1. Introduction: What is hedging?

Hedging is a term that you’re probably familiar with, even if it’s just from random posts on Twitter. In any case—whether you’re just starting out with trading or if you’ve already got years of experience under your belt—this is an incredibly important topic to master in order to optimize your ability to trade in any market environment and, most importantly, to keep that profit when the market inevitably moves in ways that you’re not prepared for. Hedging definitely isn’t the sexiest concept in trading, especially because it has to do with mitigating losses rather than maximizing possible returns by YOLOing into 100x leverage. But, as any experienced trader will tell you, if you only think about profits and never stop to consider losses, it’s only a matter of time before you’re wiped out. If it could happen to so-called “gigabrain” multibillion dollar funds, then you better believe it can happen to you.

Now that you hopefully understand the importance of considering different scenarios and being prepared for moves that go against your positions, let’s get to what hedging is all about. Simply put, a hedge is an investment made with the purpose of reducing the risk of an existing position. Hedging is therefore never something you do in isolation: no trade is a hedge on its own, but only in relationship to another position or a whole portfolio. Essentially, the point is for the hedge to be inversely correlated to an existing position, so that if you lose money on a particular investment, those losses will be reduced because you’ll make some money from the hedge. If you’re long tech stocks, for example, then you’d hedge with something that functions like a short on those same assets.
The key thing to note is that hedging always has a cost: if your original position is in profit, then you will lose money on the hedge, meaning that your overall profit will also be lower than it would have been without any hedging. One way to look at this is to consider hedging like buying an insurance policy on a trade or a portfolio. Just like with an insurance policy on a house, you’re not buying it to make money—in fact, you typically hope that you won’t get a payout out of it—but you still want it to be there so that you’re not wiped out completely if something unexpected happens (for example a market crash or an earthquake, respectively). 

This might sound like hedging is countertrading yourself, and you might be wondering why you’d ever do it instead of just opening a smaller position instead. The thing is, if you hedge properly, the hedge will be asymmetrical to your position, so that you will end up with more money at the end than if you had simply scaled down your position size. In the following we will look at all the different ways you can do that, along with one strategy—Relative Value (RV) trading—that’s closely related to hedging, but with the difference that you can make money on both the short and long side simultaneously. This is exactly why RV trading isn’t the same as hedging, but both strategies share many key concepts, which is why it makes sense to cover RV trading here as well.

2. Hedging: methods and strategies

a. Futures

Given the short intro above, it should already be obvious that futures are the simplest way to hedge. If you have a position in something, you can just short either the same asset or one that’s highly correlated to it. When it comes to shorting the same asset, this isn’t something you do at the same time as opening the position, because that would be nothing but effectively decreasing position size while paying unnecessary additional fees. Instead, you can short the same asset later, for example if it’s facing an important resistance level and selling the original position isn’t convenient for whatever reason.

Let’s say you buy 1 BTC spot at $20k and store it in a cold wallet. A few weeks later, you’re up 30% on your position, but the macro environment is looking shaky and BTC is right at a critical resistance level at $30k, which is why you want to derisk. Moving the BTC to an exchange and selling (some of) it is one way to do that, but maybe you don’t want to go through the hassle of doing that because you think that (1) the resistance is likely to get broken anyway or (2) even if it isn’t, you’d still rebuy a bit lower and don’t want to keep your funds on an exchange in the meantime. What you can do instead is short 1 BTC on futures, so that, if BTC drops back down to $20k, you will have made $10k on the short, and you’ll have $30k in total ($20k from your BTC and $10k profit from the short)—exactly as if you had sold the 1 BTC at $30k. This is because if you’ve got 1 BTC on spot and you’re also short 1 BTC, you’re 100% hedged (50% would be being short 0.5 BTC, for example), and the value of your portfolio—assuming for the sake of simplicity that that’s your only position—is “locked in” at that point, exactly as if you went all in USD. As long as the short is open, you will always have $30k, whether BTC goes to $100k or $0, as every $1 of profit on your spot position is offset by $1 of loss on the short, and vice versa.

In reality, of course, the value of your portfolio won’t be absolutely identical if you hedge 100% instead of selling 100% on spot, because of funding rates and something called the futures premium. In fact, these small price differences can provide opportunities for very lucrative forms of market-neutral trading, where you can make (almost completely) passive income regardless of how the market moves. This isn’t the topic of this article, but I’ve covered it in depth here if you’re interested.

Now, let’s consider a different scenario: you’re long 1 BTC and you want to hedge, but let’s say you’re convinced that, in the event of a market crash, ETH will go down much more than BTC. What you can do in this case is short 1 BTC worth of ETH: if the whole market nukes and it turns out that you were right about ETH being weaker, dropping 30% while BTC only dropped 20%, the profit on the hedge will be larger than the loss on your original position, meaning that you’ve got more money in the end than if you had simply sold BTC.

The idea here is simple: instead of hedging by shorting the same asset that you’re already holding, you short something that’s likely to drop lower. While this has many advantages, it also creates a risk that you didn’t have previously: it’s possible that (1) BTC could nuke more than ETH or (2) that BTC could stay put while ETH suddenly rallies. This is why hedging with different assets requires more planning and a much more active approach to monitoring your trades. In any case, the asset you’re shorting needs to be highly correlated to the position that you’re hedging while being typically more volatile or just looking more bearish. 

b. Relative Value trading

This brings us to RV (Relative Value) trading, a strategy that’s closely related to hedging. Let’s say that you’re uncertain which way the market is going to move overall, but you’re very confident that BNB is going to outperform ETH, for example. In that case you basically want to go long BNB/ETH, but there’s no direct futures contract to do that in one trade. However, you can still long BNB/ETH by opening two separate trades: going long BNB/USDT and short ETH/USDT. 

It sounds simple, and indeed it is. RV trading is just longing something that you believe is undervalued and simultaneously shorting something overvalued. This kind of an approach is done very often in TradFi for longer-term positions, but it’s also extremely useful in crypto. As you’ve probably already noticed, the entire crypto market is highly correlated, meaning that when BTC dumps. almost everything else will dump as well, and vice versa. So, if you’ve got a thesis about the relative value of two different assets, but don’t want to get rekt by a random nuke if you only long the one that’s undervalued, RV trading is the way to go. One final consideration here—which also applies to the case of hedging with correlated assets that we mentioned above—is that you need to take into account the volatility of each of the two assets. In our example, if we suppose that BNB is twice as volatile as ETH (so that it will move on average twice as much in either direction), your position size for BNB should be half that of ETH if you want to be maximally market-neutral.

c. Options

Now we’re getting to the derivatives instrument that most people immediately think about when they hear the word “hedging”: options contracts. This is an area that’s a bit complex—if you don’t feel like diving into it just yet, you can still use other methods of hedging—but there’s a good reason that it’s considered a very popular way to hedge. With options, PnL works differently from futures or spot. In simple terms, an option is a contract that gives you the option, but not the obligation, to buy or sell a specific asset at a set price at a specific future time. Contracts for buying an asset are calls, while those for selling are puts. For our purposes, puts are the most important here, as they’re used to hedge long positions, but the same can be applied for calls when hedging short positions.

Because they’re a bit more complex, you’ll notice that options contracts contain much more info in their individual names than just the ticker. For example, let’s take the contract BTC-29DEC23-20000-P: the asset in question is BTC, the expiry date is 29 December 2023, and it gives you the right to sell (P = put) BTC at that date for $20,000 (the strike price). Suppose that the price of one contract is $2.5k. If you buy one put contract, you’ll pay $2.5k, and the advantage of options is that you can never lose more than the contract cost, in this case $2.5k, no matter what happens to the price of BTC.

