Crypto Price Action Trading Strategy
Key Questions Answered
- Price action is one of the most important ways to analyze markets, identify entry and exit opportunities, and understand how markets behave in different scenarios.
- In crypto markets, barriers like Bitcoin‘s cross above the $10,000 mark, can lead to explosive price action.
Candlestick charts can get complicated fast. With the number of technical indicators, varying lengths of moving averages, and Fibonacci retracement levels, it can be hard to focus on what’s important. Most statistical indicators attempt to provide information about something that’s already known: the price.
What is Price Action?
Price action is one of the most important ways to analyze markets, identify entry and exit opportunities, and understand how markets behave in different scenarios. Behind each candle on the chart exists real capital, and getting into the minds of market participants can help reveal the direction of flow of the capital.
How to trade using Price Action Strategy?
Track Historical Minimum and Maximum Prices
For example, when looking at short-term charts, tracking historical minimum and maximum prices, as well as breakouts around those levels, can be very profitable. Several studies have shown that market participants are psychologically inclined to pay attention to breaches above or below prior highs and lows. Both local and historical extremes attract traders, and this is known as ‘anchoring.’
Breakouts beyond the historical minimum or maximum prices can also set new long-term trends, as there is usually a fundamental reason for the breakout in the first place. However, this isn’t always the case. In cryptocurrency markets, which don’t have too many examples of long-term trends due to how new they are, breaching historically significant price levels can unleash magnificent volatility.
While this can open up new trading opportunities, it’s also incredibly risky. To help mitigate some of the risks, it’s essential to learn how to place stop orders while also looking for where other traders are placing their stops. Usually, traders place orders either slightly above or below a critical price level. Price action is powerful when these stop orders are activated at scale, especially when attention is focused on a specific price.
Provide Information about Market Participants
Price movements can give us a lot of information about market participants too. Through naked short selling, an illegal practice, some traders could manipulate the market by putting pressure on an asset to break under a support level.
By spreading rumors, fear, uncertainty, and doubt, market manipulators can apply even more downward pressure. Since the drop under the support level activates many traders’ stop losses, the price can fall even further. Once this happens, the market manipulators will buy back the assets at a lower market price and close their short positions for profit. This strategy of ‘stop hunting‘ is illegal in regulated markets but occurs in cryptocurrency markets.
How to use Price Action in a Young Market?
Price action isn’t just sensitive around historical extremes – they are also sensitive around ‘beautiful’ values like round multiples of ten, even numbers, and recurring digits. In markets as young as digital assets, these values are even more significant as longer-term data isn’t available.
Prices may seem like daunting numbers and charts, but the truth is there are real people behind everything that happens. Price action trading is about learning what pushes the market into acting, what causes a shift in perception about an asset’s value, and what tactics can be used to take advantage of what is within the bounds of financial regulations.
Crypto Price Action Trading Strategy
In the absence of historical data, psychological factors are much more relevant. The natural targets for cryptocurrencies are in multiples of ten, and crossing these psychological barriers like Bitcoin‘s cross above the $10,000 mark, can lead to explosive price action. It’s not that the value of Bitcoin tends to gravitate towards these prices – it’s that these prices are pretty and naturally cause traders to pay attention to them.
Psychological Factors is More Relevant in Crypto Markets
Especially in cases where the asset is moving through uncharted price territory, financial media will also publish reports surrounding these psychologically attractive price levels to boost readership, further cementing its relevance. A potential 10x or 20x gain is easier to spot and recognize than, say, 15.78x in writing, making them easier to put in focus.
For example, in less than three months since ETH crossed its previous all-time-high ($1,380 in late-2017), its value rose by nearly 54% to a whopping $2,140. The growth from $1,000 to $2,000 took only 80 days. Previously, ETH struggled for almost three years trying to cross the $1,000 mark after dipping below its 2017 all-time-high.
These values may not have fundamental meaning, but they are important to the market and make them good price points to track over time to get the most out of these potential shifts in market sentiment. It’s also important to note that exponential price movements will eventually tire out. No asset can continue growing for more than a certain amount of time, and the markets will ultimately label it as overvalued.
Observed through dwindling buy volumes as the price rises, traders can use technical indicators to forecast these market reversal points through the patterns that typically emerge around these price levels. For instance, a market top usually has a much larger green candle, often followed by an even bigger red candle with a long top wick once buyers quit trying to push the price further up.
Chart patterns exist in many shapes and sizes, and there are hundreds of patterns in books and on the web to better understand how markets function. When the price reaches a peak, the momentum from buyers fizzles out, and sellers take over to reel in the profits. Panic at this point can cause a large number of traders to close their positions, triggering a sharp drop in value.
