Lesson 1 — Trends in Markets
Cryptocurrency supply and demand
The value of anything is determined by supply and demand. If demand increases faster than supply, the price goes up. If the supply outpaces the demand then the price goes down. The same supply and demand principle applies to cryptocurrencies.
The supply of a cryptocurrency is always known. Some, such as Bitcoin, have a fixed maximum supply. Bitcoin supply increases by a fixed amount with each new block mined on the blockchain.
Demand can increase as a project gains awareness or as utility increases. Broader adoption of a cryptocurrency as an investment also increases demand while effectively limiting the circulating supply. For example, when institutional investors started buying and holding Bitcoin in early 2021, the price increased significantly as demand outstripped the pace at which new coins were created, effectively decreasing the total available supply of Bitcoin.
We dive into further detail about supply and demand in our book, releasing next month.
Types of Trends
Now that we know what moves the markets, we have to understand the 3 key types of market trends. A trend is when the market forms a ‘predictable’ structure, showing the overall market sentiment.
3 Types of Trend
- Uptrend - Consecutive higher swing highs and higher swingg lows make an Uptrend
- Downtrend - Consecutive lower swing highs and lower swing lows make a Downtrend
- No Trend - Market Moves sideways, with no clear direction. Often rangebound and choppy
What is a “Swing”?
Swing highs and Swing lows are the most crucial points in the market and the market reactions around these areas tell us when we can get in and out of a trade and help us identify trends.
A Swing High refers to a peak reached by an assets price before a deline.Once the price moves above a recent high, a new swing high is underway. The exact high point of that swing high is not known until the price starts dropping. Once the price starts dropping, the swing high is in place and the trader can note the swing high price.
A Swing Low refers to a trough reached by an assets price before a rise. Once the price moves below a recent low, a new swing low is underway.
Swing highs and Lows are subject to the timeframe of the observer.
Example of an Uptrend
Here we have highlighted the swing lows in Yellow and the swing highs in Green. Note that both the Highs and Lows, are getting higher. (Making Higher Highs and Higher Lows).
Example of a Downtrend
Here we have highlighted the swing lows in red and the swing highs in yellow. Note that both the Highs and Lows, are getting lower. (Making Lower Highs and Lower Lows).
Example of a No-Trend
Below we can see that the market is regularly making swing highs and swing lows, with no consistent structure.
How do we use trends when trading?
Once we have identified a trending market, there are a number of assumptions we can make based on probabilities.
During an Uptrend:
- There is a higher probability of support holding.
- There is a higher probability of resistance breaking.
During a Downtrend:
- There is a higher probability of support breaking.
- There is a higher probability of resistance holding.
Trends and Timeframes
The strength and length of a trend depends on the timeframe which you are looking at. The higher the timeframe, the longer we can expect the trend to continue.
On a lower timeframe, our trend is made up using less data and the price movement is far more volatile. So here the trends don’t last as long or with as high of a probability.
On a higher timeframe, our trend uses more data. Here the trends are less volatile and last longer, with higher probability.
Conclusion & Next Steps
You should now have the basic understanding of identifying trends within the markets.
We will be posting a complimentary video which will go through this lesson and some charts examples, to provide a more comprehensive walkthrough.
Your next steps should now include:
- Taking Notes on what we have covered.
- Practice. Look at charts and try to identify trends on various cryptos.
If you have any questions on this lesson, please write them down and bring them to our weekly live on Mondays.
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See you in the next one!