Now let’s say that it’s 29 December 2023: what will your PnL look like? If BTC is at or above $20k, the contract will expire worthless, so that your total PnL will be -$2,500 (the cost you paid upfront for the contract). For every dollar below the strike price, you will profit $1, so that if BTC is at $17.5k, you will be at breakeven overall ($2.5k profit minus $2.5k that you paid to buy the contract). If BTC is at $10k, your total profit is $7.5k, if BTC is at $5k then you’re up $12.5k etc. The key thing is that you only risked $2.5k, whereas you can profit much more than that if BTC drops by a lot, and you don’t have to worry about getting stopped out or liquidated in the meantime, even if it hits $100k before dropping below $17.5 by the expiration date.

This is exactly why puts are a very popular way to hedge, as they function just like an insurance policy: you pay a set cost upfront and, if there’s an overall market nuke, the profit from the put will help make up for the losses on long positions or your spot portfolio. What’s more, you can never lose more than the initial cost on an option, so that you don’t have to worry about actively managing your hedge positions at all. Of course, options are an incredibly complex financial instrument, and I might prepare some more detailed content on them in the future if there’s interest, but now you probably understand the key principles behind using them to hedge.

d. Tail risk

Another important topic to mention when it comes to hedging is the concept of tail risk. It’s not a way of hedging or a strategy per se, but it’s a key concept in trading in general. So, what is it?

You’ve probably heard of something called the bell curve or the normal distribution. This curve describes the probabilities of different scenarios, for example the price of a given asset at a particular time in the future. 

The most likely outcomes are represented in the center of the curve, while more extreme and less likely scenarios are at either end. Those are called tails, and the one we’re especially interested in here is the left tail, as it represents the probability that the price will be way lower than most people expect. Technically, tail risk refers to the price moving more than three standard deviations from the mean, but you don’t need to know the math here: what matters (and the way the word is typically used in crypto) is that tail risk covers those things that are very unlikely but that could have a huge impact if they do happen.

One noteworthy form of tail risk in crypto relates to stablecoins. If you’ve been around long enough, chances are you’ve seen a few stablecoins collapse completely. In fact, if we’re talking about high-risk algorithmic stablecoins, a collapse can hardly be seen as a tail risk since it’s not really all that unlikely. The point, however, is that there’s always some risk even with well-established stablecoins, and that’s something you should keep in mind. There are three main ways to hedge against this kind of risk in general: (1) diversification, (2) directly hedging specific stablecoins and (3) insurance.

The easiest way is simply not to have all of your money in a single stablecoin. No matter how safe you believe it is, there’s always some measure of risk involved, which is why the best move is to diversify into multiple (maybe just 2 or 3) reliable stablecoins with different risk profiles. In other words, don’t diversify out of USDC into an on-chain collateralized stablecoin that has USDC as most of its collateral – that way you’re not really reducing risk. 

The second option is to directly short a stablecoin that you’re particularly worried about; this can be done either on a centralized exchange (through futures) or on a DeFi lending/borrowing protocol by looping borrows to create a leveraged short position. In any case, this is something you’d do only if you have a very good reason to be worried about that stablecoin, since the funding fees and interest rates would otherwise be too high to be practical. Finally, the ideal way to deal with this—and the way it works in TradFi—would be to have insurance, and there are some DeFi protocols that are offering insurance on stablecoins. The problem is that this is an extremely new and very risky area of DeFi, which is why some insurance protocols can carry a lot of risk themselves. As crypto continues to evolve and some insurance protocols achieve the kind of blue-chip reputation that the biggest lending/borrowing protocols enjoy, this will become a much more viable option, but for now, it’s far from ideal.

3. Conclusion

In this article, we went through everything from the background of what hedging is and why you would do it to the practical details of how different methods of hedging work. Now, you should be ready to implement this know-how in order to better protect your capital and take advantage of new opportunities such as RV trades. At any rate, the key thing to keep in mind is that everything above is just a framework; when it comes down to the actual execution of any strategy, that bit is up to you. There are plenty of options for each of the methods mentioned above: whether to choose a centralized or decentralized exchange, how to manage collateral for futures, how actively to monitor your positions etc. At the end of the day, you’re the one pulling the trigger and pressing either the green or the red button (or both at the same time), and the key is to take all the info that you can—such as everything that’s presented above—and use it to find and execute your own approach, whatever that happens to be.

Artykuł The Art of Not Getting Rekt: Guide to Hedging pochodzi z serwisu BloodGoodBTC.

There is no foolproof strategy in any market. Even if you are a successful trader or a newbie that has just entered the market you need to know that the “holy grail” of strategies does not exist. A trader that only chases strategies that brought him wealth in the past won’t do well. Traders that are successful in the long term realize that the key to win big is to listen to the market and adapt strategies based on market behavior as well as the macro environment.

However the strategy that we will talk about in this article is practically immune to market behavior, and pretty simple to master. Dollar Cost Averaging (DCAing) is a simple strategy that allows you to enter to add exposure to the market without worrying that you entered at the wrong time and the fear of losing bigger sums of capital.

Newbies often enter the market without a clear strategy and try to win big in a short time span. The crypto industry gives people the idea that making money is easy—which is often the case in bull markets—but as history has shown us, most retail traders enter close to the cycle top and start panic selling on the way down.

There are different strategies based on traders’ goals and if you are trying to copy someone from Twitter you might just be rekt as you have no idea how someone manages their trades and what financial goals they are chasing. Is the trader testing a new strategy? Are they even trading the position they posted? The questions go on and on. To make it, you need a strategy of your own.

This article will help you understand the concept of dollar cost averaging, its benefits & risks and how to start your DCA journey.

Dollar Cost Averaging explained

DCA in simple terms means investing smaller sums of your capital over time into any asset you want, whether that’s crypto, stocks, commodities etc., but today we will focus on Bitcoin. Newbie traders can use this strategy to avoid mixing emotions with trading which is a hard thing to do especially in the beginning of your trading journey. Traders with larger sums of capital also stick to a DCA strategy in order to minimize the impact of volatility in the market.

The main idea behind this strategy is that instead of waiting for the desired level to be reached and then pressing the shinny green “BUY” button with 100% of your capital, you should rather split investments into smaller sums which are invested in predecided levels or time intervals. I will explain how this can be done in the next section.

Markets do not just go in one direction (up/down), but after a big move down some kind of retrace to the upside is expected and vice versa, after a big move up, some kind of retrace is expected. The lower the market goes, the more you invest, however you can also buy coins when the market is going up, but this time you invest less capital and this is how you make sure that your average entry is low. And this kind of market movement gives this strategy a purpose. Remember, even if you are a successful trader with your own strategy, one portion of your portfolio should always be allocated to DCAing.

How it works

There are multiple options on how you can start your Dollar-Cost Averaging journey. First you need to decide if you are the type of trader that will pay attention to the market or you just want to be part of the market by automatically investing money on a predetermined time basis (e.g. monthly, weekly, bi-weekly etc.).

Automatic DCA

If you want to have exposure to the market without having to look at it too often you can choose an automatic DCA strategy where you will have an option to choose an asset (e.g. Bitcoin) or a basket of assets (e.g. Bitcoin, Ethereum and others) as well as the amount you want to invest in a predetermined time (e.g. monthly, weekly, daily etc.).

If you choose a basket of assets you can then split the invested amount into portions for each asset. It is always suggested to invest more of the allocated investment into the top coins. For example, if you choose only Bitcoin and Ethereum, I would suggest investing something like 80% in Bitcoin and 20% in Ethereum.

Automatic DCA is the simplest way to enter the market and not be a victim of your own emotions as well as build your wealth and a good average entry price. However, my suggestion is that this type of DCAing should be started when prices are low (compared to the all time highs), meaning that the current stage of the market is good for automatic DCA.

Manual DCA

This type of DCA is a bit different as you need to have some knowledge regarding trading, but it can pay off if you stick to the original plan. This strategy requires you to decide the total amount you operate with. The main idea of this strategy is to invest bigger sums of money as we drop lower.

