Introduction
Cryptocurrency is quickly increasing in popularity and gaining acceptance within mainstream society. This new and exciting product, grants investors individual financial autonomy and allows them to participate in the first decentralised, peer to peer financial network which is controlled by its community members.
It is important to gain a comprehensive understanding of the ins and outs of trading and investing. The volatile nature of this currency means that while it is exciting and provides the chance for investors to make significant profits, entering this market with little understanding of its complexities, could mean disaster and significant financial loss for new investors.
If you want to learn more about trading and investing in crypto you can get access to my trading webinar for free this week. Learn the ins and outs of cryptocurrency trading by joining our crypto trading course here.
Storing cryptocurrency
Cryptocurrency wallets
Cryptocurrency wallets are secure, digital pouches used to store, send and receive currency. They also keep a record of your transactions, thereby acting as a personal ledger known as a blockchain.
Cryptocurrency itself is not stored in a wallet. Rather wallets store a private key , a digital code which known only to you. This private key shows ownership of a public key, which is made publicly available and connected to a specific amount of currency.
While all wallets are developed to be secure, there are additional steps you can implement to further ensure the safety of your cryptocurrency. It is suggested that you do not keep all currency in a single wallet. Instead distribute your cryptocurrency across a number of wallets which should be encrypted and require a google authenticator to access.
Most importantly, new investors are strongly encouraged to use the official wallet for their coins or a recommended third-party wallet. Alternatively, there are universal wallets like Coinomi, which can hold a range of popular coins. Offline wallets such as Trezor, are also a great option if you wish to store a variety of coins for an extended period of time.
There is also the option of using a custodial wallet which often double as an exchange. While it is not recommended that a substantial amount of currency is stored on an exchange, if you wish to store your coins in this way, it is essential that you do your research to ensure that the exchange is trustworthy. You may wish to consider the location of the exchange, its reputation within the cryptocurrency community and its performance history.
Backing up your cryptocurrency
The autonomous nature of cryptocurrency means that you are solely responsible for the safety and security of your financial investments. Therefore, once you have chosen your prefered digital wallet, you should copy and archive your investments in case the original data is lost or becomes unusable.
There are a number of options available to backup your cryptocurrency investments. These include copying your wallet file onto a portable stage device such as a flash drive or external hard drive, printing out your private key or generating a paper wallet which is a printed, hard copy record of your coins.
Trading cryptocurrency
Exchanges are online platforms though which cryptocurrency can be bought, sold or exchanged either for other cryptocurrency or fiat money like USD or Euro.
Fiat money to cryptocurrency trading
A fiat money to cryptocurrency trading is when government declared currency, such as USD or Euro, is exchanged for cryptocurrency or vise versa. This form of trading is the only way new investors can enter the cryptocurrency market. Trading in this way is beginner friendly as you only need to consider the price of a single asset when trading. Once fiat money has been converted into cryptocurrency, a range of trading options become available to investors such as completing coin to coin exchanges.
Coin to coin trading
Coin to coin trading involves exchanging one cryptocurrency for another. This trading option can take some time to master, however it is an essential technique for any new investor. Coin to coin trading is popular as it means that an investor does not need to exit the cryptocurrency market. It also ensures that you will not miss a profit making window because your coins have been traded back to fiat money.
Coin to coin trading can be complex and result in losses for investors. However, it also offers the chance to turn a significant profit on the cryptocurrency market.
Types of trading exchange
Traditional cryptocurrency exchanges
Traditional cryptocurrency exchanges are online platforms that adhere to the current market prices of cryptocurrencies. Therefore, coins are bought and sold according to this value. These websites generally incur a fee from each transaction made through their exchange. Some traditional exchanges allow investors to buy and sell only cryptocurrencies whereas others allow users to trade fait currency for cryptocurrency.
Direct trading exchanges
Direct trading exchanges allow investors to trade directly with other buyers and sellers. This peer to peer form of trading allows participants to set their own exchange rates, irrespective of the current market price of cryptocurrencies. This platform is not the best method for trading, however in some regions it is the only available solution. If this is your chosen platform, be sure to use a trusted exchange and trade only with highly rated users.
Cryptocurrency brokers
Cryptocurrency brokers are exchanges where customers buy and sell cryptocurrencies at a set price, determined by the broker. Generally this is the market price of the coin plus a small premium. This method of trading cryptocurrency is very beginner friendly as it is simple and easy to use. However, this does come at the expense of paying slightly higher prices than on other exchanges.
Cryptocurrency funds
Cryptocurrency funds are cryptocurrency assets which are professionally managed. Investors can buy and hold cryptocurrency via these funds without having to purchase or store it directly.
Recommended exchanges
It is recommended that new investors use a direct trading exchange or a cryptocurrency broker. Before joining an exchange, it is important to thoroughly research all options to ensure your chosen platforms are reliable and will suit your trading needs.
It is suggested that you consider the reputation of the exchange and look into the reviews made by their users. Reddit or forums like Bitcointalk are great platforms to gauge the respectability of an exchange.
