When it comes to trading, every trader has the goal to generate profits, may it be intra-day or on a longer timescale. He tries to generate profits by using technical analysis, finding patterns, or looking for potential breakouts on volume in order to get an edge. However there are multiple ways and styles to achieve that outcome. For that its necessary to know WHAT you are trading, HOW you want to trade it, and what the rules are for entering and exiting positions. This is the main pitfall for every trader, especially those who just began their trading venture.
The main reason for traders failing initially is not having a system, nor a strategy, nor defined rules. This way people enter positions, but without any objective. Hence it is very difficult to make this a profit trade, because how do you know when to exit, if you have not pre-defined the goal of this trade? Thus finding out the proper strategy that is in alignment with your personality and emotional capability is of paramount importance if you want to sustain your profitability in the long run. This article will serve as a pre-book lesson, as it is more important to release these information right now, not in days or weeks.
This article is about Strategy, Trailing Stops, initial Stop Losses and maximizing coin amounts by selling tops and rebuying lower with a set, pre-defined system. Numerous strategies will be introduced, important is just that you pick the one that naturally aligns with your style and personality.
Before putting on ANY trade, you must know your objective beforehand, otherwise you will have difficulties in exiting your position even if you are in high profits.
The first decision in this – always – is this; do you enter this trade for a short period of time (intraday), or on a longer timeframe (overnight hold)?
In order to decide on a suitable Stop- and Trailing system you must know that time horizon of your trade beforehand.
So lets get started, various strategic options are available to choose from:
There so many different styles out there. Trading is obsessive, which means the longer you trade the more you are in “your game”, and only focused on specific movements and patterns to make a profit. However every trader uses a unique trading strategy, and it becomes even more individual the longer the trader refines that strategy. Therefore on a long enough time frame, there is not two traders using the exact same method to generate profits. Adaption and improvement is a natural part of the trading cycle, therefore you certainly use a slighlty different method like you did 6 months ago. Markets are always changing, so are traders.
So what are the options? I know traders who enter the market for very tiny movements, but they enter with such a big position size that it is enough to generate enough income for a month of living. This is generally called scalping, which means you enter with a considerable position size, only for a tiny movement of 0.5% or so. You do not care about where the market is going in the longer run, all you want to extract is this little movement that happens when bears close their positions and drive the price higher, when an entry is triggered. In the picture above, this is Trading the Breakout.
However there are traders that are more specialized in profiting from the whole leg resulting from a triggered entry. They try to stay in the market for several bars until the momentum declines and the trend shows some weakness. They ONLY stay in the markets for the leg, which means the whole up movement before we see any correction. At the point where the correction starts they close their position and wait for another entry, but their profits are safe. This is called Trading the Leg.
Traders with a longer time frame outlook do not bother about smaller movements, they are in for the long haul and have the patience and understanding of the market to hold a position for a very long timeframe without being tempted to sell before their target is reached (which again varies according to very different personalities out there). The are willing and able to survive all dips and flashcrashes to sell their huge bag at the top of the entire trend after it showed significant signs of weakness. Thats the strategy I apply for myself, and suggest to do so generally in order to take away the highest profit possible when time is due and the rally comes to and end.
This is called Trading the Trend.
Every of the three trading methods above will come with a set of rules that can be followed in order to get first profitable experiences under a certain “safe” pre-defined guideline. However for the reason of practicability I will focus on the latter two methods as they are most applicable to crypto trading, namely trading the Leg & the Trend.
Trading the Leg
Trading the Leg is all about finding potential trigger points that will result in major moves on high volume to the upside. Finding such an entry is comparably easy with some experiences in the markets, exiting those positions is a little more difficult, as recognizing tops is a whole science in itself, and way more difficult to master than entries alone.
In order to be profitable in this market, there are several requirements:
- The trader must be able to differentiate the leg (with-trend) from the consolidation (anti-trend), and only take entries that are in trend-direction. Reason for that is that movements in overall trend direction happen way quicker than the consolidation, and tend to be more profitable, less risky.
- The trader must be able to recognize points where much volume (thus movement) will enter the market, preferable at points where bears placed their stop-losses.
- The trader must be able to recognize the top in order to sell his position at the very top, or near it.
If those three requirements are fulfilled, it is likely the trader will be profitable enough to at least generate a lot of experiences in the context of this strategy, from which point they are able to refine, adjust and improve their system with every additional trade.
We focused a lot on entries in the past, as this is the gateway to make profits in the first place. I do understand the necessity for exits. However as stated earlier, there are so many strategies in trading, that it is almost impossible to give a “general exit rule”. Entries in general are way more easier than exits, but finding better exits is a natural consequence of continous trading, especially if you continue to use the same method every time you enter a trade. In the context of this lesson and the method of Trading the Leg, i will provide a stop system which equalizes the need to pick the exact top, but generates profit nonetheless. There are two different stop-methods you can apply in order to trade the leg profitable. One is more simple, the other one more complex. Both have their strength and weaknesses, so best would be to play around with both until you figure out which of them is more suitable to your trading style. So… lets start with the simple one:
Lets assume we have placed a buy stop order at the trigger in the example picture below:
Our order has been successfully filled with the bar pushing through the trigger and closing above. Now where do we put our stoploss (SL from here)?