The first step you want to do before you start is to open the weekly timeframe and chart the key levels and mark your buy-ins. More experienced traders can also go further and mark levels on the daily timeframe as well. As these levels are reached you enter with a predetermined amount.

The lower prices drop, the bigger portion you invest, however, you must not run out of your predetermined capital allocation. Always prepare yourself for the worst: you do not want to run out of your capital if prices go lower than you expect, as you will be missing a golden opportunity.

There are two options on how you can execute manual dollar cost averaging. The first is by placing limit orders at the levels you have decided to buy at. The second is by entering when the market reaches a certain level by either a market or limit order. However, the second option is not recommended for most people as you can become a victim of your own emotions and decide not to enter.

Below in the “Bitcoin example” I will show you how to prepare a DCA strategy in which you do not run out of money.

When do I sell?

As long as prices keep falling you shouldn’t sell as you will make a loss. However, once the market reverses and Bitcoin starts reaching higher levels, you should do the exact opposite of what you did when prices were crashing.

Chart key levels (resistance) and plan the amount you will sell at that level, it’s of key importance that in the beginning you sell smaller amounts and, as Bitcoin pushes higher, you sell more. Profits generated from this strategy can be either used when BTC retraces (but remains in the uptrend) to buy again if key supports are reached or stored in a safe wallet to keep it as a back-up capital.

Having a plan is the most important factor when dollar cost averaging. The idea of this strategy is selling smaller portions in profit and keeping that for when the trend reverses and then you have ammo to repeat the strategy again.

Benefits

Minimize risk

The main benefit of DCA is reducing risk and not exposing yourself completely to the market in case of a crash. The goal of every investor is to have as low an entry as possible in order to secure profits when markets are healthy. In theory you buy low and sell high, but that’s often not how it works in real life.

In reality, we never enter the market right at the bottom and this is where DCA comes in handy. Deciding which levels we will enter on the way down helps us lower our average entry price and sets ourselves up for times when markets are healthy. Even if we opt for the automatic DCA strategy, prices sooner or later drop lower and each month/day/week when we buy, our entry gets lower. Keep in mind, it is not advised to start using this strategy when the market is in “full bull mode” and new highs are being made.

Develop discipline

Even if you are not a trader, you probably know that with lower prices you can buy more assets for the same amount of money. This helps you position better when markets bounce, and gives you the opportunity to buy more coins than you would if you spent all your capital on day one.

When you are thinking about saving money by depositing into a savings account at the beginning of each month, you never deposit all the capital you have left, right? So, why wouldn’t you apply this mindset to trading? Investing $50 or $100 per month helps you become more disciplined as well as better positioned for the future.

By developing discipline, you avoid the fear of investing at the wrong time. Investing a huge sum of money at the wrong time can not only make you miserable, but many decide to “panic sell” and take losses rather than hold onto their position. Both these scenarios end very badly for investors.

Handle your emotions better

We could write a whole book on how emotions influence trading. If you’re interested in that—and I can’t stress how important this aspect is when it comes to trading—you can read more about how emotions can cloud your judgment when trading in my Crypto Trading Guide which is published on my website.

A DCA strategy helps you eliminate these emotions, especially if you use the automatic type of dollar cost averaging. By using this strategy we will learn not to act on “negative news” or panic sell in short term market crashes, moreover, we will be happy if they happen as our orders will be filled.

Risks

DCA is considered a safe strategy, however you still need to be aware of some risks before you start your journey. As mentioned above, it is not advised to start this strategy when markets are extremely bullish and close to making new all time highs—that’s when more active strategies pay off much more.

It takes patience to build wealth

Even though in theory DCA seems like a good strategy, it takes time to build wealth. Sometimes it takes a year or more to build up a decent position with a good average entry which makes traders ignore this strategy in hope of quicker profits.

Some traders use this strategy on alts and, worst of all, low-caps. This is a very bad idea since these assets might never reach higher levels again and can easily go so close to zero that the difference is a minor rounding error. Avoid being greedy and only use this strategy on Bitcoin, or Ethereum but with a smaller amount. As for anything else, keep in mind that most of the next cycle’s top performers probably don’t exist yet. If you’re still not convinced, use Web Archive to see what the most hyped coins were in previous bull runs. Imagine if you had DCAd into those.

Missing out on gains

It’s worth mentioning that by starting this strategy when prices are low, you could very well start buying around the levels where assets bottom and never manage to lower your average entry.

It can happen that you start your dollar-cost averaging right before the market becomes healthy again and by investing small amounts, you might miss out on bigger gains. What can then happen is that FOMO takes over and you start aggressively entering more and more on the way up and might do that all the way to the top, making your average higher by each buy. The main advantage of DCAing is to eliminate the detrimental influence of emotions, so giving in to this temptation defeats the point.

Bitcoin Example

I wrote a similar article in the beginning of March 2022, however I feel like more details could be added.

Below I will explain my strategy on DCAing Bitcoin if you start with $10000. Keep in mind that this is just an example amount. The same can be applied with $1000 or even $100 and you are on your way to start getting decent exposure to the market.

Here is an idea of how you can plan your DCA strategy and entry/exit levels;

⦁ Open the weekly Bitcoin chart
⦁ Chart potential support and resistance areas
⦁ Place bids
⦁ Go enjoy life and wait for triggers

Keep in mind that the levels that you draw don’t have to be perfect, as you are buying on spot markets and you will not get liquidated if you miss the level by a few hundred dollars (it should go without saying that DCAing on futures is an incredibly bad idea; even if you don’t get liquidated, funding can eat into your profits and you’re exposing yourself to a bunch of unnecessary risk). Also, this strategy can be used on the daily timeframe as well. What matters is that you do not run out of money in case things turn to shit. Basically, be ready for every possible scenario and get the most out of it.

As mentioned above, if you are a trader you need to keep capital meant for DCA untouched. Always DCA as a separate strategy and have capital in case it’s needed. You don’t want to end up DCAing for a few months, and when the market crashes, giving you a golden opportunity, you run out of ammo.

Finally, there’s one important consideration for all long-term strategies: security. The old mantra of “not your keys, not your coins” is incredibly valuable, and DCA is one strategy where it’s very important to think about how you are going to store your coins. You’re probably using a centralized exchange to do DCA, as many of them offer the automatic DCA strategies that I mentioned above (e.g. ,,*), but for long term storage, you don’t want to keep all your coins there.

A hardware wallet is a very cheap investment—and considering the peace of mind it gives you, it’s one of the best investments you can make. You don’t have to constantly withdraw to your hardware wallet every time you make a purchase (especially if the purchases are smaller, so that withdrawal fees would be a considerable factor), but set a reminder to withdraw your coins every once in a while—maybe every month or every few months—and that way, you don’t have to worry about whether the exchange you’re using will go under.

Conclusion

Dollar-cost averaging has benefits and risks, however in my opinion it works well for both investors and traders, if one sticks to the plan. If you have never tried this strategy and are thinking of starting today, I highly suggest using the example I wrote about above and following the 4 steps I outlined. You don’t need to use the exact levels and amounts charted there—those are just examples to give you a feeling for how the process works.

Being a regular trader, I can tell you from experience that solely focusing on a DCA strategy will bore you if you want to be more active. It is wise to use this as a second strategy, which after time starts making you profit which you can use for other strategies or investments outside of crypto.

If you have any additional questions about this strategy make sure to drop me a DM or comment on Twitter.

Artykuł How to DCA Bitcoin pochodzi z serwisu BloodGoodBTC.

The Nuances of Correct Position Sizing

Correct position sizing is critical for a Trader’s success – too little risk won’t yield respectable returns whereas too much risk can lead to blowing up accounts. Position sizing in laments terms means the dollar value of the trade risked compared to the size of the portfolio. To successfully workout this, Risk Management concepts such as the 1% Rule can be used to determine a Position Size.