It is also wise to look into the fees and exchange rate associated with using your prefered exchange, as they can differ substantially across exchanges. Similarly, it is important to check the payment options available on an exchange, to ensure it allows your prefered methods of payment.
The following exchanges are great platforms for any new investor wanting to start trading. They are very beginner friendly and are widely used and reputable platforms.
Coinbase
Coinbase is a cryptocurrency exchange and broker platform which is used by millions of investors internationally. This exchanged is based in San Francisco, United States and is very user friendly. Coinbase utilises a cryptocurrency broker system, whereby they set the the price for trading bitcoins, ethereum and litecoin. Coinbase also has high security and reasonable fees, making it a great option for new investors.
GDAX
GDAX is the sister site to Coinbase and is a great platform to use once you have a good understanding of Coinbase. GDAX acts like a traditional exchange and no fees are incurred if an investor wishes to transfer cryptocurrency between these two platforms. GDAX has all the positives of Coinbase while also enabling more technical investors to extend the scope of their trading ventures.
Bittrex
Bittrex is very popular cryptocurrency exchange based in the United States. This platform allows investors to make coin to coin exchanges of bitcoin for almost any other altcoin. The nature of this exchange means that you can not use fiat currency to trade for cryptocurrency. Therefore, you will need to be registered to another exchange where you can trade fait currency for cryptocurrency before transferring it to Bittrex to trade and invest in altcoins. Coinbase and GDAX are great platforms which can be used. It is important to remember that when trading on Bittrex, the platform takes a commission fee of 0.25% which must be factored in to ensure a profit is made.
Binance
Binance is a cryptocurrency exchange and wallet, based in Tokyo, Japan. Binance has a large user base and therefore substantial opportunities for investors to buy and sell cryptocurrency. Additionally, this exchange releases futures of bitcoin forks and thus provides additional, important investment information to users. Binance also offers low fees, deals on a variety of popular cryptocurrencies and allows for coin to coin exchanges of a range of altcoins.
BitMEX
BitMEX is an international cryptocurrency exchange based in Hong Kong. This exchange allows coin to coin trading meaning it only trades in cryptocurrency. BitMEX offers margin trading, meaning that users are able to buy coins on funds borrowed from a broker, in this case, the exchange. BitMEX leverages up to 100x bitcoin and therefore users can have their buying power multiplied 100 times over. Additionally, BitMEX only accepts deposits and withdrawals in bitcoin.
One of the major strengths of BitMEX is their strong security, having no security breaches to date. However, BitMEX should not be used by beginners as it is as it is more suitable for more experienced, technical invested. Furthermore, BitMEX is not available in the United States as it was barred for not meeting the country’s regulatory conditions.
Final Note
You should now be equipped with the information you need to start making initial investment in the cryptocurrency market. However to do this, you will first need to set up accounts on your chosen exchanges.
Setting up cryptocurrency accounts
Introduction
Now you have an idea of the best exchanges available for cryptocurrency, it is time to set up an account on your chosen platform/s. Below is a step by step guide to setting up accounts and wallets on the exchanges recommended in our first article Getting Started. Make sure to keep this article close by to ensure your first interactions with these exchanges are simple and stress-free!
CoinBase
- Go to the CoinBase website
- Click the sign up button and follow the steps to create an account
- Ensure you set up 2-factor authentication to further secure your account
- Connect your bank account, debit card or credit card to your account
- It is suggested that you sign up using a bank account as the fees are lower
- Begin by trading fiat currency for cryptocurrency
- Click into settings and set up your wallet
- Input funds into your wallet and buy coins instantly
- Start buying and selling coins
Bittrex
Disclaimer: To trade on Bittex you need Bitcoin, Ethereum or Tehter. Therefore you will need to create an account on Coinbase/ GDAX to trade fiat money into cryptocurrency
- Search for the Bittrex home page
- Click the login button then continue to the sign up page
- Follow the steps to create an account
- Ensure you enhance your security by inputting basic information through the settings button and through enabling two-factor authentication
- Load cryptocurrency into your account
- Send a small transaction first to ensure you got everything right
Binance
- Go to the Binance Website
- Click on the register tab and complete the signup process
- Verify yourself and receive a confirmation email
- Ensure you enable two-factor authentication via a pop up when you first log in
- Go to the deposit page and select the coins you wish to deposit
- Transfer your coins to the generated address
- Double and triple check the address
BitMEX
- Search for the BitMEX website
- Complete the signup process via the tab
- Registration only requires an email address and therefore anonymity is ensured
- Click on the trade tab and explore the trading instruments available
- On the left of the screen you will see the trading platform interface. This provides a record of recent trades, the order book and recent order slips.
- You can personally tailor the side panel to your viewing preference.
- Select the coins you wish to deposit and transfer your coins to the generated address
Creating a new wallet on MyEtherWallet
- Go to the MyEtherWallet website
- Select the create new wallet option displayed on the main screen
- Create a password for your new wallet
- Save your keystore file
- The keystore file contains your private and public keys.This number is also required to access your account
- Save your private key and print the paper wallet
- Type your private key into the box. Then click the unlock button to access your wallet and view your public keys
Ordering Ledger Nano in Australia
Once you have set up accounts on your chosen cryptocurrency exchange platforms, it is recommended that you purchase a Ledger Nano. A Ledger Nano is a multi-currency hardware wallet. This portable device is used to safely store cryptocurrency and secures digital payments. The Ledger Nano can connect to any computer via USB.
