Crypto-Forex 101

Crypto-Forex 101: A Magic School Bus Ride
By the @CryptoForex Team

For those of you just getting into crypto-forex, you’ve come to the right place. We at @CryptoForex have decided to compile a comprehensive introductory guide for new traders. In this guide you’ll find everything you need to start getting into cryptocurrency trading. We’ll cover the process of placing orders, from when you decide your ask or bid price, all the way to its final execution. We hope you’ll find this guide simple enough to easily follow with very little experience, yet comprehensive enough for even the most experienced traders to learn a little something.

Beginner Forex Terminology

Exchange – A marketplace where financial instruments are traded.
Put simply, the website you will be using to trade Bitcoin or whatever other cryptocurrencies you are interested in trading.

Volume – A measure of the number of shares or assets traded in a particular market per a given amount of time.
Put simply, the amount of people buying and selling at the particular website you’re using to trade.

Forex – A market in which currencies are traded, as apposed commodities or other financial instruments.
Put simply, the trading of coins and other national currencies.

Volatility – A statistical deviation of order executions from the norm. High volatility means the deviation is high, and low volatility means the deviation is low.
Put simply, how crazy the market is.

Slippage – The difference between the intended price and the actual price a financial instrument is traded at. Slippage is a major concern in markets of high volatility.
Put simply, Sometimes you get screwed when you place an order. Because the market fluctuates so quickly, the order executes at either a higher price or a lower price than you had intended.

Ticker Price – A ticker price gives you the last price the financial instrument was traded at.
Put simply, what the last person paid for a Bitcoin or some other cryptocurrency.

Market Order – An order placed to buy or sell a financial instrument immediately at whatever the best price currently is for that particular financial instrument.
Put simply, an order to immediately and fully buy or sell an amount of Bitcoin to the current highest bidder or lowest seller.

Limit Order – An order to buy or sell a financial instrument at a specific price, regardless of market conditions and current ticker price.
Put simply, you want to buy or sell at a certain price and you’re willing to wait in order to do it.

The Basics

Finding an exchange: When finding a suitable exchange there’s a number of things to consider, and you’ll find as you become more experienced that your needs will become more complex. Newer traders should look for an exchange with a simple interface and high volume. High volume is a significant consideration for newbies, because it can mitigate confounding variables like slippage. For new traders looking to trade on more than one market, we recommend BTC-e. For traders just looking to trade Bitcoin, we’ve heard wonderful things about BitStamp. For more experienced traders, we would recommend an exchange that provides solid API access, leveraged options, and more then one order execution option – Bitfinex is about the most innovative exchange we have seen so far.

Getting funds on your exchange: We’ll use BTC-e as an example. After you’ve created your account, click on the word “profile,” located in the upper right hand part of the screen, then click “funds” to bring up the funds menu. After that, find the currency you want to deposit (Bitcoin in this example) and click “Deposit.”

After you click “Deposit,” a new area will pop up at the bottom of the page with a newly generated Bitcoin address and QR code for your account.

Copy this deposit address and use it to send funds from your wallet to the exchange, or to have your mining pool deposit directly to your exchange account. Once funds are sent from the given source to the exchange, be patient. The blockchain will have to confirm the transaction before you see the funds in your account. This usually takes an hour or two– any longer and you should contact support at your exchange.

Anatomy of An Exchange

All exchanges of any financial instrument adhere to the same basic format. There is some kind of account summary page displaying all your current balances, like the one pictured above, a ticker showing the last market price, some information about market volume, and finally, the trading area.

At BTC-e, you place an order by going to the section that says “Buy BTC” and type in the amount of Bitcoin you’d like to buy. When you click the “Calculate” button, it will return how much Bitcoin you will actually get and how much Bitcoin will go to the exchange to cover fees. Selling is done in a nearly identical manner. The section below the orders section is where we really start to get into the “nitty gritty” of forex, the “Orderbooks”. The orderbooks are a log of all the current buy and sell orders still pending execution. Or put more simply, it’s a list of people who want to buy or sell Bitcoin at a particular price, and although no one is currently willing to buy/sell at the price they want, the people on the orderbooks are all willing to wait.

Placing an order from A to Z: This is where we get into the mistakes a lot of newbies make when conceptualizing how an order works. Placing an order at an exchange is not like buying something from a retail store. Just because you put the cash in doesn’t mean you’ll immediately get what you want.

Markets work more like auction houses. Everybody bids at whatever price they think that particular financial instrument is worth. Everyone is trying to sell at what they think the financial instrument is worth, or whatever they think the maximum is that they can get out of the particular financial instrument.

When you decide what you think Bitcoin (in this example) is worth and place an order, unless you place a market order, the order will not be immediately executed and it will go to the orderbook where you’ll have to sit and wait with everyone else in the orderbook.

Being in the orderbook is a little bit like waiting in line, which can be a good or bad thing depending on your trading strategy. Everybody with a better offer is served before you, and be prepared for people to cut in line. Finally, when your order comes up as the best buy or sell price, the next person to place a market order will be buying or selling to you.

Considerations when placing an order: Market orders and limit orders both have advantages and disadvantages. Neither is better or worse then the other. Market orders are executed immediately – in a rapidly declining market, this can help you exit a market quickly, preventing further loses. In a rallying market, this can help you hop on the band wagon quickly and take advantage of increasing prices during a later sell.