The concept behind Position Sizing may seem mind-numbing but it serves the trader well in the long run. It avoids traders from opening random sized positions that disregard Risk Management.

In essence, random trades with random position sizing completely disregards Risk Management. This promotes more capital to be at risk at any given time, leading to larger than necessary losses. Focusing on a set Position Size will psychologically place more emphases on the Risk Management aspect of the account. This is critical for Day Traders who can easily lose sight of how much risk is in play when multiple positions are open.

The 1% Rule

The 1% Rule is a profitable practice used by Trader’s to execute trades with the correct Risk and Position Size depending on their account balance. The concept behind this rule is that Traders only risk 1% of their total capital on any give trade. This is designed to help greatly when it comes to periods of drawdowns.

The rule is intended for traders to psychologically adhere to a Risk Management System that accounts for only a 1% drawdown on any trade. There are different strategies around this rule where it allows traders to either put on larger Position Size with tight stop-losses and or smaller Position Size with wider stop losses. It really depends on the Trade Plan; tighter stop losses are mainly for scalps whereas wider stop losses are for swing trades.

Applying the 1% Rule is quite simple as it is in direct influence with the size off an account. For example, a $10,000 account will only risk $100 on any given position. To do this successfully, traders need to calculate the trade risk, which is simply the difference between the Entry Price and the Stop-Loss price. It is important to note that the Stop-Loss placement is strategic, it needs to be identified first to work out the Position Size of the trade whilst risking only 1%.

There is an exception to the 1% Rule, once a trader finds confidence in a high probability trading setup, it is viable to risk up to 3-4 % on the trade. This allows the trader to scale their account with larger position sizing when the risk to reward is worthwhile.

It is important that traders understand the objective of each of their trades. Longer swing trades are great for larger position sizing by averaging in. Day Trading and Scalp Trading on the other hand  is suitable with a fixed position size as multiple trades can then be taken.

Position sizing overall is directly influenced by the capital available in the trading account. Experienced and confident traders have the ability to increase their risk by increasing their position size when suitable.

Risk Analysis Process

A Risk Analysis process is predetermining the potential Risk associated with any trade and or investment. This helps Traders recognise and plan for the negative effects before committing to the position. The goal of a Risk Analysis Process is to ensure that Traders don’t get caught off guard when Trading Plans fall out of place. It helps to systematically manage losing positions with the aim of minimising loss as much as possible, this is in direct relation to

Position Sizing. The process of risk analysis includes the following,

• Identification of Risk
• Analysis of Risk
• Evaluations of Risk
• Risk Commitment

Identification of risk is the first step, here traders make Trading Plans that determines the maximum loss involved. It includes identifying invalidation levels where if reach, the trade is automatically closed. Identification of the risk should also be in relation to the overall Risk to Rewards Ratio. The Reward of the trade must outweigh the Risk, this makes the trade valid and worthwhile.

The second step is the Analysis of the Risk, this is more related towards the trade idea. The analysis process will surface the probability of the trade playing out. Ideally, Traders will aim to take High Probability Trading Setups. This allows them to adjust risk accordingly such as having wider stop-loss placements.

Evaluation of the Risk is the third step, this is an important part of the process where Traders finalise their plans. Levels are solidified and marked and cannot be changed after this stage. It essentially finalizes the Trading Plan before the trade and or investment goes live.

The final step is the Risk Commitment, here the Trader and or Investors puts on Real-Risk in accordance with their Trading Plans and Position Sizing. They adhere to the risk process so that if the trade was to go against them, they know they’re exact invalidation point. Commitment towards the risk is important as this helps reduce any Emotional Tilt when the trade is live.

Trading a proven strategy

A trading system needs to be profitable over the long run, this can only be achieved through back testing and accumulation of statistics. Once a strategy has been developed, Traders must adhere and execute on it religiously. This ultimately helps avoid suboptimal trades which can lead to unnecessary losses.

The main goal of trading a proven strategy is that it will adhere to a Probability Model which will play out over the course of time. Essentially this means that a string of losses will always be followed by a series of winning trades. If a trader trades with no Proven Strategy, then there is essentially no Probability Model in place.

It is important to remember that as Traders, results will be random, with proper Risk Management and Position Sizing, detrimental loses can be avoided. Overall, trading is purely a probability game, having a proven system will account for the Risk, the Rewards will naturally be greater overtime.

Emotional Control

Emotional control can be mastered but requires a lot of self-understanding by the trader. As trading is a probability game, there will be strings of losses that can affect the performance of a trader. Once on TILT, traders become prone to making irrational decisions that tend to disregard Risk, leading to account damage.

Position Sizing can have a direct impact on the Emotions of a Trader, for example, a larger size might put the Trader on TILT. This can cause them to make decision that are not part of their trading process or plans.

Day trading in general requires a lot of focus which can be mentally taxing. Some of the more common strategies to help with emotional discipline include taking regular breaks. This is quite helpful especially after a stressful encounter with the markets. This simple act clears the traders mind and brings them back into an equilibrium. This will allow Traders to focus on their proven strategies with correct Position Sizing executions.

Overall, the goal for traders and investors is to stay within an equilibrium with the market. That is, to not perceive themselves above and or below the market, but to stay levelled. This will ensure that the decisions made are well informed and in accordance to Trading Plans and processes. It takes skill to understand when to stop trading because of this imbalance, however, this can be mastered through self-awareness – the Trading Hierarchy above shows to importance of Emotional Control in relation to Position Sizing.

Final Notes

To summarise some of the key aspects of Position Sizing in this article

1. Position sizing in laments terms means the dollar value of the trade risked compared to the size of the portfolio Crypto insurance is a growing industry and may be a valuable service to some
2. The 1% Rule is a profitable practice used by trading to execute trade with the correct risk and position size Make sure you know your pathway to convert crypto to fiat and how to extract value from it
3. A Risk Analysis Process is predetermining the potential risk associated with any trade and or investment, this includes the calculation of Position Sizing.
4. Position Sizing can have a direct impact on the Emotions of a Trader, if Positions are not Sized properly, it can lead to Emotional TILT

Remember, trading is about survival in over the long term!

Artykuł Position Sizing pochodzi z serwisu BloodGoodBTC.

Most of you have day jobs and/or families to take care of; yet you want to participate in this market as an active trader, not solely as an investor.

This swing trade strategy is what you are looking for.

To put it simply, it is a strategy in which you basically determine and set points where you place bids (buy levels) and where you sell (TPs) based on pre-determined levels.

First example, just to demonstrate the plain strategy.

Here you can see a clear market structure with support and resistance levels. Based on this strategy, you will find the appropriate levels to enter, and to get out.

The chart presents a normal market movement. However, since we know the crypto market could be quite volatile, we need to set not one, but a few extreme points of Buy and Sell levels.  Pay attention, as the market goes down, we accumulate, and as it goes up, we distribute. But not all in one target; in order to minimize the risk and optimize a long-term P&L, we buy and sell on different steps along the way.

To clarify, here is another example of a chart with more volatility.

As you can see, there are levels which might seem unrealistic and unreachable at first. However, more often than not, your orders will get filled at these levels.

This chart shows the reason I added “extreme” buy and sell levels.  One wick down or up is enough to get our orders filled. Of course, we are not gamblers; so these are NOT our primary targets.  But, we always keep enough to unload or buy big on these levels. Remember, you must always have at least 20-30% of cash in your portfolio for times like this.

Let’s put these two charts into perspective and see how the actual price action plays out.

We can clearly see that not all orders get filled.  No one in the trading world has a 100% hit ratio of catching bottoms or tops. But, with this tactic, you can achieve the optimal averaging.

That is the reason why it is so important to set different levels and always stick to this style. Steady, and in few steps.