Then, once the prices get so low, buyers start accumulating the undervalued assets again, but prices usually re-stabilize after the panic subsides, beginning the cycle again. Some believe Bitcoin’s fall to $3,100 in 2019 represents the market bottom due to its slow and prolonged reversal, for BTC has never fallen lower since.
When these patterns become visible, traders can usually benefit from exploring external events to better grasp the market’s sentiment. Soon after Bitcoin touched its market low in January, IEOs brought more prospective buyers to the scene.
IEOs are exchange-regulated crowd sales similar to ICOs but without the risk of getting scammed. Since the exchanges regulated which projects could conduct an IEO, investors were happy to fund them as an initial offering is almost guaranteed to be profitable. The first IEO from Binance was quite successful, and the increasing interest in these offerings led the way to even more people showing interest in digital assets.
Like any market, cryptocurrency prices move in cycles. A wave of growth is almost always followed by a wave of decline – what goes up must come down. It’s akin to a mechanical spring, where it can only be pressed to a certain level and jumps back after the pressure is alleviated. However, the spring isn’t infinitely extendable and will move back into an equilibrium state once it is let go.
Price action can also help identify trends – progressively higher lows characterize an upward trend, and declining highs over time represent a downtrend. Any introductory book on technical analysis will tell you the same thing, but it’s crucial to drive this point home. Traders don’t make decisions based on hard numbers; they use the numbers to flesh out their ideas about the market.
Compared to equity or debt markets, blockchain-based digital assets move through these cycles at much higher speeds. Cryptocurrencies have experienced a parabolic bull market followed by a bear market before the current bull cycle, all within a few years. While market volatility isn’t something that needs to be avoided, it takes a certain nuance to enter and exit markets successfully every time.
Price action trading may seem like common sense at first, but it’s not just about predicting where the market is going based on historical data – it’s about understanding the fundamental reasons behind why prices move the way they do.
What are the Limitations of Price Action?
Price action allows traders to read the market and make subjective trading decisions based on publicly available data. Using current and historical price movements and technical indicators, traders can predict where the price might go, why, and for how long.
Since price action analysis practically ignores factors pertaining to fundamentals and focuses more on price movements, price action trading strategies are highly dependent on technical analysis tools. Based on the trader’s strategy, there are a variety of tools to use. Some look for trend lines and price bands, while others look at support/resistance levels, market consolidation periods, and high/low swings.
The tools used don’t have to be complex algorithms, and most traders simply track the price directly while taking into account trade volumes and volatility levels. However, as mentioned above, psychological factors can also influence market behavior. For example, Bitcoin has historically spent a lot of time between $9,500 and $10,000, but crossing the $10,000 mark has pushed the price even higher on multiple occasions.
However, depending on market conditions, this can also be used to set up pre-emptive short positions, as a push above a psychological limit can also signal an incoming reversal. It’s very rare for traders to interpret price action precisely the same way, as each of them will have their own interpretation of the market’s movements. There are no well-defined rules here – only a subjective understanding of markets.
However, a short-moving average crossing over a long-moving average will likely produce the same market reaction – upward price movement. Even without fundamental analysis, a short-term moving average, say a 50-day MA, crossing over a more long-term MA, like the 200-day MA, is called a ‘golden cross‘ and is broadly recognized as a sign of incoming bullish price action. These events will yield similar behavior among traders, and in the right scenario, traders can even take advantage of this cumulative positioning.
How to Use Price Action for Derivatives Market?
Price action isn’t just valuable for spot markets either. In fact, it is used on a wide range of securities, including derivatives contracts like futures and options, and it is employed by all kinds of traders, from retail traders and speculators to arbitrageurs and hedge funds.
Trading or investing in markets as volatile as crypto can be incredibly profitable, but you also risk losing a significant part of your portfolio unless appropriately managed. Remember to diversify your asset allocation and do your own research before investing in any kind of financial asset. Price action trading is usually conducted by short to medium-term traders rather than for more long-term investments since most traders believe markets move in random patterns with no systematic way of defining a foolproof strategy.
However, by taking advantage of the market’s inherent psychological triggers, price action traders can identify the best entry and exit points without even understanding the fundamental reasons why an asset is or isn’t doing well. Different traders have different luck with this strategy, but while it primarily comes down to skill, experience helps a lot.
Price action strategies also enable traders to define their own complex yet flexible approach, which investors can apply across multiple asset classes on various platforms. Further, the ability to backtest these strategies in historically similar situations can be massively helpful, especially if the market has a history of repeatedly behaving a certain way.
There are countless theories on price action, with some claiming obscene success rates, but it’s important to note that not everyone who follows a particular strategy will do well. Only the success stories make the news, and when it comes to cryptocurrencies, its decentralized nature means you and only you are responsible for your investments.