Swing-Trading Crypto Simplified

In a market, where ICOs and private sales become less and less accessible or riskier, most people need to rely on swing trades to get a decent return.
In fact, project lock-ups become so ridiculously long, even trading provides a better return in a shorter amount of time and with less risk.

We start with the foundations in identifying price action and then look at case studies as applied to cryptocurrencies.

Disclaimer: I´m not a financial advisor and this article is for educational purposes only.

Index:

• Foundation - Candle Comparison
• Trends
• Catching the trend
• Application
• Volatility Breakout — Newton’s Moving Train
• Special: Trap Reversals
• Conclusion

1. Foundation — Candle Comparison

First let´s start with the basics.

When reading candles, we need to compare them.

For the time being, imagine the examples below to be daily candles. It´s effective to use daily candles in swing trading, because of the big picture analysis. The concepts apply to all timeframes.

1.1. Breakout Candle

In this example the green candle took out(breaks above)the previous candle´s high and closed above it. The candle itself created a higher high in the short-term. A sign, that buyers are very strong. I call this a breakout candle, because it took out the previous candle´s high and is known as a bullish engulfing in TA-terms.

Breakout Candle-Green candle creates a higher high

Breakouts appear on technical chart partterns as well as candles. Candles are the smallest component to read breakouts from.

There are breakout candles, inside candles, outside candles.

1.2. Inside Candle

Inside candles are a sign of short-term consolidation. If it was a bullish trend, it would be a sign of bullish continuation.

Inside Candle

1.3. Outside Candle

In crypto, a candle close and candle open are almost always the same. That is why we don´t have outside candles that both have open and close outside of the previous candle. I had a hard time finding those on cryptocurrency charts. The outside candle below(not in a true sense due to inside close) reflects a lot of indecision, and we probably should wait for the next candle to see where the direction goes.

Outside Candle

2. Trends

Let´s expand into the bigger market structure. To get 100%+ gains on a swing trade, we need to understand that the market has short-term trends, intermediate-term trends and long-term trends. Identify when the trend starts for an entry and when the trend reverses for an exit.

Let´s start with the smallest component, the short-term trend.

2.1. Short-term high

Comparing three candles, we can identify a short-term high or short-term low respectively. They can act as reversal patterns.

The short-term high is shouldered by two lower highs, and the short-term low is shouldered by two higher lows. To get even better confirmation, the red candle´s low should take out(break below) the first green candle´s low(not the case here).

Short-term high

2.2. Short-term low

The same as above, vice-versa.

Short-term low

2.3. Intermediate-term trend and Long-term trend

Intermediate-term highs(red) are created by two neighboring lower short-term highs.

Long-term highs are created(blue) by two neighboring lower intermediate-term highs.

And vice-versa.

Compare with the graphic below.

Trends on three different scales. We want to catch the Intermediate-term and Long-term trends.

2.4. Market Cycles

These trends come in cycles. What we want to do is get in on the left-hand side of the cycle and get out on the right-hand side of the cycle.

Left-Hand Side and Riight-Hand Side of the cycle on the long-term trend

3. Catching the Trend

Now that we know how these trends work, how do we identify our entries and exits?

We can look for a breakout candle/bullish engulfing like in the beginning of this guide. However, here are trend reversal patterns in the intermediate-term so that we can catch larger trends.

Generelly speaking, a higher high and higher low are indicative of an uptrend, and a lower high and lower low are indicative of a downtrend.

3.1. Long entries

Higher low, followed by higher high

Higher low, followed by higher high

Lower low, followed by higher high

Lower low, followed by higher high

3.2. Short entries

Higher high, followed by lower low

Higher high, followed by lower low

Lower high, followed by lower low

Lower high, followed by lower low

4. Application

So let´s put it all together for a theoretical swing trade.
Ideally look for higher high and higher low.
Statistically, for altcoins, I would pay attention, when it´s 20% from the bottom. It´s slightly high risk, but high probability.
Usually it´s best to use daily candles, because it gives you more time to execute, and it has better confirmations.
The daily timeframe is where we get the big returns from 100%+.
1h and 4h timeframes are good if you go for 20–30% swings, but you might miss on the big move if you get out of a position too early.
15min timeframe are great when a coin is highly volatile. Here you can scrape 20–30% in a very short amount of time. Mostly after a big move, we can have a contrarian setup(subject of another post).

Analyze this chart for a swing trade setup

Entry Criteria:

• Higher high short-term or intermediate-term
• Usually 20% from the bottom(for altcoins)
• Ideally gains over several days

Exit Criteria:

• Stop below the 20% risk(worst-case)
• If it breaks out of 20%, our entry becomes a trailing stop(break-even)
• Lower low short-term or intermediate-term or below 20% from newest high

Optional:

• Lower-timeframe to optimize entry
• Lower-timeframe to optimize exit
• Not ideal, since need to watch chart, and we need to sleep, except when algo trading
• Algo trading risky if mistakes in the code

5. Volatility Breakouts — Newton’s Moving Train

How do we find the right coins to trade? How am I going to know how long the trend lasts? How do I know how high the breakout is going to be?

Here we´re going to talk about momentum and how increases in volatility in subsequent candlesticks define it.

Let´s look at the quote by Isaac Newton.

An object in motion tends to remain in motion — Isaac Newton

This is our basis mindset of trading momentum against the crowd psychology:

Buy high, sell higher. Sell low, buy lower.

The concept of comparison of candles is very important here. When a subsequent candle is bigger than the previous, then it has an increase in volatility.

By comparing multiple candles, we can spot weakness and strength in the overall pattern.

5.1. Normal breakout

Here is a normal breakout defined by higher highs and higher lows. Nothing special, but our bread and butter.

ZRXUSD

5.2. Accelerating momentum

Volatility constantly increases over several days until it goes parabolic, hits a wall, pulls back, and starts a second leg up. Like a train, the speed constantly increases. Once momentum starts, it´s hard to stop.

A lot of people get out on the first pullback, but momentum just started.

Again, all this is done by comparing candles one to another.

5.3. Bullish engulfing candle breakout

A green candle closes above the previous candle´s high and creates a subsequent higher volatility candle. As you see here, volatility is a sign of strength. The last red candle is an inside candle and didn´t take out the previous candle´s low. The next candle didn´t either.

ZRXUSD

5.4. Alt season pump

We see a 100% gain in a day and most people´s reflex is to lock in profit. This explosive increase in volatility is a sign for even more upward momentum.

TRXUSD(Log)

Conclusion

I hope you now understand the structure of the market, and how to read it in a very simple way. We learned how to compare candles, to identify trends and have the right mindset to feel the momentum of the market.

While it doesn´t cover my whole trading model, it´s the foundation to build upon.

Stay tuned for more.