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A POSITION TRADING STRATEGY FOR CRYPTOS
As it has been said before, the best way to make money from viable cryptos is to buy and hold them forever, since investments that are worthwhile are also investments that appear in your will.
Apart from a ‘buy and hold’ method of investing, there are other ways to make money from medium-term movements of cryptocurrencies.
While there are a plethora of worthless crypto trading systems out there, there are a few crypto trading techniques that have proven to be rare gems. One of them is discussed in this piece.
This is a position trading strategy, because we will hold a position for a certain amount of weeks. We also exit a non-performing trade after a fixed period of time.
WHEN NOT TO ENTER THE MARKET
Do not go against the major trend, since doing that will prove to be suicidal. Major trends are easily located on higher timeframes.
This is where many people get it wrong. Many traders enter the market at wrong times; they go long when prices have rallied significantly, and thus suffer when caught in pullbacks that invariably occur. They also go short when the markets are significantly bearish and ready for a serious bounce.
Granted, a market that appears oversold may still go further southwards, and vice versa for a market that is overbought. However, those who trade in such manner will often get whacked by inevitable corrections that follow. When a barber or a waiter starts talking like a trading genius, showing you how much they have made, then it is time to exit the market.
We want to follow the trend. We want to follow the line of the least resistance, for that makes a perfect rational and logical sense. Nonetheless, we want to enter only when the odds are properly stacked in our favor, since we just don’t want to buy because the market is going up and we don’t want to sell simply because the market is falling.
Yes, we don’t want to sell in a bear market that is crashing into long-term demand zones; and we don’t want to buy in a bull market when it is ramming into very strong supply zones.
WHEN TO ENTER THE MARKET
When the market is seriously weak, wait for a transient northwards movement before you go short. This makes you sell when there is a rally in the context of a downtrend. In order word, you are selling at a higher price in a downtrend.
When the market is significantly bullish, wait for a transitory dip before you go long. This makes you buy when the price is on sale, and in the context of an uptrend. In order word, you are buying at a lower price in an uptrend. That means you are buying at a lower rate.
By selling weak trading instruments at higher rates, and buying strong instruments at lower rates, you maximum you chances of making profits.
READINGS, TIMING AND PARAMETERS
The logic behind this trading technique has been summarized above, but some questions remain. What timeframe to use? When to enter exactly? When to take your profits? When to exit a non-performing trade?
For this crypto strategy, the condition for entry in a bear market is different from the condition for entry in a bull market.
Strategy style: Position trading
Indicator: Exponential Moving Average (EMA)*
Instruments: Focus on the top 100 cryptos only
Entry rule in a bear market: When the EMA* is sloping downwards, go short on a coin that has rallied by x* percentage, provided price remains below the EMA*
Entry rule in a bull market: When the EMA* is sloping upwards, go long on a coin that has dropped by x* percentage, provided price remains above the EMA*
Exit rule for non-performing trades: Exit a trade that has proven to be non-performing for x* days
Exit rule for positive trades: Exit a positive trade that has been on for x* days
Position size: 2% per trade
AN EXAMPLE IN A BEARISH MARKET
Between June 26, 2021 and June 29, 2021, Internet Computer (ICPUSD) moved upwards by roughly x* percentage; whereas that happened within the context of a downtrend. Thus it would be illogical to go long then. Rather the best action was to go short because the line of the least resistance was in favor of sellers.
Since June 29, 2021, until the time of writing this article, ICP has fallen by close to 2300 pips.
While doing this, we take the risk management and position sizing recommendations serious.
You’ll never be a victorious trader until you master these 2 vital aspects of trading.
A GOOD ENTRY IN A BULLISH MARKET
In May 2021, EOS (EOSUSD), which was previously enjoying buying pressure, suddenly dropped heavily, losing more than x* percentage of its value. The price was still above the EMA (which was sloping upwards). This scenario proffered a clean entry signal, and we opened a long trade on EOSUSD.
EOSUSD eventually went upward and made a nice profit before we exited the trade.
A GAME OF PATIENCE
As outstanding as this crypto strategy is, the signals generated by it are few and far between.
First we focus on the top 100 cryptocurrencies only, because of their liquidity, high capitalization, potential and popularity. Second, we don’t enter the markets until our conditions for long or short trades are totally met. That is why patience is needed while using this strategy.
Think of how many trades you have taken in the past. Have you been profitable with them? Taking a few trades in a month or a quarter and making decent profits is better than taking numerous sub-optimal trades over short period of time and having drawdowns.
Valid signals generated by the strategy discussed here are scanty; but when it does generate a signal, then, believe me, it’s time to make money. We’ll always be patient for valid signals to be generated.
Dr. Van Tharp says you can only trade your beliefs about the market and that success in the markets depends upon how useful those beliefs are. That means when you have useless beliefs about the markets, you’ll find it difficult to trade victoriously. For you to be victorious, your beliefs about the markets must be useful.
The trading method discussed here is one of the systems we use to generate long-term signals for our subscribers in Learn2.trade Crypto Telegram channels. There are other strategies that generate intraday and swing trading signals, but the one discussed here is what will be used to generate position trading signals for our subscribers.
The next article in this series will discuss a magical/outstanding non-directional (market-neutral) trading methodology. Honestly, this ensures we make money no matter what the markets does.
*The exact parameters and readings are not disclosed as we use this strategy to generate signals for our paid subscribers.
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