The Cryptocurrency market is in pandemonium.
In one corner it’s been touted as the next oil and in the other corner it’s been called the biggest over-escalation of price since the dot com bust.
This quora answer got 12,800 upvotes. In this answer Bitcoin hasn’t been called a fad, but a straight-up scam.
Invest or Trade Crypto?
Structural flaws with Crypto-Currency
The main pitch towards crypto was the fact that it was decentralized. It would avoid the middlemen like Visa, Mastercard and be able to avoid the payment fee.
But the truth is, crypto isn’t truly centralized.
The transactions still need to be checked and verified and a few hold the power to cross check this. So crypto also has a centralized structure.
The main flaw with crypto is the lack of fundamentals. Currency’s base is precious metals like Gold. What is crypto’s base. What are its fundamentals based on?
There are no Fundamentals. The price of crypto is purely moving based on market sentiments and excitement.
So what does one do, if they want to participate in the Bitcoin rush, but don’t want to Invest?
Bitcoin has a lot of speculation and volatility and almost nil fundamentals. This means it’s a perfect candidate for technical analysis and most importantly price action trading.
Trading is practiced worldwide because of it’s money making potential in the short term. Not every person subscribes to the “Hold Forever” maxim promoted by Warren Buffet and Fundamental Investors.
Trading is dependent on market movements and the demand and supply of the particular underlying.
So how do traders trade?
Do they simply predict which way the stock will go?
Traders use a science called Technical Analysis. It involves tools that help you understand which way the market might move. These tools are called indicators. There are various indicators that help traders make a decision on
- When to enter a trade
- Where to place a stop loss
- When to exit
- What is the general trend
Indicators are guides to help you make the decisions regarding the above questions. Traders generally use contradictory indicators that help in fool-proofing their assumptions.
Traders also read price charts to figure out patterns. What are price charts?
Price charts look like the image below. Each bar is called a candle. To know more about charts, go through this article.
In this chart above, to the untrained eye, all you see is a bunch of red and green bars. But to the trained eye, this is an opportunity to trade.
Marked in the blue is a pattern called Head and Shoulders. If this pattern is formed, it gives an idea to the trader about the trend the market is going to take. The head and shoulders pattern generally helps with identifying trend reversals.
Like the above pattern, there are various patterns which aid the trader to make a decision.
This is a big but. Technical Analysis are called lagging indicators because they don’t reflect real-time market sentiments.
Price-action trading doesn’t fall under technical analysis because it isn’t lagging. Price action trading is also called Naked Chart reading because of no indicators used.
So how does price action trading work?
Trade ideas and trends are figured out just by looking at the price in real-time. Which means no indicators are used, just by how the price is moving, the trader makes an educated guess about where the trend is moving.
Crypto and Price Action Trading
So the suggestion to people who want to get in on the Crypto action is to use price-action trading to make money.
The price of crypto is too unreliable even for technical analysis. And technical analysis is a lagging indicator of where the price is going to move.
Price-action trading is more real-time and suited for crypto-currency trading. Here is a chart example of price action trading with crypto.
In this example above, you can see the trend. In the markets this is how you notice trends.
Higher highs, and higher lows means an upward trend.
Lower highs and lower lows means a downward trend.
How you see a lower high is compare the previous high and see if the current high is lower. That is a lower high. A combination of lower highs point to a downward trend.
So in this case, you would short Bitcoin and your stop-loss would be placed at a higher price when the price goes up.
When each lower high is hit, then the stop loss gets changed. So you are placing dynamic trades to keep yourself updated to the price and movements.
It goes without saying trading crypto is hard because of the lack of fundamentals or because of its extreme random nature.
The ideas mentioned here shouldn’t be taken word for word. They are just ideas. They aren’t foolproof and the user need to do their own research. This is the way a person can participate in the crypto market without Investing their hard earned money and without having to risk too much. Placing strategic stop losses can protect your capital.