Trading Strategies

There are three trading strategies introduced in this chapter. These strategies will form the foundation of other strategies that you will surely get used to as you mature in your trading abilities. This is assuming that you are new to cryptocurrency trading and have minimal knowledge and understanding of what it is and how to do it.

Remember that this market moves constantly. Hardly a second that goes by when a trade is not being conducted. With more than 50 pairs of currencies and fiats, trading can easily become a full-time occupation.

Buy the Dips

Always remember to buy the dips. Dips are moments in the price movement that a march forward is followed by a momentary step back. This is the characteristic of most markets. When you are new to any market, it is an effective way to identify trends. When you are day trading, trends are not what they would be if you were a long-term trader. A long-term trader considers a trend to last anything from a few days to a few months, and enters his position and leaves it for days, weeks, or even months. A scalper in cryptos or a day trader doesn’t do that. He actively trades the waves, both up and down, and exits in minutes, or hours, at the most.

Since you are doing rapid trades, you can use the dips to get a better entry point once a mini-rally has started. This is your first strategy. When you first get started, observe the graphical representation of price movements. Don’t look at the numbers, as the numbers can’t give you an image of the price as it takes shape. Watch the chart and adjust the timescale to 5 seconds, 10 seconds, and 1 minute to get an idea of the nature of the movement. You will notice that every advance is punctuated by a retracement and every fall is retarded by a momentary uptick. Get used to this patter and use it in your ability to buy the dip.

Never place an order as soon as the market turns from one trend to the next. Wait for the dip, then buy on its next run. That way you can see the rally form rather than face the retracements soon as you get in. It also gives you an opportunity to confirm the push forward. Use the dips as a trigger for your market entry.

Do the same thing when you are shorting the market – wait for the dip. In this case, the dip means that it is backing off its downward trend and momentarily ascending. Wait for it. When it reaches its apex and starts back down, that’s when you catch it. Make it a habit to never try to catch it at its peak. Fortune may grant a perfect catch while the price peaks, but it’s never a good long-term habit to have.

The apex and the pit have a specific purpose, and that purpose is not for you to harvest or liquidate, but for you to prepare for the next move. Those are your trigger points.

Arbitrage

This is an advanced strategy only as far as beginners go, but it is something that you should master right away. Arbitrage doesn’t focus on the ups and downs of the market, but rather the mispricing of the market. In cryptos, this is an underutilized strategy, and if nothing else, this is the strategy you should take away from this book.

When there are so many pairings, your best bet is to use the automated programs that I use (as described in the earlier part of this chapter). Without automation, you are not going to be able to make use of the greatest benefit that cryptos provide – and that is tradability and volatility.

Back to arbitrage.

In arbitrage, the thing that you are looking for is a mismatch in price between pairs. So, let’s say for instance you have the price of A vs B, price of B vs C, and the price of C vs A. If all goes well, and the A:B is 1:2, B:C is 1:3, then it should be that A:C should be priced at 1:6. But in a pricing mismatch, A (in this example) is bidding at 1:6.5. What happens in this case? Look at how simple this is. If I use one unit of A to buy C, I get 6.5 in return. With 6.5, I can use C to buy B at the rate of 1:3, which will get me 2.167 of B. With 2.167 of B I exchange that back into A to get 1.08 of A. When I first started the arbitrage exercise, I walked in with only 1 unit of A and I exited with 1.08 units of A. This example shows an 8% return. That’s not so important, because the numbers are only examples. The point is that this trade would take just 30 seconds to complete.

Now let’s look at how you set this up on your trading. Before I forget, there is something that you should do on a daily basis. On any given day, there are numerous mispricing opportunities, and you will not be able to catch all of them manually. You will need a program or an AI algorithm to catch them and execute the trades. Just keep the program running and set it up to either trade automatically, or to seek your approval prior to placing the trade.

If you don’t do this, there are a number of other traders who are going to do it. The fastest to execute this gets the prize. The guys who trade on web-based portals are certainly not going to be in the running. Because, to take advantage of this, you need extremely low-latency systems and real-time data feeds. Your Bloomberg Terminal can do it, only if you are on a T1 line.

On Balance Volume

The two strategies you’ve seen so far are really enough to get you started, but here is a third one that goes beyond just buying and selling when and if you ‘feel’ like it. The logic behind the first one, on the surface, is designed to get you to identify market entry and market exit triggers. On a deeper level it is designed to get you familiarized with the nature of price movements and the use of charts to visualize them. The second strategy was arbitrage, and that was designed to get you to profit off the mispricing of the market. That’s on the surface. From a deeper perspective, it is designed to get you to open your mind to the different ways of taking advantage of the markets.

This last of the three strategies is designed to get you to see what the smart money is doing. By using this strategy, you are keeping an eye on where all the money is flocking to. If you can get comfortable with the movement of big money, then you can pretty much ride the trends and scalp the fluctuations.

To do this you need an OBV indicator. Bloomberg has it preinstalled on the Terminal. Some prominent MT4 for cryptos have it as well. OBV stands for On Balance Volume.

The OBV indicator gives you insight into how much money is flowing into any given position. What happens when you see money pouring into a currency? You know that it is about to take off. One of the things that you don’t normally see in the online or web-based trading platforms is the volume of orders that are going in the pipeline. When you watch that with the OBV, what you get is pretty good insight into where the market is going to tip at any given moment.

Conversely, what you can do, among other things, is watch where the market starts to lose steam, and either get out of a position, switch counters, or short the asset. The possibilities of how to read the market and what to do get pretty sophisticated once you start to get comfortable with the OBV. But the two things that you absolutely must keep your eye on is the pending trades and the OBV.

There is also something called the OBV mismatch, and it is a trade of the second order in the sense that you are no longer just looking at the price of things to determine a trade; you are looking at the effect of the activity around it that is measured by the OBV.

If you find that there is a mismatch between two cryptos, then you go to the price that they are trading at and determine if the price of the cryptos are converging or diverging. If you find them converging, then prepare yourself for a sell order. If they are diverging, do the opposite.