The second post in our bitcoin trading series covers the basics of making a successful trade. From identifying a trend, to timing positions, this post will show you the tactics used by top bitcoin traders.
This post is divided into three sections:
How to read charts
Identifying market trends
Opening and closing positions
Section 1: How to Read Charts
At first charting websites, like
BitcoinWisdom, appear to offer an overwhelming amount of information. However, they are easy to learn when you break it down section by section.
Candlesticks / price chart
Candlesticks are the most widely used method of tracking prices. This because they convey a lot of information in little space.
A candlestick is the rectangles and lines that resemble a candlestick shape. They are used to show what the price has done within a chosen time interval, which in this example will be one hour.
Price directionAs the closing price is less than the opening price, the price of bitcoin fell. Therefore the candlestick is red. If the price rose the candlestick would be green.
Highest priceThe highest point of the stick shows that, during this hour, the price reached approximately $238.
Lowest priceThe lowest point of the stick shows that, during this day, the price fell to approximately $233.
Opening priceThis is the part of the rectangle that is horizontal to the candlestick to the left. In this hour, the price opened at approximately $237 (which was the closing price of the hour before).
Closing priceThis is the part of the rectangle that is horizontal to the candlestick to the right. In this hour, the price closed at approximately $234 (which was the opening price of the next hour).
Sometimes the highest and lowest price can occur at the same time the hour begins or closes. The first candlestick on the left is an example of this.
Volume
This is perhaps the most simple part of a charting interface. Volume measures the amount of trading that has taken price in a certain time period. By default, most bitcoin charting websites measure volume in terms of bitcoin.
Order Book
An order book is an integral part of a bitcoin exchange. The order book is a record of market makers wanting to buy/sell at specific prices and quantities.
A full explanation of an order book is covered in part 1 of our bitcoin trading guide.At BTC.sx, we offer direct market access, which means that the trades you make on our platform include the exchanges’ order books.Trades
The trades list is a record of recent trades. In this case, the most recent trades was a the sale of 10 bitcoins at $234.80 per bitcoin. This can be used to see at a glance what is happening in a high amount of detail.
MACDMACD stands for moving average crossover divergence. Do not worry if this sounds complicated — all will become clear in the next section. For now, just think of the MACD as a rough guide of the momentum price changes have.
The MACD is an important tool for many traders for identifying market trends, which is our next section.
Section 2: Identifying Market TrendsA trend is a general direction that the price is moving towards - either upwards, flat or downwards. An upward trend is often called a bull market, while a downward trend is called a bear market.
Looking back at bitcoin’s price history, we can see numerous bullish and bearish trends. The price of bitcoin is rarely stable!
Generally, beginner traders should attempt to trade according the broader market trend. Although it is possible to profit from a long / buy position in a bear market, this requires traders to time their entry and exit points very carefully. This is covered towards the end of this post.
How can I spot a trend?It is quite easy to look back a plot the bull and bear markets on a chart. However it is more difficult to identify the current market trend .
To help traders identify the current trend, there are three common tools that are used.
1. Moving AveragesA
moving average is the average price of bitcoin over a rolling time period. Moving averages are particularly useful for bitcoin because they smooth out random price fluctuations — which are common in bitcoin markets.
There are two types of moving averages. Firstly, simple moving averages (SMA) average prices equally and is calculated by:
(price+price+price…) / number of price intervals = SMA
Secondly, exponential moving averages (EMA) average prices unequally. Instead, EMA places greater importance to more recent prices. A formula for EMA looks something like:
((price * large weight)+(price * medium weight)+(price * small weight…)) / number of price intervals = EMA
If you hear the phrase 30 day moving average, this means that 30 price intervals have been used in the formula, with each interval being 1 day long.
Below is comparison of how different the SMA and the EMA looks on a chart. The blue line represents a short-term average, which uses shorter price intervals. The orange line represents a long-term average, which uses longer intervals.
SMA
EMA
Although there does not appear to be too much difference. The points at which the short-term and long-term averages crossover are very different. For beginners, using a SMA is generally sufficient to identify trends.
Identifying trends with moving averages is simple. When the short-term average (blue line) is above the long-term average (orange) line, the price is rallying. When the short-term average (blue line) is below the long-term average (orange) line, the price is falling.
Moving averages also provide data for the MACD, which is our next recommended tool to spot trends.
2. MACDThe MACD, as mentioned earlier, shows both price momentum and direction. It is calculated by subtracting a long-term EMA from the short-term EMA.
Moving averages simply show the price direction. The MACD also shows the price momentum. If there is a large difference between the two moving averages used in the calculations, then this indicates strong momentum. Or a small difference indicates weak momentum.
Momentum is shown in two formats on the MACD, but represent the exact same calculation. These formats are the histogram and the lines, which look similar to moving average lines.