For instance, let’s say you have $1000, and you want to enter a trade.  Most amateurs in the market are impatient and want to enter positions as soon as possible, and as many as possible. They go all in at one level and hope to exit at another. This euphoria to be a part of something that your good friend recommended to you, can cost you everything you own.  It is far better to stick to this strategy from day one. Remember, slow but steady wins the race.

Set your entry and exit points before you even think about buying any asset. That will dramatically reduce your stress as well, especially if you are a beginner.

Now let’s see how exactly we can profit from this.

In this example, we took the average entry points and average exits. Not the best entry, nor the best exit. But simply “average”. You can clearly see that riding on these waves can be stress-free and yet very profitable. I use this strategy all the time with almost all coins with enough volume and enough data (new coins cannot be traded like that, since it is harder to detect valid, strong support/resistance lines).

On the chart below, I have explained some numbers, percentage, and the size with which you should enter at level 1 or level 2,3,4.

The chart is self-explanatory.

You might ask, why are some levels more distant than the others?

What would happen If you divided your entry in same portions?

The answer is simple: you will be overexposed to some maybe not so great levels, and also you will increase the likelihood of selling your asset way too soon.

Therefore, at levels that are more likely to happen, we put less of our trading capital.

As the level gets more obscene (still followed by TA logic, of course), you engage a bigger portion of your capital as an order.

This is in fact the best way to de-risk and make the most of any trade.

For instance, as you can see in the right corner of the chart, if our “buy level 5” was to get filled, and assuming we place 50% of our trading capital in it, and  then sell it at level 1 to level 4, we would have a 145% return. That would be “the swing of the century”, right?  Not really. If you do it this way, properly, then high returns are not a myth. They are common.

I hope you found this useful. I will try to prepare more content of this nature.

Love, Blood

Artykuł Swing Trade – Average-in & Average-out pochodzi z serwisu BloodGoodBTC.

Every trader needs to come up with a recovery plan to use as an escape route when the trade goes the other way and they need to get out of it. One of the most frequently asked questions in trading is, is trading cryptocurrencies profitable? The short answer is, YES. But you have to master the craft and have the right crypto investment resources at your fingertips.

Digital currencies are highly volatile and it is that volatility that acts as a double-edged sword. It’s common to see your portfolio grow 10 – 1 000% within a short period over just hours and then turn into the negative. When it comes to taking profits in crypto, you need to have a plan and be always on your toes.

One of the major advantages of the crypto market over the stock market is that while a prospective investor is required to tick a lot of boxes to get access, the crypto markets are generally easily accessible. But it is also at this spot that the double-edged sword metaphor comes into play. Because it is easy to get into crypto exchanges where life-changing financial opportunities lie in the form of volatility, which is also at the same time, a vice to these newbies, as their emotions can be easily riled up and get in the way of logic. In the end, they blow their capital.

To come up with a solid profit taking strategy in crypto, you must approach it in a highly objective manner, free of emotions. Avoid falling in love with your trade, once you hit your profit targets, GET OUT. Do not wait for potential gains that might not even come. Remember the market is volatile, avoid treating short term positions like long term investments, HODLing can end up costing you dearly. Sitting through massive gains without taking any profit is a trap, do not fall into it. With crypto, dollars can quickly turn into dimes, so holding onto short-time positions for too long can lead to rapidly dwindling portfolios. Instead, you can come up with a solid strategy and stick to it.

As a trader or investor, your profit taking strategy will determine whether you end up winning or getting rekt. Therefore you need to come up with a plan ahead of time about what you want your take profit strategy to look like. Some traders prefer to exit their entire positions all at once, while others prefer to easily exit the market bit by bit across a range of prices. You need to decide about your approach and then stick to it ahead of time. 

If you choose to leave your trades to run for long then you must set a stop-loss order. So that you do not lose all of your gains. For example, you have a bitcoin long position at $50,000 and an exit of the position at $55,000 for $5,000 of profit. What to do? As an option, you can set a stop-loss order at break-even $50,000 to stop your trade from losing you money. So if you start noticing that bitcoin is starting to go down, you can close the original order completely. In short, having a stop-loss at break-even ensures that you will not end up losing money if your trade is already profitable. 

At the end of the day taking profit in crypto depends on your level of comfort with risk and ultimate goals. However, having a strategy will better your chances of success. One of the tricks that most traders employ is keeping an eye out for divergence. By definition, divergence occurs when the indicator and price of the coin do not agree and this can have an effect on your trades.

There is a higher probability that there is bound to be price retracement when divergence is recognized. Divergence will ultimately assist you to recognize and react appropriately to changes in the price action. 

Another factor to watch when trading is Fibonacci levels. By its very nature, the cryptocurrency market at times pushes prices to Fibonacci levels. If you pay close attention to these levels, especially concerning retracements, you will gain an advantage when it comes to cryptos.

Also as you know crypto markets are influenced by algorithms and automated trading bots to some extent. These bots and algorithms tend to push prices to Fibonacci levels. If you pay attention you will notice that in some cases there will be some price reaction as a result of different Fibonacci levels. Such setups can provide a liquidity pool in the short term for you to close a trade and make a profit.

As you might have realized by now, having the correct strategies on your side can help you trade successfully. It is wise to learn to read the signals in the market so that you know when to get in and out at the right time. The more you practice and test your strategies the more chances to create wealth you also create for yourself.

Artykuł When to Take Profit when Trading Crypto pochodzi z serwisu BloodGoodBTC.

You don’t want to be one of those people, but with the right knowledge, you don’t have to. Here’s a post with all you need to know about leverage: what it is, how it works, and how successful traders use it. With that said, let’s dive right in — from the basics on what leverage even is to practical details on how the pros use it.

Basically, leverage means trading with borrowed funds or through other financial instruments that enable you to open a position that’s worth more than your collateral. Think of it like this: when you’re trading spot, your max leverage is 1x: for every $1 on your account, you can buy $1 worth of a coin. Also, when you’re trading futures, you can also have an effective leverage of 1x or below, as long as you open a position that’s worth the same as your collateral or less.

“But I always choose 20x leverage,” I hear you say, “so how can it be less than 20x?” The thing is, when you’re trading on Binance Futures and choose 20x, that is the maximum leverage of your position, not the effective leverage. For example, let’s say you’ve got $1k on your Futures account and you only open one position worth $1k on Cross Margin. Your collateral is $1k and your position is $1k, so your effective leverage is 1x. The fact that you chose 20x in the menu only means that 20x is the maximum leverage you can get, and in this example, you can add up to $19k to your position size (or open other positions worth up to $19k).

This distinction between effective and maximum leverage is very important, and when you hear pro traders talk about how leveraged they are, they’re referring to effective leverage. New traders, on the other hand, will mistakenly say they’re leveraged 20x even if they’ve got a $100 position with $1000 collateral, as long as they chose 20x in the drop-down as their leverage (not knowing that this is max and not effective leverage, which is 0.1x in this case).

Now that we got that out of the way, let’s talk about how to use leverage. There are two main uses here: increasing position size and improving capital efficiency (while reducing exchange risk).

Increasing position size is the best known use of leverage: you open a position larger than your account balance so that you can make higher returns. But this also means that any drawdowns are also larger. For example: if you’ve got $100 of collateral and buy $100 worth of BTC on spot, and BTC goes up by 10%, you’ll make $10. On the other hand, if you open a position worth $1000 by using 10x leverage and it goes up by 10%, you’ll make $100 — a 2x instead of a 10% profit! But, if it goes down 10% while you’re leveraged 10x, you’ll lose the whole $100 instead of $10. In this scenario, you will be liquidated or — in other words — rekt, and you should avoid this at all costs.

