formation of a double top / bottom pattern signals whether it will be a continuation pattern or a reversal pattern. If the previous move was a long extended up / downtrend to the first top / bottom, then the pattern could signal a reversal, while on a short previous move, it could be a continuation pattern.
Markets making new highs / lows (at least in the last 40 bars) can signal a reversal pattern. The “size” of the pattern, or the length of the interval between two tops / bottoms, gives an estimate of the likelihood that the pattern will succeed. A sufficient duration of the interval between two tops / bottoms signals a high probability of a reversal. The “size” of the retracement (at least 15% of the swing start) between two tops / bottoms also indicates the likelihood of the pattern being successful. If we see high volume on the first top / bottom and weak volume on the second top / bottom, followed by higher volume on the breakout signal, then there is a high probability that the pattern will succeed.
Double Top Trading Rules
A “double top” is a two-peak formation with an intermediate swing low. After the completion of the second peak, price declines below the reaction low, signaling a potential trade.
Varieties of Double Top / Bottom Patterns
Knowledge of the types of patterns and trading rules for them significantly increases the chances of successful trading on “double tops / bottoms”. Most of the patterns have some variation of their basic structure (simple or complex) with slightly different rules for trading different patterns in the same group, but have the same requirements for volume change, price movement and entry timing. Some examples of variations of the Double Top / Bottom pattern are Dragon, Trader Wick’s 2B Top / Bottom, and Adam and Eve, which we will briefly discuss below.
Dragon model
Dragon patterns usually form at the bottom of the market. This pattern works on all time frames and on all market instruments. Like most double bottom patterns, the dragon represents superior trading opportunities with a low risk to reward ratio. The dragon pattern resembles the W pattern, and the inverse dragon pattern is similar to the M pattern, albeit with different trading rules.
The dragon pattern begins with the formation of a head, after which the price descends from the level of the head to form the two legs of the dragon. These two “legs” in the model are usually formed with a price difference of 5% – 10%. The second leg provides a strong signal of an imminent reversal, especially when confirmed by a reversal bar or divergence on any oscillator. A price increase in the second leg is usually accompanied by a spike in volume. A trend line is drawn by connecting the dragon’s head to the hump. When the price closes above the trendline and the given price action is confirmed by divergence on any oscillator, it signals a reversal. The second confirmation of the dragon pattern occurs when price closes above the hump, usually located within the 38% -50% range from the head to the low of the first leg.
The foreign exchange market demonstrates such unpredictable dynamics that all advisors and the best forex indicators without competent trader management remain absolutely useless tools. Therefore, the number 1 task of any beginner is to learn how to make a high-quality forex forecast . Let’s consider what options exist, and then try to make a choice in favor of one of them.
This is where all kinds of lines, forex advisors , indicators and other auxiliary applications are used. The whole mechanics of the deal is as follows:
• The trader receives a signal to enter a position based on the data that the instruments used by him demonstrate.
• Immersed in the deal. In most cases, this moment does not have a clear reference to time and is determined by the internal instinct of the market participant (his experience, inferences, forecasts).
• Exit the position and fix the result. The main focus here is on compliance with the rules of money management, when the level of potential risk is two or more times less than the expected profit.
The quality of forecasting here is influenced by the trading rules, according to which the selected method of earning operates. In this regard, profitable forex strategies must meet the following parameters:
• Comprehensible logic based on the laws of market mechanics.
• At least three mutually complementary conditions, on the basis of which a trader makes a decision to enter a trade.
• Correct risk / reward ratio.
• High performance that can be verified in history.
• Clear conditions allowing trader to leave the position in time.
This forecasting method refers to the study of financial and foreign exchange events that can affect the dynamics of the foreign exchange market. This is the most difficult and key analytical method. Only truly competent traders are able to use it effectively. The main problems are related to the fact that the same events in different conditions are displayed in different ways on the market.
Suppose trader need to make a forecast for the euro dollar currency pair for November 2015. In this case, the trader’s actions will look like this:
• The initial assessment of the situation is based on the data recorded in the “Economic Calendar”.
• When suitable conditions are selected, a preliminary forecast is made regarding the future price action. The situation is aggravated by the axiom stating that it is necessary to buy assets by ear and sell on the basis of established facts.
• The related factors and circumstances are studied, which confirm / deny the prediction made. Here trader need to be able to filter information and work only with primary data.
• The deal is in progress. Unlike the previous forecasting method, here the emphasis is on a short-term impulse movement, after the completion of which, an open deal is immediately exited.
The altcoin trading methods discussed in the article are effective and tested on personal experience, however, novice traders are strongly encouraged to familiarize themselves with the presented strategies on a demo account in order to gain the experience necessary for successful trading. It is also recommended to analyze the history of quotes for a period of at least 6 months. This will allow trader to verify the effectiveness of the considered methods and assess the potential for profit.
Important! The use of Martingale and averaging methods in combination with the presented strategies is not recommended.
The strategies mentioned are only recommended to be applied on the BTC / USD pair as it is the leading high-cap altcoin. It is impossible to use the “Pump & Dump” strategy by large trading participants on such assets.