There are a number of Australian online shops which sell Ledger Nanos. Follow the belong steps to purchase this device online.
Crypto wallets Australia
- Search this website
- Click on the products tab
- Select ledger nano S
- Add to cart
- Proceed to checkout and confirm billing and shipping details
Hardware wallets
- Scroll and select “ledger nano S”
- Add product to cart
- Proceed to checkout and confirm billing and shipping details
Final Note
Now that you have set up accounts on your chosen cryptocurrency exchanges and made some initial investments in the cryptocurrency market, you are now ready to start diving into the cryptocurrency community and finding new projects in which to invest.
Finding new projects
Introduction
Are you ready to dive into the cryptocurrency community and finding new projects to invest in? At first, this process can seem a little overwhelming and you may be lost with where to begin. Below is a collection of some of the best places to start looking to find your next profitable investment or exciting new project.
Telegram
Telegram will help you to tap into the dominant communication channel for all things cryptocurrency. There are a number of great and free cryptocurrency channels available to follow. It is recommended that you start by following https://t.me/Blockcircleacademy and https://t.me/BitcoinBravado. These two channels host discussions and debates relating to cryptocurrency and potential trends, making them a good place to start when you are searching for new projects.
Additionally, https://t.me/cryptoaquarium and https://t.me/CryptoPortfolioChat also host cryptocurrency conversations. Crypto Aquarium is a very active cryptocurrency chat which discusses trading altcoins and general cryptocurrency industry growth while CryptoPortfoli Chat focuses on cryptocurrency investing.
Reddit is one of the best platforms for discussing cryptocurrencies and cryptoassets. This platform is a great way to determine community opinions on possible cryptocurrency projects and gain knowledge and ideas from more experienced traders.
While there are many cryptocurrency subreddits, we recommend you consider engaging in the following.
/r/Bitcoin
This is the most popular cryptocurrency subreddit. Proponents of bitcoin, traders and miners use this section to discuss issues related to bitcoin. This includes discussing new articles and technical issues relating to the future of this cryptocurrency. Almost any new bitcoin development is recorded and discussed on this subreddit.
/r/btc
This is the second most popular bitcoin subreddit and was created by users who felt that r/Bitcoin was too censored and controlled. Therefore, this section does not regulate discussions and is a place where cryptocurrency ideas and publications can be discussed freely and openly.
/r/ethereum
This subreddit is a very popular and active section. It provides users publications and news on a number of projects related to ethereum.
/r/litecoin
In the last year the traffic on this subreddit has been high and very active. This subreddit discusses ideas and projects relating to Litcoin.
r/cryptocurrency
This subreddit provides general discussion and news related to cryptocurrency. This section does not prohibit certain discussions and instead welcomes all ideas and publications. It provides a global community discussion regarding all cryptocurrencies.
r/altcoin
This subreddit provides new, opinions and discussions relating to all types of altcoins.
/r/BitcoinMarkets
This section is dedicated to the trade of bitcoin. It encourages the discussion of price movements, different exchanges and provides information about potential new projects related to bitcoin. It also provides information on how to increase your trading profits fot bitcoin.
Slack
Slack is a cloud-based set of collaboration tools and services. Slack offers direct messaging options as well as open chat rooms called channels. These channels are organised by topic and there are some great channels dedicated to cryptocurrency discussions. You can join a channel through a URL link or invitation from a team administrator.
BitcoinMarkets slack account
This slack account hosts a lot of interesting discussions from the community regarding bitcoin and altcoin prices and new investments and project ideas. This account has 15 public channels with the most popular being #announcements, #btc, #general and #altcoins.
Coinfund slack account
This slack account is an open community for blockchain technology research. This account has a number of public channels which discuss the latest research in cryptocurrency.
Cryptominded slack account
This slack account hosts conversations between cryptocurrency enthusiasts about various currencies, the applications and more. This account has 12 public slacks including #general, #meta and #trading. They also have a #beginners channel which is great for any questions new investors may have relating to cryptocurrency.
Bitcointalk
Bitcointalk is a forum where you can get information straight from the creators. On these threads developers often post their ideas and announcements making this a great way to find new projects before the wider cryptocurrency community may be aware of these new investment opportunities.
Final Note
It is important to remember that gaining information from the cryptocurrency community and developers about new investment projects can be biased towards their favoured coins or creations/ idea. Therefore, it is important to do further research and analysis of these projects before investing. Two ways to ensure that your new project is likely to succeed is through looking at fundamental and technical analysis.
Fundamental Analysis
Introduction
Fundamentals are key price determinants which can be analysed to evaluate the intrinsic value of a cryptocurrency. This analysis involves examining factors including the coin’s functional benefit, community backing and supply and demand, to determine the likely value of the cryptocurrency. This information thereby equips investors with a powerful tool to guide their purchasing and selling decisions.