That’s why an important rule is that you should never trade with leverage until you can be consistently profitable on spot. If you can’t make money without leverage, you won’t suddenly be profitable by going 20x. Instead, you’ll simply wipe out your account, and the only thing that will go 20x is the speed at which you will do that.

Still, if that does happen, don’t simply give up on crypto but use your experience as a lesson, get some money back into your account and start again with proper risk management (most traders blow up at least once before becoming successful, so don’t worry about it, but it is a hell of a lot easier if you skip that step).

The second use for leverage is capital efficiency, and this is how many pro traders use it. In fact, in an environment where assets can easily move 20–30+% per day, there’s hardly a reason to use leverage to increase your position size, unless you really know what you’re doing.

Increasing capital efficiency means that you can decrease the amount of money you hold on an exchange while still trading at the same position sizes. For example, instead of holding $100k on an exchange and trading spot with that money, you can move $90k elsewhere and still trade with the same position sizes by using leverage. There are many reasons why people do this — yield farming opportunities, better returns elsewhere etc. — but probably the most important one is exchange risk. The thing is, no matter how safe some exchange is, you should never have all your capital on any single exchange, and cold storage (getting a hardware wallet) is much better. So, to minimize risk, traders will often move a bunch of their capital to safer storage options and only keep a small amount on an exchange, while opening positions at their usual size by using leverage. That way, if the exchange gets hacked in the example above, you’d only lose $10k instead of $100k.

Conclusion

I hope this guide can help you get a grasp on what leverage is and how to use it like the pros do. I’ll do more posts on specific aspects of this, such as risk management, but for now, get out there, trade safe and don’t get rekt!

Artykuł Leverage: What It Is, How To Use It And How Not To Get Rekt pochodzi z serwisu BloodGoodBTC.

Nevertheless, the news has quite a big impact on the crypto market — prices, trading volumes and public sentiment experience high volatility and some of it can be traced directly back to news and the reaction to it. Many inexperienced crypto traders and investors neglect or interpret the news incorrectly, which causes them to cash out at times where experienced traders recognize good entry points — the exact opposite of what the news might suggest. To guide some of those unlucky souls, I’ve prepared this article which explains how to analyze the news correctly so that it aids your trading decisions instead of infusing you with panic and fear.

Firstly we need to discuss different news channels and sources. There are many options, each has its advantages and disadvantages.

The most obvious one should be Twitter, as it sort of holds a status of the go-to platform for crypto announcements. Its accessibility enables every crypto project team to update their followers on development and announcements easily. Moreover, the format is shaped in such a way that you can only post short messages, which force everyone to post only the concise point of the message without unnecessary flattery. On the downside, because of the accessibility and short messages, twitter feeds can quickly become congested with people trying to get their point across and provide as much information as they can. To avoid this, you can every once in a while unfollow accounts that rarely provide useful and up-to-date information.

The second option that is quite popular are crypto news outlets and platforms that are dedicated to cryptocurrency-based news. Some of the most well-known are Coindesk and Cointelegraph, which post articles about pretty much everything crypto very frequently (sometimes multiple articles per hour). Usually the quality of the articles is quite good, but keep in mind that these platforms exist solely for providing as much crypto news to their followers as they can. If you’re day-trading and trying to profit on small price nuances this could be used to your advantage but if you just want to get the most relevant, course-changing news you might experience a tough time in filtering the additional content.

The third option is quite underrated but I use it pretty much daily when looking for new opportunities and when I want to know everything that’s going on in the market. The sources I’m talking about are old-school news aggregates like Bloomberg, CNBC, yahoo finance and my personal favorite — Investing.com. They represent well established sources that have stood the test of time and usually cover a vast range of news, from tech, traditional finance and business to general economy and crypto development. They pull the content from many different sources and provide a ton of fresh news if that’s what you’re looking for. I personally give a lot of emphasis on checking crypto news on these aggregates multiple times per day because they share news the quickest and twitter posts usually pull their information from these sources. When they reach Twitter, it might as well be too late to make a move and catch an entry point before the market reacts. When general news arrives at twitter, it’s usually already been read by a large number of people that have already made their moves. If you want to stay ahead of the curve and make daily trades, make sure you frequently check a good news aggregate.

If you’re interested in a particular crypto project, you might as well keep an eye on their official project webpages as they usually contain updates and announcements that might boost the price of their token. Keep in mind that their claims might be overblown to generate hype around their project and to lure more potential investors to follow them.

The last two news sources are the ones you should probably avoid if you don’t want to follow the herd of sheep into a slaughterhouse. Sometimes local news will outlets will cover something about some cryptocurrency and most often than not, they’re completely clueless. Additionally, when local news starts talking about cryptocurrencies and similar topics, it’s usually a sign of a bubble or at least an unsupported hype that will likely die out. You should assume the similar when one of your friends starts talking about some random cryptocurrency out of the blue, especially if they don’t understand the fundamentals and only yearn for a quick profit. Avoid acting on news from these sources at all cost because it will only lead you astray — it’s like the blind leading the blind.

The next lesson here is to make sure you understand every bit of the news that you read. If you truly understand all the terms and references, you’ll likely be able to spot news that’s overblown, written just for the sake of writing or is misrepresenting the actual development. Even the slightest misunderstanding of a term in an article might cause you to totally misinterpret the message and act in a manner that will be suboptimal. Therefore you should always take the time to at least check the definition of an unknown term on Google.

After reading the article, you should get an idea of what it’s trying to portray, if it’s good or bad and how impactful the news could be for the market. To make sure the content is factual, truthful and not overblown, you can do two simple preventative actions. First evaluate the source and the author. Nowadays anyone can create a news blog or post something on twitter, so you have to make sure they actually know what they’re talking about. Check their credibility, what they’ve done in the past and on what platforms they’re usually active. Verify their motive for writing the news –try to guess what they gain from it. Sometimes it’s an honest announcement of a project’s development and sometimes it’s an attempt at executing a pump and dump move of a shitcoin (many influencers get paid to hype up some random cryptocurrency to their followers so be wary of people promoting crypto without any experience in it).

Second, you can fact check the claims made in the news. Often authors will create flashy titles for clickbait or enlarge the numbers mentioned in order to make the news look more important than it really is. If what you’ve read wasn’t posted on an official source, they should link to where the official announcement can be viewed or they at least hint to where the author got the information provided in the article. If you cannot find the official source, you can at least compare the news article with a post from another news outlet as it is probably covered elsewhere as well. Always stick to the rules: “if it’s too good to be true, it probably is” and “trust but verify” as they might save you from a bad decision fueled by misinformation.

Besides crypto news, you should also pay attention to regular business and economy news as they sometimes greatly influence the price movement and the capitalization of the entire cryptocurrency market. As directly crypto-related news might creep onto your newsfeed (like Tesla deciding to stop accepting Bitcoin as payment for their vehicles) factors like inflation, regulation and material shortages for producing computer parts might not, yet they will influence the market moves. This might be a bit more difficult to master as you probably won’t notice a correlation between crypto and such news when you first start reading them, but it will get easier with practice and experience. Additionally, the market might sometimes react in the opposite way of what you’d expect. For instance, some thought people will invest their capital into cryptocurrencies at the start of the COVID-19 pandemic as Bitcoin and similar tokens could provide a safe haven if inflation would take place. Instead, Bitcoin and the rest of the cryptocurrency market crashed down together with the stock market because of people panic selling investments and hoarding toilet paper (and similar assets) instead.

