Miguel Leite Follow Co-founder and CEO of Coinvision. +8 years experience in tech and blockchain startups. In crypto for the tech.

11. Introduction to Trading Strategies

3 min read

Introduction to Trading Strategies - Coinvision

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Now that you know how to buy and how to store and understand the importance of having a diversified portfolio with tokens that projects you understand and believe in, maybe it is time to try your hand at a little bit of trading.

Many books have been written about the art of trading in the stock markets, and increasingly in crypto, so this short tutorial will only address the most basic technical indicators you can use to guide your buy and sell decisions. As we said, trading is more of an art than a science and every trader will have their favourite indicators and techniques. In the end, the baseline objective is the same for all, buy low and sell high. Just before we start, however, keep in mind that trading, particularly in crypto, is extremely risky and you could lose all your funds. That said, you can also make a lot of money, so just remember to never invest more than you are willing to lose.

So now, the trading techniques. Indicators serve the purpose of helping a trader predict the probabilities of what the coin’ movements will be. Most indicators are based on algorithms that take into account the coins’ history, so they look back in time rather than forward to calculate the probability of what may happen, just keep that in mind.

Important to also remember, ‘probability’ is different to ‘possibility’. As an example, it’s possible that BTC can reach $1.000.000 in 2018 but is very unlikely to happen, meaning that the probability of such an event is very low given what we know today about crypto markets.

Technical Indicators

  • Are:
    • Statistical tools to better understand price movements
    • Stronger when combined (but traders tend not to use many at once as it may bring more confusion. Combine just the ones that work the best for you)
  • Are NOT:
    • Oracles
    • Fulfilling prophecies

1. Moving Average (MA)
The moving average is a very popular trading indicator that helps to cancel out price swings to try to interpret what the price trend of a coin is, either upwards or downwards. They act as magnets for the price as sudden moves up or down tend do correct to levels below or above, respectively. MAs consider different time frames to calculate these trends. Some of the most popular with traders are the 200, 50 and 21 days MA, but really the time frame depends on how short-term or long-term is the trend.

To be clear, a 21-day MA can indicate a negative price trend in the short-term that would be included in a longer-term 100-day positive trend.

It basically gives an indication of where the market seems to be moving. The simple moving average (SMA), which gives a simple average of price movement over a defined period of time, and the Exponential Moving Average (EMA), which gives more weight to more recent prices, are the two most popular variations of the MA.

2. Supports and resistances

Supports and resistances define prices in levels where it is perceived that strong buying action (support) or strong selling action (resistance) will occur. The graph below shows support and resistance points in BTC price. These are important because they tend to mark points of trend reversal in price, because investors see them as points where the coin can be either oversold or undersold and so decide to enter or exit positions.

Strong supports or resistances tend to be found where price touches a certain level several times while holding that level (an example of current strong BTC support is around $5800 and around $10000 for a strong resistance).

As with any support or resistance in life, sometimes they don’t hold, and the resistance or support is broken. When this happens, their roles reverse, the support becomes resistance and the resistance becomes the support, until they are broken again.

3. Relative Strength Index (RSI)

The RSI is a momentum indicator, very popular among traders. It assesses in a scale the impact of recent price fluctuations to indicate if the asset is oversold or overbought. The scale in which this perception of price momentum is shown ranges from 0 to 100. It is commonly considered that an RSI below 30 means that an asset is oversold and that a value above 70 means that it is overbought. These levels tend to indicate a price trend reversal.Particularly in crypto, on a strong bull trend the overbought tends to be above 80 and oversold below 40, whereas on a bear trend 60 or above is the usual overbought level and 30 the oversold.

This indicator is particularly useful in conjunction with trend line supports or resistances, because they tend to coincide.

4. Moving Average Convergence Divergence (MACD)

The MACD calculates the difference between the 26-day and the 12-day EMA. The difference between these two values gives a perception of price trends and helps with buying and selling decisions. When the MACD moves above its 9-day EMA it indicates a possible price climb. The opposite is true for when it moves below the nine-day EMA. Also, it has a zero (0) line where being above it signals a more bullish trend and a bearish if below it.

This indicator tends to be used more as a delayed confirmation indicator rather than an earlier one.

5. Volume

Volume is defined by the number of buyers and sellers in a market and by how much capital is being moved within that particular currency pair. This is relevant because major price movements tend to occur when there is considerable growth in the volume of capital being traded. The higher the volume, the higher the strength of the movement. For a trader, volume gives important indications for trend shifts. For instance, if a trader wants to confirm if a support level will hold, looking at the buying volume is useful, as a low buying volume indicates that the support is less likely to hold than if the volume is high. The reverse is true for resistance levels. If there is low selling volume, the resistance is more likely to be broken.

There are a myriad of different indicators investors can use to trade. None of them has ever proven infallible. In the end, it is up to the traders to define which indicators they believe are more accurate and produce the best results. However, these should be used as part of an overall trading strategy, and with a considerable amount of skepticism. Some traders like to use as many indicators as possible to draft complex charts, while others stick to one or two, or sometimes none.

These five are a small collection of the most popular and most used, and are a good way for you to start reading charts and understanding how a currency pair works.

Happy trading.