Fundamental analysis on cryptocurrency is a unique process as this form of currency is still in its developmental stage and has limited track record to show. Therefore, more extensive research is necessary to determine the viability and potential of a coin.
Finding sources of information
It is important to ensure the reliability of the information you are using to conduct your fundamental analysis. There are a number of sources we suggest you explore when gathering information about different coins.
Coin’s white paper
A coin’s white paper is a detailed proposal which outlines the purpose and mechanics of the cryptocurrency. Consequently, this is an important source of information for conducting a fundamental analysis of a coin. Reading the coin’s white paper alone, may not be the only source of information you need to consult. White papers can be quite complex and technical and therefore further research is necessary to ensure a comprehensive analysis can be gained.
CoinCheckup
Coincheckup is a cryptocurrency analysis and research platform. It was designed with the goal of providing transparent information to investors about each cryptocurrency. This information provides a helpful starting place for investors to analyse whether the coin is likely to be a beneficial investment.
Coin’s slack channel or blog
It is a great idea to join the slack channel for the coin you are considering investing in. Their slack channel operates as the official and main channel of communication for the core development team and is the place where community members can interact with this team. Additionally, it is a good idea to research whether the coin has an official blog as this can be an excellent source of updates from developers and key investors.
Community forums including Reddit and Bitcointalk
Forums such as Reddit and Bitcointalk are also a major source of information when conducting a fundamental analysis. These community forums can provide a clear understanding of the community’s opinion on the coin. Forums are also an excellent place to gain a breakdown of the mechanisms of the coin in a way which is easy to understand.
Google is another high-quality source of information relating to a coin. Search for anything that you can find on the company. Pay specific attention to published articles, news and interviews to ensure the information you are sourcing is reliable.
Fundamental values to be analysed
Qualitative
Company strength
It is important to consider the background of the company who has developed the cryptocurrency. Primarily, it is necessary to examine the company’s previous accomplishments, the strength of the leadership team and the team’s capacity for diversification. This will help to determine the strength of the business and consequently the likely strength of the coin itself.
It is also important to analyse the company’s other main products. Consideration should also be given to the transparency of the products and their status. If the company’s other products are faring well, this is evidence that their coin may also be a viable investment.
Questions to evaluate company strength:
- Is the team made up of an experienced selection of experts?
- Does that team have a track record of high performance and success?
- Does the project have experienced advisors?
- Are the company’s other main products successful?
Functional benefits
It is necessary to consider the functional value of the coin, meaning its usefulness and purpose. A coin needs a strong purpose which encourages people to invest, otherwise the market price will fall as soon as the hype surrounding the new coin dies down. This is what is meant when people within the cryptocurrency community say that a cryptocurrency bubble has popped. Thus, it is important to consider; if the company’s cryptocurrency is linked to the success of their other projects.
Questions to evaluate the functional value of a coin:
- Does the coin have a strong purpose?
- Does the coin linked to the success of the company’s projects?
- Does this coin fill a need in the cryptocurrency market?
User activity and relationship with brand
Consideration should be given to the community following behind a coin. The best way to gauge this is to examine the traffic on a coin’s website, social media and google searches. Community platforms such as reddit and slack are also great places to analyse the community’s views about a coin.
Additionally, it is also necessary to look at the communication style of the team behind the coin and see whether they communicate openly and are transparent with their investors. The main reason this is important, is because the cryptocurrency market is predominantly driven by the community and their investment choices and thus community opinion will in part determine if a coin’s successful.
Questions to evaluate the coin’s community engagement:
- Does the coin have a lot of traffic on its website?
- Is the coin discussed positively on reddit, slack and social media?
- Does the team communicate openly and transparently with investors?
Critical economic events
It should also be considered if there are likely economic events, societal changes or technological innovations which will challenge the success of the company’s projects and in turn their coin. Economic events have considerable influence over cryptocurrency prices and can have a clear and easily recognisable impact on the future supply rate of the currency. Additionally, high profile hacks on major exchanges can also impact the future supply rate of the currency. It can influence price and government legislation regarding regulating cryptocurrency. Finally, unrelated events including financial and economic challenges in a country can result in price decreases or increases in a coin.
Questions to evaluate the likelihood of negative economic events:
- Does the company prioritise security for their coin?
- What is the political climate regarding regulating cryptocurrency and this particular coin?
- Is the country where this coin is based, likely to have a strong financial future?
Quantitative
Supply
The first quantitative analysis which should be considered is the supply of the cryptocurrency. A unique characteristic of cryptocurrency is that there is a fixed supply of currency and therefore it has a fixed and predictable total supply volume, which cannot simply be increased like fiat currency. The supply of the coin is important to examine when investing. If the supply is low, then the coin will be in high demand and thus be more valuable.
Questions to evaluate supply:
- Is there a low supply of the coin?
- Is there enough supply to provide you adequate investment opportunities?
Demand
One key factor which determines the demand of a coin, is its transaction availability. It is important to consider the variety of opportunities to use the cryptocurrency which have increased significantly in recent years. There are now a range of organisations accept cryptocurrency including Dell, Microsoft, Paypal, Spotify and Amazon.