Worked explanation
Using the right hand-side of the above MACD, we can see that the price has upward momentum. This because the histogram is green and pointing upwards. We can also see this because the short-term moving average (blue line) is above the long-term moving average (orange line).
This must mean that when the MACD was calculated, a positive number was obtained.
Top trading tip: the MACD is more useful as a long-term indicator. In particular, the three day MACD chart is popular among traders at /r/bitcoinmarkets. It has historically been a good predictor of incoming price movements for bitcoin (shown above).
The third tool are crossovers, which can apply to both moving averages and the MACD.
3. CrossoversMoving averages and the MACD are great for identifying trends. But as a trader you want to be buying low and selling high. To do this you need to know when a trend begins and ends. This is what crossovers show.
Crossovers can apply to both moving averages and the MACD. Let’s first look at moving average crossovers.
Moving average crossoversA moving average crossover is when the short-term moving average crosses over the long-term moving average. These have been identified on the below chart with yellow circles.
As you can see, each crossover signals the end of the previous trend and the start of the next trend.
As a trader you should aim to buy when a bull trend starts — the short-term moving average (blue line) moves above the long-term moving average (orange line).
Conversely, you should aim to sell when a bear trend starts — the short-term moving average (blue line) moves below the long-term moving average (orange line).
BTC.sx CEO, Joe Lee, used moving average crossovers to turn $100 into $200k in trading bitcoin.
Read our interview with him here.MACD crossoversMACD crossovers are very similar to moving average crossovers. A crossover occurs in two circumstances:
When the MACD calculation stops producing a negative number and starts producing a positive number. This is a bullish crossover.
When the MACD calculation stops producing a positive number and starts producing a negative number. This is a bearish crossover.
Don’t worry if this sounds complicated! Remember that this can be easily seen from the histogram or lines. The below chart has highlighted MACD crossovers with yellow circles.
These circles have been drawn on the histogram, but could have been drawn on the lines. You can use whatever you prefer in your own trading.
You should aim to buy when a bull trend starts — the histogram becomes green.
Conversely, you should aim to sell when a bear trend starts — the histogram becomes red.
Armed with this knowledge, you can now start thinking about what your next trade should be.
Section 3: Opening and Closing PositionsYou may recall from our the first part of our bitcoin trading guide, that a position has an open and a close. We will now walkthrough how this is done.
By this point you should have a few ideas on where the price of bitcoin might be headed, signed up on BTC.sx and have made a deposit.
These are also explained explained in the first part of the trading guide.First let’s look at opening positions.
Opening Positions1. Ensure there is a sufficient Balance to Open the Trade.Cross-check your Account Balance, and ensure their are enough funds to cover the following -
Trade Deposit, Open Fee and Close Fee.
2. Choose Position Size (trade size out to market)This can be adjusted by moving the slider, or selecting the over-type icon to manually input the value. Similarly, you can use the up/down and left/right arrows on your keyboard.
3. Choose Trade Leverage Option
4. To Execute a Trade positionClick the Buy or Sell Button — depending on the market trend.
Trade execution ‘in progress’ is indicated with spinning arrows.
Trade confirmation is indicated by pop-up timestamp
5. Position is now openInitially all positions open with a negative profit. This is because the price has not moved enough to cover trade fees. It is important to be patient and allow the price sufficient time to change in order to become profitable.
Closing a position1. Timing the closeThe exact time that you close a position is very important because it is the final action that determines your profitability.
As mentioned above, one strategy is to close your position when the market trend changes against you. For example, if you opened a long during a bullish crossover, you may want to close that long if a bearish crossover happens afterwards.
Another strategy is to close your position at the peak of a price rally or the bottom of a price crash. Although this is much harder to spot, it can be more profitable if you time your close well.
Worked example
In this example we have spotted a bearish crossover on the MACD and have decided to enter a sell position at $230.
Initially the trade screen tells us that our position is not profitable. However, we are patient and the price continues to fall. The trade screen is now telling us that we are profitable and we are now looking for an exit price.
If we wait for the next crossover we close our position at $220 — not a bad profit. However if we close near $213 we make an even larger profit.
Top trading tip: to spot the bottom of the price crash, we should continue to watch the MACD. When the histogram bars start becoming smaller, this indicates that trend may be starting to reverse.
Although this signal is not as reliable as a crossover, it is the point of maximum financial opportunity:
2. Closing the positionSimply click the trade Liquidate button to execute the Close Order with the exchange.
Trade Engine executes a Market Close Order at the Exchange.
Trade Liquidation — Profit/Loss calculations take place.
3. Position is ReconciledThe account balance has now increased as a result of the profitable trade
ConclusionYou should now be in a position where you can make basic trades on
BTC.sx that are based on a simple analysis on the market direction.
In part 3 we will be covering the basics of technical analysis, including support and resistance patterns.
Like us on Facebook or
follow us on Twitter for future updates.
If you have not yet signed up for an account on BTC.sx click here. The registration process takes just two minutes and does not require any identity verification documents.
