Hi Goomboo, thanks so much for posting this epic thread. I am relatively new to all this, so please excuse my ignorance if my questions are a bit basic. I would really like to ask them though, as I am determined to never use a method which I do not fully understand.
Firstly, the exponential moving averages; the values are 10 and 25. But 10 and 25 what? Is it, as I suspect, 'ticks' which to my understanding is the time period which you select - in this case hours?
Secondly, you mentioned in your original post about checking for liquidity. I understand that this means that you want to make sure there is enough capability of movement in the market such that you don't end up posting a buy or sell order which takes a large amount of time to be accepted, exposing you to the risk of market movement against you in the meantime. Could you please explain how you read the charts related to the website that you linked to in order to determine if there is sufficient liquidity to cover your moves?
I am in BTC more for the fun aspect and because I believe in the technology than to necessarily make a large profit; I have only invested a small amount which I can afford to lose. But I sincerely hope I can make a nice profit so I can give you a generous tip not only for your great advice, but also for your general ethos; one thing I have noted about this site is that people are almost jumping of the roof of the exchange / cracking champagne bottles just about every few minutes depending on the market. It's really refreshing to hear from someone with a level head and real world experience.
Thank you very much for the compliments and I'm more than happy to answer your questions. We all were new to it at some point, so don't worry :p
1. The moving average number just says how many data points it is using to calculate the average - in our case closing price of candles (hours). The number 10 means that it is an average of the 10 past closes. It's an exponential average which means (skipping the math) that it gives a more "smooth" picture. For a comparison, I'd look at a simple moving average versus an exponential moving average of the same period, side-by-side and you'll get the "aha!" moment. The idea behind using a moving average is that it gives us a picture of the trend, or which way prices are tending to travel at that moment.
2. Liquidity is a fancy finance word that basically is about quantity
, not time. It's an electronic exchange, so when I click "buy", it should be executed pretty much immediately, so time is not really what I'm worried about. If you look at that website (http://bitcoin.clarkmoody.com/
) it shows you the amount of bitcoin you can buy or sell at certain prices. I'm worried about a concept called slippage, which I'll explain in the below example/picture.
Let's say I want to buy 1,000 BTC right now. For me to buy, there has to be someone willing to sell me these BTC - and I need to know what his price is. Since I'm trying to trade for a profit, the price I receive (the average price I pay per BTC), is important because after all my profit is just the difference in my entry / exit prices minus commissions. Below is a screenshot of the liquidity in the market and the current price at Mt. Gox. That price at Mt. Gox is fine if you are just curiously looking at BTC, but if you are actually trading them, you need to know what your trading price
will be. For example, to buy 1,000 BTC, you would end up paying an average of around $5.00 per BTC. This is called slippage - you see the price is $4.98, but your trade will actually cost of $5.00 per coin - you slipped!
Putting it in fancy finance words - liquidity helps prevent slippage.
I wish you the very best in your trading and I am very happy to see that you are doing the research and protecting your hard-earned money.