Questions to evaluate transaction availability:
- Is the coin accepted at a range of organisations?
- Are these organisations successful and high profile?
- Are these organisations ones you frequently engage with?
Trading volume
The trading volume of cryptocurrency has increased significantly. For example, within six years the trading volume of bitcoin increased from less than 2,000 BTC to 60 million BTC. It is important to consider if the coin you are planning to invest in, has a strong demand with significant room to grow. One way to determine this is to consider if the coin meets a specific purpose, whether its demand will increase along with the success of the company’s other projects and therefore whether the currency is likely to gain a strong following. This will help to suggest whether there is likely to be a high demand for the coin and if the coin’s price is likely to remain high or at least stable.
Questions to evaluate trading volume:
- Is there a strong demand for the coin?
- Does the coin meet a specific purpose?
- Is the coin linked to the success of the company’s projects?
Final Note
Now that you have a sound understanding of fundamental analysis values and where to find sources of information, you are now ready to explore technical analysis. Both types of analysis are imperative to consider if you are to make well informed decisions about your newest cryptocurrency investment.
Technical analysis
Introduction
Technical analysis is the second approach to analysing the value of investing in a coin. This form of analysis involves examining the past market data to statistically quantify the future value of a cryptocurrency. Despite, the cryptocurrency market being highly volatile, technical analysis demonstrates that there is some logic to trading in this currency and the market can be forecasted with a reasonable degree of precision.
There are a range of market indicators which can be used to forecast the value of a coin. However, not all of them are reliable or provide useful information. Below are the most accurate and trustworthy market indicators which investor should use.
Moving average
The moving average of a coin, is one of the simplest and most powerful market indicators used to forecast the future value of a coin. The average value of a coin is represented by its closing price and therefore, an average value can be calculating by examining this price over a certain period of time. For identifying short term trends, a simple moving average can be used which considers that average of a coin’s closing prices over a period of 25 or 50 days. As the new data becomes available, old data is dropped and this causes the average to move along the time scale.
These short term fluctuations can be short lived and therefore, to confirm a trend, it is important to compare them to the long term moving averages called exponential moving averages (EMA). These average can be calculated by looking at the closing prices of a coin over a 100 or 200 day period. The exponential moving average applies more weighting to recent prices however takes into consideration the closing price of the coin all days prior to the current day.
When comparing the two moving averages, if the short term moving average drops below the long term moving average, this indicates that the market is falling. Consequently, the opposite is true; if the short term moving average grow above the long term moving average, then this indicates that the market is rising.
Moving average convergence/ divergence
Moving average convergence/ divergence (MACD) indicates market dynamics and can be used to predict a trend and its strength before it even begins. The MACD is the difference between a longer moving average and a shorter moving average and is represented as a line plotted on a MACD histogram. Generally, this line is calculated by subtracting the 12 day EMA from the 26 EMA. Then a 9-day EMA of the MACD line is plotted as a signal line on the graph.
When the MACD line touches the signal line, this signals changing market trends. Additionally, if the MACD drops below the signal line, this is an indication that it may be advisable to sell your cryptocurrency and if the opposite occurs it is an indication to further invest in the coin.
Market depth
Market depth refers to the ability of a coin to withstand fluctuations in demand without this significantly affecting its price and. This indicator also tells the size of an investment needed to move the market price by a certain amount. Additionally, market depth demonstrates the volume of cryptocurrency available for purchase and sale, with the lowest point on the graph indicating the current value of a coin. If the market is deep then a large order is needed to change the price and thus the price of the cryptocurrency is quite stable.
Most recent trades
This indicator involves examining the latest trade made on a platform. This will be displayed on almost all cryptocurrency exchanges and allows you to study the trades made by the most profitable traders. Examining recent trades allows you to understand the prices at which the coin is being purchased or sold. It also allows you to determine the mood of the community which contributes to the price of the coin. If the community determines that the market is going up, then there will be high incidence of buying and the price of the coin will increase and vice versa. If a significant number of people are making the same move then it is wise to replicate their purchases or trades.
Trading volume
In addition to examining recent trades, the trading volume of coins can be used to indicate the mood of the community towards a specific coin or a change in price. Trading volume is commonly represented as a bar graph and indicates the volume of trades that occur at various times. If the price of a coin increases and the trading volume also increase, this is an indication that the market supports this change in price. In contrast, if volume decrease with a change in price, then this suggests the market is against this price rise. This is important to understand as a lack of support for a price change can indicate that it will only be a short term trend.
Accumulation/ distribution indicator
The accumulation/ distribution indicator aims to gauge the supply and demand of a coin by ascertaining whether cryptocurrency investors are generally accumulating (buying) or distributing (selling) a coin. This is calculated by analysing the divergences between a coin’s price and volume flow by multiplying the money flow multiplier by the volume. The money flow multiplier is the difference between the closing price and the low price of the range minus the difference between the high price of the range and the closing price. This value is then divided by the difference between the low price and high price of the range.
After this, the money flow volume is calculated by multiplying the money flow multiplier by the volume of the coin for that period. Then the accumulation/ distribution line is calculated by adding the previous period’s money flow volume by the current period’s money flow volume.
