today I will share an insight into my trading techniques as there has been overwhelming interest during last week. Lets start with the obvious:
My trading strategy is the result of five years trial-and-error. In the course of my short trading career I have made almost every mistake possible, and paid a hefty amount for every lesson learned. And that is absolutely necessary in my opinion in order to learn the game. Yes, you can learn by books, by observation or by following other traders idea’s. But eventually there is only one thing that makes you a better trader: That is to make your own decisions based on the very best knowledge you have at that time, and to learn from whatever the outcome may be. If you feel fear when you put on a trade, good. It shows that you are entering unchartered territory, and those experiences tend to give the greatest rewards, because whatever the outcome, you will certainly learn something new, which means more experience and profits in the future. Certain lessons are harder to learn than others, but its important you make all the mistakes so you know what to avoid in the future. Everyone holding on a losing position knows the feel. And I am pretty sure we all have been there quite a few times. It is not logical information learning that gives you the edge, but the capability to trade while excluding your emotional response mechanism for the decisions you make. And that is only possible if you have experienced the whole bandwith of emotional reactions to a trade. Fear, greed, mental capitulation, you need those valuable lessons to become solid in the future. Have healthy roots, so you can build your system as a logical consequence of the lessons learned.
I always have been focused on long-term, whatever I do. Hence my trading strategy is a reflection of all things important to me trading longer timeframes. The very most important thing to me is to recognize a Major Trend Reversal (= change from longterm downtrend to longterm uptrend) so early, that…
a) … you have enough time to position, so you can wait for quality entry signals
b) … you have a good probability that prices will never retest your entry price ever again
c) … you can ride the whole trend without the hassle of trading in between (which is IMO number 1 cause for longterm traders making less profit as anticipated)
In this list, b) is the crucial one. I want to enter at a point in the chart where prices will likely never return to, so that at no point I will be holding a losing position. I am willing to accept a single retest of my entry price, but usually not twice. You see the margin for this kind of trade is quite small, thats why I spent a great deal of my trading life to find those spots in the chart. I said before, the reason why I posted so many entries during the last two weeks is not that I am a entry-generating machine, but because almost all daily charts are eager for upside reversals. This means, this is a highly significant situation. If you miss the right entry, this means not that you are not going to make a profit, it just means that the risk is higher for a retest below your entry point, and thus a potential trigger for undesired emotional reactions towards your trade (like closing with a 2% loss although the entry was correct, due to emotional instability). We as traders want to minimize the risk of emotions taking over the rational decision making process.
Which brings us to the question, how to spot a Major Trend Reversal early? The way I work with this is Higher Highs, Higher Lows, which is the basic definition of an uptrend, and Lower Highs, Lower Lows, which is the definition of a downtrend. It really is as simple as that, although many other factors play a role too.
For the purpose of visualization I put an example in the chart above. The first spike is an uptrend by definition: Higher Highs, Higher Lows. However after the peak market changed into downtrend, thus Lower Highs, Lower Lows. So far so good. What you would be looking for is a reversal of this downtrend pattern to spot the reversal early. In this particular example (which is BTC/USD in Mid 2011), the first interruption of this pattern came around September 2011 with the first Higher High after many Lower Highs, Lower Lows. This High here (after the black vertical line) tells me that the market is in the process of reversing, although still far from actually reversing. Thus I still have a lot of time to position myself accordingly. So what is needed for a Major Trend Reversal to be valid?
a) break of a major trendline
b) a first Higher High after long downtrend,
c) followed by the first Higher Low after long downtrend,
d) preferably high volume on buy bars, weak volume on bear bars
e) the confirmation of trend reversal with another Higher High
because this way, we have 1) Higher High, 2) Higher Low, 3) again Higher High, which is the definition of an uptrend. So after the first Higher High has appeared on the chart, few things become obvious:
- Prices will now attempt to build a new Low. Question now is: Will it be Higher or Lower than the previous Low?