First we need an initial SL in order to protect ourselves in case the trade goes very wrong. This is not so important when Trading the Trend, but it is crucial in Trading the Leg. So once we successfully opened a position, the SL will be placed at last low, like that:
As long as the trend is intact, our SL should not be triggered. This is purely for protection purposes. It is up to you to decide if you use a HARD SL by putting a sell order in the market that activates when your SL has been hit, or if you use a rather visual SL, in which you see your actual SL triggered, but try to close your position higher than that, as often another pullback occurs. Anyway, lets go on, our trade is active and the initial SL is placed. We are good to go. So what is next? Our SL is very far away from our entry, so we have a relatively high risk yet. As soon as the entry bar that triggered closes, we will move our SL to the low of that bar, like that:
Our risk now is smaller, but we are not yet in profits. However the next candle is a strong breakout candle:
We therefore thighten our SL to the low of the bar once it is closed. Right now we dont have any risk at all, worst case scenario would be to be stopped out at break-even, which is a profit trade. Why is it a profit trade if we didn’t make any? Because we observed the pattern and learned something, that will in turn lead to less mistakes and more profits in the future.
While more bars appear in the chart, we always take our SL and put it on the low of the last bar once it has closed. For the sake of simplicity, I put all SL levels into the next chart:
By using this method, we have been stopped out at a decent profit by just placing a SL at the low of each closed bar. This is the simple principle. However it is obvious that we did not profit from the whole leg, but got stopped out in a bear trap which resulted in another major leg up. We therefore missed out on potential profits, which is undesired. When we enter a trade we want to extract the maximum amount of profit there is. If that is not the case we need to refine our strategy in a way that enables us to do so, which is the responsibility of every traders himself. There is however another SL method focused on Trading the Leg, that is a little more complex. For that let me first introduce the Outside and Inside bar methodology that is needed for this system:
So the outside bar engulfes the inside bar, which is a trading range in a lower timeframe. Trading ranges tend to be fluctuating a lot. Understanding that is crucial in order to sense why this system is a little more complex versus the simple system. So what exactly is different?
Basically the SL rule stays the same, we enter the trade at the trigger, set an initial SL and place our new SL at the low of every new closed bar. However there is an exception of the rule. In case one bar closes within the range of the previous bar (thus becoming an inside bar), we pull back our SL to the low of the bar prior to the outside bar. Reason for that is that an inside bar is basically a trading range in a lower time frame, and trading ranges tend to fluctuate and test both extremes, usually called noise. Preferably, you do not want to get trapped out due to noise when trading the leg up. Let me visualize:
I will fast forward and put in the correct SL with every new bar so you can get a better idea of how that works in practice:
This way we have not only avoided being stopped out in the bear trap like in with using the simple method, but still hold this trade with massive profits. It is a bit more complicated to understand, but definitely a more efficient SL method. However keep in mind that we need to put our SL back to a previous level (therefore risking to get less profits). In case the trade goes badly we may lose all of our previous profits this way. On the other hand however, if the trend continues to go on longer than expected our likeihood of increasing our profits is higher than with the basic method. As i said earlier, each of these methods have their own strength and weaknesses, and it is important you choose the one that is suitable to your trading style and personality. Try both, see which one works better for you. If you get stopped out of your trade in profit, wait for another promising entry, rinse, repeat. Suggested time frame for Trading the Leg is 15min upwards to daily. You can trade the legs in 5min charts when there is so much volume that you see nice shaped bars and little gaps.
Trading the Trend
Using a SL method for trading the trend is somewhat different to the one above. The main objective is not to get stopped out even by major corrections within that trend, but to ride it to the very peak. Let me find a better example of a trend and explain it within the visualization:
As wordpress is kind of complicated when it comes to pictures, please go here to see the
HIGH-RESOLUTION PICTURE so you can actually read whats been written in there.
please mind that you can use the trend SL method also in lower timeframes like 5min or 15min. Trend does not solely mean something huge in daily or weekly charts, there is trends everywhere. At last, lets take one chart and put in all different SL methods i explained in this article so we can clearly differentiate between them:
Again, click here for HIGH RESOLUTION
All stop methods have generated profit, only the Trend Swing method is still active. The chart sure is a bit messy, but a direct comparison is needed to understand the strength and weaknesses of each system. For the simple method, we have been stopped out quite early, while the complex method managed to get some higher returns out of this trade. the swing trade is still active (was later stopped out around $ 3325 using this SL method – not seen in this chart).
I do suggest to spend some time with those methods in order to find a system that suits your style, and experiment with it until you are ready to refine it based on your own experiences with that method.
Expontential Moving Averages
As we are already in the flow, let me find some words why I use EMAs as only indicator.
Generally EMAs are just a visualization of the last x bars average price movement. So for example, an EMA 20 shows the average price movement of the last 20 bars, visualized as a line. Especially to traders relying on technical analysis, moving averages are useful in assessing the strength and stability of trends. You can use any EMA value, but i found EMA 20, 50, 100 & 200 the most useful ones, especially in high time frames like H1, H4, Daily, Weekly. Due to the fact that EMAs are simple to use and highly respected in trading I like to use them as additional source of information if I am not absolutely sure about the steadiness of the trend and if there is uncertainty of how the charts continue to move. As usual, lets have a look to get a better picture of how it works:
EMA always work as either support or resistance, depending on how price action develops around these lines. If prices are below the EMAs, its resistance, if prices are above, EMAs act as support. Generally the zone between EMA 100 and 200 is buy zone. That means IF EMA 100 is above EMA 200. It is the same in a bear trend when EMA 100 is below 200, then the zone between those EMAs is a strong sell zone.
If prices crash after a huge rally, it is rather likely they will retest either EMA 100 or 200, or previous highs – or a combination of all of them. Hope that serves as a basic understanding of EMAs. It is certainly no genius science, it does not even matter what value you use. It solely is important that you use the same values everytime you trade, so you can observe and learn how prices react to these respective EMAs. Play around, experiment with it, both with SL methods suggested above, and various indicators.
May that be helpful for now, however this is just a basic understanding of how to apply methods to your trading style in order to refine them with your own experiences later on. So more following in the future, would be happy to get a feedback so I can improve things in the coming articles.
All the best,