The accumulation/ distribution line can be used to determine if a coin is trending. If the coin is in a strong downwards or upwards trend, it is likely that the accumulation/ distribution line will follow. If the coin’s price is in an upward trend and the accumulation/ distribution line is in a downward trend, this suggests that there may be selling pressure and that this may cause the price to reverse and turn downwards. Additionally, the reverse is true.
This indicator is useful to determine divergence, when the accumulation/ distribution line is heading in the opposite direction as the price line. This will indicate a reversal in trends and will help steer your investment and trading decisions.
Relative strength index
The relative strength index (RSI) is a momentum indicator which is used to identify the speed of price movements. An RSI can only be used when a trend has already been clearly established and can determine when there will be a short-term reversal in a trend. An RSI is calculated by comparing a coin’s price over time with the coin’s volume.
To calculate RSI, the current closing price of a coin is compared to previous closing prices and is generally represented as a line below a price chart that rises or falls as momentum changes.
A momentary change in the trend of a coin, which is knowns as divergence, is indicated when the RSI is going one way while the price is going the other. Bearish divergence, when the RSI is starting to decrease while the price is still rising, is an indication that the momentum of the coin is decreasing and is a strong signal to sell the coin if the indicator reads ‘oversold’. In contrast, a Bullish divergence, where the RSI is increasing while the price is decreasing, is a sign to buy into the coin if the indicator reads ‘overbought’.
Double bottom reversal pattern
The double bottom reversal pattern is a common reversal indicator which points to where there will be a reversal, from a downtrend in price to an uptrend. In order to determine if a double bottom reversal pattern has occurred, the following criteria must be met.
- Prior Trend- There must be a prior downward trend in the price of the coin before the double bottom pattern occurs.
- First Bottom- The price of the coin breaks its downward trend and spikes upwards.
- Peak- The peak is the highest price the cryptocurrency reaches after the break in a downwards price trend. This high price should occur at a 10 to 20% increase from the first bottom.
From here, the second bottom price should occur. This bottom price does not have to be exactly the same as the first, but should occur within 3 to 4% of the first bottom. Then the line should follow an upwards trend thereafter.
- Once it has been established that a double bottom reversal pattern has occur, trading should only occur after the price has risen past the peak price. It is advisable that investors buy after this point.
Double top reversal pattern
In contrast to the double bottom reversal pattern, the double top reversal pattern indicates that there will be a reversal from an uptrend in the price to a downtrend. To qualify as a double top trend, a set of criteria must be met.
- Prior Trend- There must be a prior upwards trend that occurs before the double top pattern occurs
- First Peak- This is the maximum top price the coin reaches before the downward trend begins
- Trough- The trough is the lowest price point that the coin reaches after the first peak. This drop should not be as low as the lowest point preceding it.
- Second Peak- The second peak must occur at approximately the same spot as the first peak by 1 to 3%. This is the highest point reached before the downward trend occurs and the price begins to decrease.
- Break in the neckline- The neckline is the level or price at which the trough occurs. Once the price goes below this level, the pattern is complete and a double top has occurred.
Identifying a double top is important because when you have identified the reversal in the upwards trend, it is an indication that it would be a good time to sell.
Average true range (ATR)
The average true range indicates the degree of price volatility for a coin. The average true range is a moving average of approximately 14 days of true ranges.
True range can be calculated by determining the greatest of the following:
- Method 1: Current high minus the current low
- Used when the current period’s high is above the previous period’s high and the low is below the previous period’s low. The current period’s high-low range will be used as the true range.
- Method 2: Current high less the previous close value
- Used when the previous close is greater than the current high.
- Method 3: Current low less the previous close value
- Use when the previous close is lower than the current low.
The average true range reflects the degree of interest or disinterest in a move. Strong moves are often accompanied by large true ranges whereas weak moves have narrower ranges. Consequently an upwards moving trend, with an increase in ATR, indicates a strong buying pressure and reinforces the reversal in pattern. A downwards moving trend with an increase in ATR supports the reversal in the trend and shows strong selling pressure.
Elliott wave theory
The Elliott wave theory was developed based on the premise that the cryptocurrency market has repetitive patterns that are cyclical, due to investors’ reactions to outside influences. The uptrends and downtrends within the market, were identified to often occur in the same repetitive patterns which were called ‘waves’. This cycle can be used as a predictive indicator of future market moves and trends.
Types of waves
There are two types of waves identified in this theory.
- Impulsive Waves- These are groups of three or five waves of the same pattern. This trend indicates the main direction of prices for a coin. Then, three corrective waves will occur which move against the price trend.
- Corrective waves- These wave are characterised by three distinct price movements, two against the current trend and one which follows this trend.
This ability to study market trends using the Elliott wave theory, allows investors to identify where the current price is situated within the current wave cycle and thereby forecast price direction and magnitude of the next wave in the cycle.
Ichimoku cloud
The ichimoku cloud indicates the support or resistance of a trend, its direction, the momentum of said trend and trading signals. If the price of a coin is above the cloud, this is an indication that the coin is currently in an upward trend. Conversely, if the price is below, a downward trend is occuring.