Now let’s take a look at how news affects the price of a particular cryptocurrency. In a nutshell, you can observe three events that can take place because of good or bad news. First, there’s a quick reaction of the speculators that were among the first to read the news and have placed their bets (either by buying or selling the tokens), thinking they will be able to profit on the delayed reaction of the rest of the world or that they’ve gotten out of the market before the price makes a proper adjustment. Often, these quick reactions might be totally unjustified as these short term speculations can be based solely on rumors or news that aren’t really impactful (we’ll take a look at this in the next paragraph). If this is the case, the price of the token quickly bounces back to the previous price levels. If the news are actually impactful or course-changing for a particular cryptocurrency, you can often observe the second event; a proper price adjustment (upwards or downwards) that takes days or in some rare cases even weeks to complete. This adjustment unfolds in such fashion because people don’t read the news all at once — the world has to “catch up”. More often than not, traders will also be of different belief on how much this news will affect the price. Because of this disagreement, the price will form a trend but it won’t just directly jump to a settling point. Before it stabilizes at a new level, it may go up and down in price before it discovers the stable price point. The third affect the news has on the market is increasing the trading volume. Every time the public is led to believe they have to make a quick move in order to adjust to the new development, they will generate a big amount of trading volume. When looking back and trying to connect the dots, this spike can easily be traced back to the source of new euphoria or fear and it usually makes the price jump quickly in either direction.

A common mistake crypto newbies make is not differentiating between short-term buzz news and the actual course-changing news that shift the markets for the long term. This is hard to learn and even harder to explain, so I’ll provide some examples for easier comprehension. The only way I can explain to you how to differentiate between the two is to ask yourself this question at the end of the article: “Does this change the usability or functionality of the underlying coin?” Of course, to be able to answer it correctly you must know the unhindered facts behind the news.

Now for some examples, we’ll first take a look at some scammy buzz news that you wouldn’t want to trust:

• In January, there was a rumor of a Bitcoin double spend succeeding, which would create additional unwanted supply. Quite a number of investors were spooked and dumped Bitcoin, fearing it will collapse from this “backdoor”. If they’d fact check the situation, they would figure out that the blockchain actually prevented a double spend by invalidating one of the blocks that have spawned. Some traders quickly realized this misconception and grew their positions at a discount when the rest of the market was fearful.
• Quite a few times there was news that China banned Bitcoin and cryptocurrencies which created multiple price pullbacks. What most of the media failed to explain was that the ban was only covering certain scenarios for battling money laundering and that Chinese individuals can still buy and sell cryptocurrency uninterrupted.
• Jake Paul promoted a few coins on twitter which should raise quite a few red flags. While it’s hard to doubt his success on Vine and Youtube, it’s tough to perceive him as an expert in cryptocurrency. Most likely, he was paid to promote these tokens with his big social media reach. Every time someone promises a way to get rich quick, it’s probably not in your best interest to listen to them.

Now let’s look at some actual course — changing news that enabled cryptocurrency to become more widely accepted:

• Earlier this year quite a few large companies (like Tesla, Square and MicroStrategy) announced they’ve bought Bitcoin in order to diversify their holdings portfolio. This news signals us that Bitcoin has reached the point of such mainstream adaption that companies are willing to invest millions and even billions of dollars into certain cryptocurrencies. Many investors attribute the unforeseen reach of the last bull run to this fact.
• Similarly, many hedge funds and banks like JP Morgan announced they’re preparing actively managed crypto funds to let their clients invest into crypto. While I personally believe it’s way better to directly invest into crypto by buying a token you’re interested in, this move enables older generations that aren’t that tech savvy to dip their toes into at least a portion of those sweet crypto gains. Besides that, it further legitimizes crypto, so it’s hard for someone to rationally claim that crypto is a scam altogether.
• If you paid close attention, the price of a cryptocurrency jumps up every time Coinbase announces they will incorporate it into their exchange. While this doesn’t affect the functionality of the token, it makes it available to a much wider audience as Coinbase is regarded as one of the most popular crypto exchanges that’s very user friendly. Besides that, Coinbase has strict rules and requirements around what cryptocurrency they’ll enable to be traded on their platform. While this makes them offer a smaller range of crypto, their choice is regarded as a sign that those cryptocurrencies have actual useful functionality and good odds of succeeding in the long term.
• You might have herd that Coinbase launched its initial public offering (IPO). While this doesn’t directly affect the price of crypto, it shows that a company that solely does business with cryptocurrencies can be treated seriously enough to be allowed to issue its stocks to retail investors. As more and more of announcements and moves like these come about, crypto becomes more legitimized and regarded as a serious investment option.

Conclusion

To close out this article, I can give you one last advice when handling the crypto news: don’t get too caught up in it. Of course it’s important to be updated with the latest trends and development but you can easily lose your head in trying to figure out what’s the next thing that happened. Personally, I’ve developed this habit of taking a breather once every few hours, perhaps a short walk outside to empty my head and it actually helps me get into “the zone” once I’m back in action. It differs from person to person, so make sure you experiment around to figure out what works for you.

Artykuł How To Evaluate Crypto News pochodzi z serwisu BloodGoodBTC.

On-Balance Volume (OBV) might sound like something complicated, but in fact, it’s one of the simplest indicators out there. Unlike many other indicators, it doesn’t derive its data from the price, but rather from volume, while all it takes from the price data is whether a specific candle is green or red. More specifically, the OBV simply adds up the trading volume in all previous candles on the chosen timeframe, while the volume on red candles is subtracted. So, let’s say we’re looking at the daily chart of a specific trading pair where the volume on one green day is 100, then 20 on a red day, and 150 on another green day after that. The OBV would show the values 100, 80 and 170 for these three days.

But since the OBV takes into account all of the previous trading activity, its numerical value isn’t important, rather, the crucial bit is how it changes candle to candle, and this is depicted with a simple line. Unlike the RSI, this line isn’t limited to a range from 0 to 100, and it looks a lot like a price chart if you choose the line view instead of candlesticks.

Here you can see the OBV under the chart, as it’s usually displayed

So, what does this line mean and why do I think it’s one of the best indicators out there? To see that (and I’m sure you’ll agree with me on how good of an indicator it is once you start using it), we need to cover how to trade based on the OBV. There are two main ways to use it: first, looking for divergences and, second and more interestingly, looking for breakouts and support/resistance levels.

When it comes to divergences, the OBV can be used in much the same way as the RSI: when the price forms a higher high and the OBV paints a lower high, that’s a bearish divergence. In the opposite case, with a lower low on the price and a higher low on the OBV, you have a bullish divergence. These should always be used together with other signals to confirm possible entries.

But the real interesting bit with OBV is the second method, namely breakouts and important levels. The thing is, the OBV doesn’t just look like a price line, but it can also be analyzed in the same way as a price line. That means that you can look for patterns, support/resistance levels, retests and so on. And the main reason that this can be a very good strategy is that a breakout on the OBV can happen before the breakout on the price chart. Of course, this doesn’t mean that a breakout of the price is certain (in trading, there are only probabilities), but it does mean that it’s likely to follow. The OBV breakout essentially points to a growing level of investor confidence and buy pressure, and it’s easy to see why this would lead to a breakout on the price chart as well.

Let’s take an example that happened very recently, namely with Bitcoin. If we look at the daily chart, we can see that it broke out of a Bump-and-Run Reversal (BARR) pattern on the 6th of August:

This pattern is pretty easy to see here, and it certainly looks bullish (and if you want me to cover some of these underrated patterns a bit more in another post, just let me know in the Twitter replies!). But if we look at the OBV, we can see something really interesting:

The OBV had the exact same pattern, but the breakout was confirmed on July 26th, a whole 11 days before the breakout on the price chart. Here, it’s obvious why seeing that so early can be a huge advantage. Of course, this isn’t 100% — not all OBV breakouts will carry over to the price — but it works often enough for it to be one of the most important strategies that I use personally.

It works on different time frames too, with the usual disclaimer that patterns on higher time frames tend to be more reliable. And, of course, it works for all the patterns you would use on the price chart: triangles, flags, wedges, channels etc. So, open up some charts, test this out and practice it until you’re printing more money than a central bank!

Artykuł On-Balance Volume (OBV): One of The Best Indicators Out There pochodzi z serwisu BloodGoodBTC.

