ExMasters Degree: How to Trade a Trend in Cryptocurrencies
This is the first article of more to come on the types of technical trading strategies. Today we are going to find out how to trade a trend in cryptocurrencies. “A trend is your friend,” goes the famous saying among traders. It has been said and repeated millions of times in books, articles, and blog posts on how to make profits in financial markets to the point that it actually lost its original weight. We will recover it, find out how to spot a trend, what indicators to use, how to enter a trade, how much you can risk, and how to set your profit targets. Trend trading is probably one of the easiest and most popular strategies around, and you should definitely put it into your arsenal of strategies. But first things first: what is a trend?
What is a trend?
The most straightforward answer: a trend is a market moving in one direction. The price can sometimes move against the trend. Still, looking at longer-term charts (daily or weekly), you will see the big picture and understand that those are only corrections (retracements) within a prevailing tendency.
How do you spot a trend?
You surely know that any market can move up and down, and thus signaling an uptrend or a downtrend market, respectively. An uptrend can be defined as the market going up with price making higher highs and higher lows while a downtrend is a market where the price is making lower highs and lower lows. The chart below illustrates the uptrend in the BTC/USD pair that kept trending upwards from the 13th of March till the 2nd of June of 2020 before the price stalled and started ranging.
Indicators that help to identify and trade a trend in crypto
One of the best indicators that help traders to spot a trend in cryptocurrencies is moving averages (MAs). This indicator is used to help smooth out the price data over a specified period of time by creating a continually updated average price. A simple moving average (SMA) is a calculation that takes the arithmetic meaning of a given set of prices over the specific number of days in the past; for example, over the previous 21, 50, 100, or 200 days. If the price is above a given average, it means the price is trending up; if the price is below it, it means the price is trending down. If the moving average keeps crossing the middle price, it means the market is not trending but ranging or is in the state of consolidation.
Useful tip: You should never try buying in a downtrending market, as it is the same as trying to catch a falling knife. You only buy in an uptrend, and you only sell in a downtrend.
Another useful indicator is the trendline. Trendlines help us identify potential areas of support and resistance (supply and demand), thus aiding us in deciding where to enter a trade or place a stop loss. The example of the BTC/USD pair shows an uptrending market as the price is above the 50-day moving average, and the price regularly jumps up after touching the trendline. (You can also clearly see higher highs and higher lows)
Duration of trends
Trends vary in duration, depending on their lengths, they can be long-term, intermediate-term, and short-term.
- Long-term trends will last from half a year to 3 or more years. Typically, value investors who have an approach of buy and hold will trade these trends.
- Intermediate-term trends may last from a few weeks to half a year. They can be corrections (called counter-trends) within more overarching trends. Those that like faster turnover of their money or do not have a stomach to wait patiently and persevere during market corrections tend to ride intermediate-term tendencies.
- Short-term trends may last from a few days to a few weeks. They are good for short-term traders who enjoy market volatility, use leverage, and expect fast profits. Crypto markets have plenty of these short-term tendencies giving an avid short-term trader multiple opportunities to capitalize on them on various crypto pairs every month.
How to trade a trending market?
For that, we will utilize the above-mentioned tools: 21-day SMA and a trendline on daily charts.
When the trend is up, the price will stay above the 21-day SMA. A point of entry will appear when the price will drop to 21-day SMA on a daily chart. If you refer back to the BTC/USD graph, you may see that the price retraced to 21-day SMA on 4 occasions from the 25th of April to the 2nd of July (2019), and then it started ranging. Any time the price touched 21-day SMAit was a buy point. Alternatively, you can enter a market any time the price touches or gets very close to a trendline.
How much should you risk while trading?
Most trading pros have a 2% loss of equity rule. However, when we talk about long-term trading and following a trend, you should give more space for your stop losses. There tend to be wider fluctuations and you can simply be knocked out of a position when the market moves against the trend. These occurances typically scares weak players out of their positions. So, for trend-trading, you can have from an 8% to 10% stop loss rule on your trades (on equity).
How to take profits?
Taking profits is the hardest part of trading. Why? Because you never know whether the price will reach your expected target or come short of it by just a few points. It is generally great to set your take profit target as double the size of your stop-loss (that would be 16–20% of your equity). In that case, you can be right 1 out of 3 times just to break even. If you are right 1 out of 2 times, you make 8%-10% on a trade. Alternatively, you can move your stop below the low of your entry point and move it up as long as the trend makes higher highs and higher lows. You should exit all of your positions when the price reaches a lower high and lower low on a daily chart, as it is displayed in the graph above.
How to spot trend reversals?
Everything comes to an end. A trend does not last forever. Those who believe otherwise are not wise. Whatever rises will also fall. It has been proven millions of times over centuries in any financial market: stocks, commodities, currencies, indexes, and the youngster market of cryptocurrencies too Therefore, you need to learn how to spot a reversal of a tendency. One of the best signs that an uptrend is about to end is when the price fails to make a higher high and then breaks the low downwards by creating a lower low. The opposite is valid for a downtrend. When the price fails to make a lower low and then breaks the higher low upwards, the downtrend might be over. A break of a trendline is another sign that a trend might be over for good. If one of the two happens, you should consider closing all of your open trades and wait for signals to trade other market conditions: range, breakout, or a downtrend. Refer to the most recent chart above for a visual example.
Trading a trend is a strategy that is best for traders who focus on the long term picture, do not want to analyze the markets for hours every single day sitting glued to their computer screens. Also, trend trading is useful to those who wish to avoid market noise that is usually abundant in day trading or simply desire to catch big moves. Big money is in big moves! If you are that type of person, you should learn the fundamentals of following a trend in cryptocurrencies, identify trends looking at the historical charts of various financial instruments, and do DEMO trading before committing any real money.
Even though past performance is no guarantee of future success, we know that history keeps on repeating itself.hus by studying the past you will keep growing as a trader and eventually master trend trading for any other trading strategy.
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