When the price is in the cloud, this indicates that one should not trade. This is because when the price is in the cloud, no trend can be determined and therefore there is no clear direction of the prices. Cloud breakouts are when the price lifts above or below the cloud and this is considered to be an entry signal for investors. If the price rises above the cloud, investors should be looking for long term investments and if it breaks below the cloud short term investments should be considered.
Final note
Through using a combination of technical and fundamental analysis indicators, traders can make more informed decisions regarding trading and investing particular cryptocurrencies.
Breakout anatomy
Introduction
Analysing breakout patterns is used as a market strategy for many investors in the cryptocurrency space. A breakout occurs when, after many attempts by the seller to lower the price of the coin, they agree to sell at the buyer’s higher price. This then causes the price of a coin to break through a key resistance level, which is the level at which the price of a coin is impeded by an overwhelming level of supply.
At this level, investors are unwilling to pay a higher price for the coin. When a breakout occurs, the price of the coin generally spikes upwards as investors realise that the price of the coin can rise higher.
The fallout of a breakout
Once broken through the resistance level, the coin’s price will rise to new levels. If the volume is still low, then the buyers confidence will increase. In most cases, this creates a tension between the upward trend and the downward trend in price of the coin, fueled by traders who have an invested interest in pushing the price above the moving average and those trying to push it below this level.
This is the best place to begin buying into the coin as a stop loss can be used to offset the risk associated with engaging in this trade. Soon, the buy volume will increase dramatically as investors rush to buy into the coin. This willingness to pay higher prices for the coin will push sellers rise the price. Generally, once the breakout has risen to the same height as the first wave which started the trend, the price will slowly begin to decrease.
Entry point into a breakout
Depending upon the goal of your investment, there are two key entry points for a breakout.
The first is to buy into the coin at the point where the resistance line has just been broken and the price is beginning to rise. This position is suitable for those looking for a long term investment and are hoping the coin will rise in price.
The second entry point is suitable for short term investments where the buyer hopes the coin will drop in price. It is recommended that this investor buy into the coin when the price is set to close below a support level. Once entered into this trade, the investor needs to be patient and wait for the breakout to occur. It is advisable to wait until the end of the trading day to make your investments as this will provide you with the best guarantee that the breakout will hold.
Exit point for a breakout
It is important that investors have a predetermined exit plan in place to ensure that the trade will be successful. It is important that your goal for the trade is reasonable and well calculated. There are three main exit strategies an investor could implement.
- Exiting with a profit
It is important to determine a target price that you will aim to reach during a trade. The easiest way this can be done is by looking at the recent price action by examining charts that plot the coin’s price over time. If an investor is executing a successful trade, then it is advised that they remain in the trade until the coin has reached the predetermined price point or time target. At this point, they should pull out of the trade.
- Exiting with a loss
It is important to recognise when an investment has failed and to exit the trade as soon as possible. After the breakout has occurred, old resistance levels become new supports and old supports become new resistance levels. This then provides a way to determine if a trade has failed and to determine stop-loss positions. It is advised that an investor closes the trade at the old support or resistance level.
Final note
Breakout trading is very volatile and is characterised by investors making rash investments or exit decisions. Using these tips can provide a guide for how to execute a breakout trade which is profitable and minimises risk.
Stop losses
Introduction
A stop loss is a type of order you can use to try and limit your potential trade losses. When you invest in a coin, you can place a stop loss on it, which is a sell order for when the coin’s price drops below a certain percent, say 5% of what you original paid for the coin. Sell orders aim to limit the amount of money you will potentially lose on any given trade.
Stop losses in the cryptocurrency market
While stop losses aim to reduce the potential loss of a trade, it is not always advantageous. This is largely due to the unregulated nature of this market and the reality that the market is largely consumer driven whereby the investments and trades of others cause price changes.
This occured on GDAX in 2017 when an investor placed a multi-million dollar sell order at the market price. This caused the stop loss orders of hundreds of other investors to be triggered and many people lost money.
When stop loss orders are useful
Stop loss orders are, for the most part, unwise in the cryptocurrency market. However, there are some instances where they can be positive and the risk of using them can be minimised.
- Exchanges that allow you to modify your stop loss after starting the order
- When you are able to modify the stop loss order throughout the trade, they can work effectively. This functionality enables you to set a very low stop loss order at the beginning of the trade and change it if the trade goes positively. An investor can then set their stop loss at a positive value, meaning that it will sell above the entry price.
- Trading altcoins in short term
- Stop loss orders can be useful when you are trading for fiat currency. In this case, if a coin is indicated to increase in price, an investor might set a profit order and a stop loss order with 25% of the entry price. This will allow you to make some money if you correctly predict the changes in price for a coin.
- Trading altcoins in the long term
- If an investor has analysed the coin and found indicators which predict that the value of the coin will increase over the long term, they can place a sell order at large profits. Additionally, it is suggested that a much lower stop loss order should be created. This is because when investing for the long term changes such as bad media coverage of the coin or an exchange being hacked could result in the price of the cost dropping to zero, meaning the loss of investments.