The RSI is a momentum indicator used in technical analysis (TA), first developed by J. Welles Wilder. Simply put, it measures the speed and change of price movement and signals when a cryptocurrency or an asset is either overbought or oversold. It holds values between 0 and 100 and is typically calculated with 14 periods (more on that later). Usually, it’s plotted as an oscillator (a line graph that reaches values between two extremes) beneath the price chart. Generally, an asset is considered overbought when the RSI is above 70% and oversold when it’s below 30%. In such extremes, one can expect an upcoming trend reversal or a corrective pullback in the opposite direction. We’ll take a look at some examples to show you the practical implications later on.

The formula for RSI is calculated in two parts and is fairly simple yet difficult to explain.

The first part (simple 14-period averages):

RSI = 100 — (100 / (1 + (initial Average gain/initial average loss)))

Average gain = Sum of gains over the past 14 periods / 14

Average loss = Sum of losses over the past 14 periods / 14

The average gain and average loss used in the calculation are the average percentages of gains and losses during the chosen period and the average loss is expressed as a positive value.

The second part (smooths the result):

RSI = 100 — (100 / (1 + ((Previous average gain x 13) + current gain) / ((previous average loss x 13 + current loss))))

Through the second step, the results are smoothed in order to become more accurate, produce less false positives and to extend the calculation period. Once again, the average losses are expressed as positive values.

After the second step, the RSI points can be plotted onto the chart, creating the visualization we stride for.

Now that we know how the RSI is calculated, let’s look at what we can learn from it and how traders use it for TA. We’ve said before that when the RSI is signaling that a token is oversold or overbought, we can expect a reversal or a corrective pullback. Despite that, the RSI can and similar momentum oscillators can become overbought/oversold and remain so in a strong up/down trend. We can see such behavior in the Bitcoin example below. Even though the RSI signaled that BTC is overbought for quite some time, the price climbed higher with minimal pullbacks because of a very strong long-term uptrend.

To counteract such false positives, we can combine the RSI with other trading indicators to either confirm or deny the price reversal signal. In this fashion, the RSI is often combined with the Moving average convergence divergence (MACD) indicator which calculates momentum differently from the RSI by comparing the relative positions of a short and long-term moving average. Another popular RSI combination is with Moving average Crossovers, that predict reversals quicker.

Because of the RSI’s nature of false positives in strong trends, it’s most useful in sideways movement — when the price of a cryptocurrency stays within a certain range. In the example below, we can see that Ethereums (ETH) price moved sideways within the chosen time period. When the RSI signaled that ETH is oversold once towards the end of November and again in the middle of December it correctly predicted the trend reversal that followed in the coming month and a half, when the price more than doubled. At its peak in the middle of February, the RSI almost touched 90%, predicting a trend reversal that followed. In the middle of March when the price reached the bottom again, the RSI dipped under 30%, correctly signaling yet another reversal which followed in the form of a slow but steady uptrend in the following months.

According to Wilder, RSI divergences can also predict potential reversals because directional momentum doesn’t confirm the price. When the price of a token forms higher highs while the RSI forms lower highs a bearish divergence is formed, which signals a potential reversal downwards. On the flip side, when the RSI forms higher lows while the price forms lower lows, a bullish divergence is formed, signaling a potential reversal upwards. A bearish divergence can be observed in Litecoin’s chart below, where the price kept making higher highs and the RSI consistently recorded lower lows. Soon after the overall trend reversed, causing the price to decline over the next three months.

Lastly, the RSI can signal an impending reversal with “failure swings”. They’re completely independent from price action or divergences, therefore we solely focus on the RSI. A bullish failure swing forms when the price dips below 30%, jumps back up, dips back down but holds above 30% and then beats the prior high. Conversely, a bearish divergence forms when the RSI moves above 70%, pulls back, bounces back up but fails to exceed 70% and then breaks the prior low level.

A bullish failure swing can be observed on the Cardano’s graph below, where the RSI dipped under 30%, bounced back above, retraced again without breaking 30% and then barely pushed above the previous high. After the failure swing, the price movement recorded a short term reversal and uptrend we could make a move on.

Binance’s graph depicts a bearish failure swing, where the RSI jumped above 70% while in a price uptrend, then it fell back down and lastly climbed up almost to the 70% but not reaching it again, predicting the upcoming bearish price movement that followed in the next months.

Conclusion

While the RSI is super useful, it has its limitations. Usually it works best and is most reliable when conforming to the long-term trend. Because the indicator shows momentum, it can remain oversold or overbought for quite some time, when the token has significant momentum (a strong, long-term trend) in either direction. Because of this, the RSI is most useful when the price moves sideways, within a price range. As mentioned before, it’s also often combined with other indicators to confirm the reversal signals.

Artykuł How to spot trend reversals with RSI pochodzi z serwisu BloodGoodBTC.

One of the indicators that I really deeply encourage you to use is the Relative strength index (RSI), that I’ll talk about today. First I’ll spend some time explaining what it is fundamentally and afterwards I’ll dive deep into practical applications of it. My firm belief that knowing how to use it in practice is of utmost importance is the predominant reason for not including the fairly complex mathematical background (besides, you’re not here for that).

The RSI is an oscillator used in technical analysis, which measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price. Its value ranges from 0 to 100. Traditionally values above 70% indicate that an asset is becoming overbought (overvalued), while values below 30% indicate that it is getting into oversold (undervalued) territory. Both signs indicate that either a correction in a price or trend reversal is on the way.

Basically, under normal circumstances, when the price is in a sideways movement, we interpret RSI under 30% as a bullish sign and RSI exceeding 70% as a bearish sign. In case of a strong overall trend on a longer timeframe we need to adapt thresholds. In case of a strong long term upward trend, we move them higher, in contrast to moving them lower in case of prevailing downward trend. Such a phenomenon can be obtained from the following picture. Since it’s difficult to evaluate when and how much to move thresholds, RSI is most useful when the price moves in a horizontal direction long-term.

It’s of vital importance to look for sharp changes in the RSI value in order to spot trend reversal. In case of a bullish trend, when the RSI fluctuates around higher values and repeatedly exceeds 70%, the sharp fall to 30% indicates a weakness in a trend and signals reversal of a trend. On the flip side, during bearish trend, when the RSI fluctuates around lower values and frequently fails to reach 30%, a sharp increase to 70% is a signal for trend reversal.

An even superior sign of trend reversal is what we call Bullish divergence, which occurs when the RSI forms higher lows, while the price of an asset forms lower lows. On the contrary, Bearish divergence occurs, when the RSI forms lower highs, as the price of an asset forms higher highs. As the name suggests, the first is a bullish signal, while the latter is a bearish signal for a trader. An instance of a bearish divergence formation can be observed from the picture below.

The last RSI signal that can predict trend reversal is called a swing rejection. Bullish swing rejection forms as RSI dips below 30%, once again gets above 30%, makes another dip but doesn’t get into oversold territory and then breaks the prior high. Inversely, a bearish swing rejection forms as RSI gets above 70%, pulls back beneath 70%, makes another high but doesn’t get into overbought territory and then dips below the prior low. The following picture portrays how price reversed soon after the confirmation of a bearish swing rejection.

To sum it up, RSI can be immensely useful, but needs to be used in combination with other indicators. Generally, traders apply it when price has been moving sideways in the long-term, but has been in a short-term trend and they want to predict whether the trend is there to stay or its reversal is on the horizon.

Overall, one thing to consider is that moving averages and other MA-based indicators are typically better when the market is in a strong trend (e.g. for finding entry and exit points), while oscillators such as the RSI and Stochastics (I can cover this one later on people are interested) are better in ranging markets.

Artykuł All About The RSI And How To Trade It pochodzi z serwisu BloodGoodBTC.