- Lower Trading Range, around the last Low, will likely be protected by buyers.
- Any break above the 1st Higher High (extended green line in the chart) will be seen as the 2nd Higher High, which shows acceleration. At that point we have an official uptrend. Usually we see a spike after the 3rd or 4th Higher High, thus you are in very early and use the spike to push the price far away from your entry.
That means you as a trader have several opportunities how to trade this. You can position early after the first Higher High in the correction that follows. This is what I call an early entry. When we get the 2nd Higher High, it is the confirmation of the trend reversal (as Higher High, Higher Low, Higher High). This is my preferred entry point, although I like to buy in anticipation of that happening. This I call the safe entry. Sure, the early entry is much more profitable, but has more risk associated as we don’t have yet the confirmation that the trend really is reversing – could be a trap at this point. Safe entry gives you smaller rewards, but has also less risk. Traps are less likely to occur at this point. Also, the point when the official trend is reversed by definition (at the 2nd HH) is very likely protected by bulls. The goal of the trade in this example is to recognize the trend reversal early, and ride it all the way up. That means technically until we have no more Higher Highs, Higher Lows, but a change in trend pattern, i.e. a first Lower Low, or Lower High, which indicates the bull trend is getting weaker and potentially about to reverse to downside. As this is only an introduction it is not important you get everything, I will go more into depth in future post.
So lets play this example through. We did buy the green line, because at this point the official definition of an uptrend is correct. Not that prices never retested this range. From the moment you put on your trade, you never had a losing position.
It is important to see the very big picture. Most traders tend to think that the current range is all there is. Its not, there is much more space above to be explored. So lets zoom forward to check how we did in the longrun.
In this specific example we bought BTC early at $ 7.00 in 2011 at the green line. Waiting two years, making a x38 profit, thats nice. But remember, BTC was so early, barely anyone knew about it. Price discovery therefore was likely slow, and will be much quicker in other charts due to the rising interest in crypto generally.
So lets be clear about this, you have entered a trade at the right time, having not been in risk once, and reap x38 profits by not doing anything at all. But wait, there was more to come wasn’t it?
So if you have been patient and sticked to your strategy you would have bought at $ 7.00, and ideally sold at the peak around $1000+. Thats a profit of x155. Getting 155 dollar back for every dollar invested is quite a prime deal. By doing nothing at all really, just finding the right entry and having the patience to follow your plan through. Sure you can trade in the meanwhile to increase the amount of coins you hold (i.e. selling at $250, buying back at below $100 -> 2.5x more coins than before). But this is for experienced traders, the lower the timeframe, the more skills you need to be profitable IMO. That is because: the higher the time frame the more valid and significant the signals will be, while in short time frames good signals often are just traps to push you out of your position.
When you look at the charts provided, it is actually an easy move to make. Most of the times it is way more tricky than it sounds here, but I guess you know that. Three things are of crucial importance if you want to master longterm trading:
- Enter a Trend Reversal early, at the right time, with minimum risk
- Be patient. Let the pattern unfold. How can anyone know the top when the breakout is just beginning? This is pure speculation. The information you need in order to assess if the top is reached will be provided by the chart itself along the way up, if you are conscious. Stick to your plan.
- Try to master selling the top. What makes a top? How can you recognize one, what are first indicators for a potential reversal to the downside / larger correction? That is an entire topic itself so I will not go into depth at this point, but in the future.
To me this strategy is the perfect symbiosis of experience and my personality as a trader. It is gaining maximum value with least amount of work as well. And in crypto, there are many charts, many opportunities to let roll in profits. We are still at the very beginning, so positioning early for this large upside Trend Reversal that is unfolding right now (especially LTC & ETC) might be the most important thing you do for your future financial career. If you have any question about any of this, please feel free to send me a msg on Twitter or Telegramm.
More to follow, stay tuned. In the meanwhile, trade consciously. Much success.