Exchanges that allow Stop loss orders
Not all exchanges allow stop loss orders to be set up on a trade. The following are two of the the best exchanges for using stop loss orders.
- Binance- This exchange allows stop losses through their ‘Stop Limit Orders’.
- BitMEX- This exchange allows stop losses through their ‘Stop Price Orders’. Please note, using high stop loss orders on this exchange is risky and investors should only decide on a stop price after considerable analysis of the coin.
Final note
It is clear that as a general rule, stop loss orders are inadvisable in the cryptocurrency market. However, there are instances when you are investing in a trade where a stop loss may be positive and the risks associated with this order can be minimised. If you are considering setting up these order, it is advised that you conduct thorough technical and fundamental analysis of the coin to determine the best price at which to set the order.
Risk management
Defining risk management and its importance
Risk management is the process through which investors identify, assess and manage the potential risks associated with a particular trade. This process is instrumental to the success of any investor in the cryptocurrency market. While it is impossible to never completely minimize the risk of trading, there are a number of key aspects to managing this risk and ensuring that your investments are profitable.
Evaluating the risk: Reward ratio versus win rate
The reward ratio versus win rate strategy can help an investor determine if a trade is a risk worth taking. If a trade has a low reward ratio and low win rating then it is reasonable to conclude that the trade is not worth making. If a trade has a high reward ratio and a low win rate or a low reward ratio and a high reward rate, then it is likely a profitable trading opportunity.
The most advantageous trades occur when there is both a high reward ratio and a high win rate. These trades are likely to turn a significant profit for the investor as there is a low risk associated with the trade and a significant change of a positive outcome.
Forming a risk management plan
To develop a successful risk management plan, an investor needs to undertake technical and fundamental analysis of a trade. After this analysis has been conducted, you will be able to use the reward ratio versus win rate to evaluate the trade and determine if the risk is worth taking. Once you have decided to enter a trade, a risk management strategy should be developed. This includes the following:
- Entry, exit and stop losses
- Consult fundamental or technical indicators to determine the best point at which to enter and exit the trade.
- If you miss your predetermined entry point into a trade it is vital that you never try and chase the trade. This will only ever lead to you making a very risky investment which will more than likely result in a loss.
- Execution
- Some traders are great at analysing the market however are are poor at executing any trades or investments, often due to fear of making a loss. Failing to enter the market will never enable you to turn a profit, so be brave. Take the risk and enter the market
- Trading Size
- Before entering the market, it is necessary to decide the size of your trade. This can be hard so for beginners it might be a good idea to set a fixed percentage on every trade or coin.
Managing greed
It is important that once you have developed a risk management strategy that you do not deviate from it after entering a trade. It can be hard not to trade when the price of your coin is increasing, however these emotionally driven decisions will result in risky, less profitable trades.
It is advised that investors do not follow the price changes of the trade very closely, as this will make you more inclined to make trading decisions based on emotion. The best way to guarantee a successful trade is to be calculated and adhere to your risk management plan.
Never fully exit a coin
It is recommended that you never fully withdraw all of your investments in a coin. While this may seem like a good idea, it is suggested that you leave a minimum of 10-15% of your investments in a coin. This will enable you to still have a stake in a particular coin if at some point the market picks up.
Never go all in
No matter how promising a particular trade or investment opportunity appears, it is wise to never invest all of your money in one place. The volatility of the cryptocurrency market means that any trade, even a seemingly perfect trade, can collapse and result in a significant loss.
A successful investor will have assets across a number of coins and it is recommended that you look at investing into five or more coins. However, it is important to not invest in more coins than you can closely analyse and monitor, as poorly researched trades will likely result in losses.
Evaluating your risk management strategy
In order to analyse the success of your risk management strategy, it is important to analyse the outcomes of your trades. It is only be doing this that you will be able to amend and improve your risk management for future trades.
- Breaking even- Breaking even on a trade, is an indication that your risk management strategy is working effectively. However, it is also evidence that you may be becoming too risk averse in your investments. It is important to downsize your risk on a trade, however this should not compromise the possibility of you generating a significant gain.
- Small profits- If trades are generating small gains then this is evidence that your risk management strategy is working effectively. However, it is also an indication that you are not allowing your trades to run their course and achieve a higher profit. This is likely characterised by emotionally driven responses to changes in the market resulting in you closing trades too early or using low targets. It can take consistent small wins before an investor realises that this approach is impeding their ability to make large profits.
- Large profits- Turning large profits means that your risk management strategy has been almost perfected. The majority of trades will result in big wins, largely due to the investor having developed trading sizes appropriate to the risk. You will also likely close the majority of trades at predetermined points, while allowing the others to run their course to significant profits.
Establishing such a well refined risk management strategy can take time but remember that making trades that break even, turn small profits or even result in small loses will give you the experience you need to become a better trader.
Final note
It can be tempting as a new investor to buy into a coin and not sell it for an extended period of time. While this passive strategy is simple and associated with less risk, it will never allow you to make any significant profits and is simply zero fun!
So, take the risk, be brave and trade.
If you want to learn more about trading and investing in crypto you can get access to my trading webinar for free this week.