The main disadvantage to market orders is slippage. Sometimes when you place a market order you expect to buy or sell at a certain price, maybe the ticker price, but the market all of a sudden slips one way or the other, and you end up buying for more or selling for less than you expected.

Limit orders can be slow, especially in low volume markets, and unfortunately, you have to deal with people cutting in line all the time but they have the advantage of entering or exiting a market exactly where you want to. If you have a carefully planned strategy for your investment, this can be a wonderful thing.

Graphs and Some Basic Analysis

Although BTC-e has its own graphs, they are limited, and some exchanges like Mt. Gox and Bitfinex don’t have any kind of graphs at all,– and if you’re trading without a graph, you’re trading blind. The best and most comprehensive source for graphs and indicators for newbies I’ve seen is Bitcoinwisdom. Using Bitcoinwisdom as our reference market graphs can be overwhelming at first, but don’t panic– it’s a lot easier then you may think. My first suggestion is to navigate to the setting menu and change the chart style to “Candle Stick,” this is the most common and informational type of graph for traders.

So what the hell is a “Candlestick”? When you look at a candlestick graph you’ll notice the entire graph is made up of these little rectangles, and believe it or not, these rectangles tell you a lot. There is a whole body of study on how to successfully trade based on the shape and size of these rectangles alone. These rectangles are called “candles” and the lines extending below or above them are called “wicks.” The body of each candle tells you at what price the market opened on the particular interval of time and at which price the market closed during that particular interval of time. On the green candles, or “bull” candles, the bottom of the candle signifies the price at which the market opened, and the top of the candle signifies the price at which the market closed. On the red candles, or “bear” candles, the top of the candle signifies at which price the market opened, and the bottom of the candle tells you at which price the market closed.

The wicks of each candle give you a little bit of information of what people thought about what would happen during the particular time interval. Basically, the wicks are the outliers, they are a graphical representation of the people who bought or sold Bitcoin outside of the average buy or sell during that interval.

On that first big red candle in the picture above, you can see the candle wick extended far below the candle body. This means that people were panicking and weren’t very optimistic about the market during the next interval, so they often sold much lower then the price at which most people were selling. On the green candle after those two big red candles, you can see a wick extending far above the candle body. This generally means people were very optimistic about the market during that interval and were willing to buy far above the average price during that interval.

Market Depth

Another mysterious little addition to the Bitcoinwisdom charts you may have noticed are these wiggly little lines to the right of the graph that only show up on intervals shorter than 1 hour. These squiggly lines are probably the most unique and important offering Bitcoinwisdom has, and are the reason that even if I rely on other software for graphing, I always keep Bitcoinwisdom open in the background.

These little squiggly red and green lines represent Market Depth. What makes Bitcoinwisdom unique is that it shows live changes in market depth. The green squiggle is the Sell Depth, or more easily understood, where people are placing their sell orders. The red squiggle is the Buy Depth, or where people are placing their buy orders. The grey squiggle is the difference between the two, and likely the best place for you to buy or sell if you want your order to execute quickly.

At this point you’re probably asking yourself “well, what about this other other complicated looking stuff?” The answer to your question lies in our next section…

Some More Advanced Topics

Indicators and Analysis

Now that you know how to read a candlestick graph and place an order, you’ll need to come up with some kind of strategy. If you’ve been using the above knowledge to do some “fly by the seat of your pants” kind of trading, you’ve probably noticed it doesn’t work so well. Although you may get lucky on a few trades, in order to reliably make money trading any financial instrument you’ll need to come up with a system.

In this system you’ll need a predefined market condition in which you will enter a position (buy) and exit a position (sell). When defining these conditions you’ll find that a candlestick chart just isn’t enough, and that’s why in this section you’ll be learning about all sorts of easy to read mathematical tools that will help you refine your technique and turn trading into a science.

Intermediate Forex Terminology

Moving Average (MA) – An indicator used to smooth out market noise cause by out liar orders and volatility. Calculated by averaging market close prices over a particular time interval.
Put simply, an average line fit for market data.

Exponential Moving Average (EMA) – Similar to a moving average, but more “weight” is given to recent market data.
Put simply, a more responsive version of a moving average.

Oscillators – A class of indicators scaled between extreme market conditions which measure current market conditions relative to a constant norm.
Put simply, wavy lines that give you information as to whether the market is currently closer to one extreme or another.

Relative Strength – A momentum based analysis that compares a financial instrument’s performance relative to the rest of the market.
Put Simply, imagine a market is like a linebacker. When he first tries to build up speed he’s too fat to do it quickly and can’t build enough momentum. But once he gets going, he’s unstoppable; the technique involved here is trying to buy right before he’s become unstoppable.

Relative Strength Index – A mathematical derivative of “Relative Strength” which compares current market conditions against max and minimal momentum conditions by taking the difference between a maximal momentum value and the theoretical current buy/sell conditions (RSI: 100 – 100/(1+RS*)).
Put simply, a measure of how overbought and oversold the market is.

Working our way down the parameters menu, the first items you’ll notice are the “Main Indicators,” which include one of the oldest and most popular indicators – the “Moving Average” (MA) – and the slightly newer but equally popular “Exponential Moving Average” (EMA). As you first start building up a strategy, these two indicators will probably be your home base.

Crossovers: Most EMA and MA based strategies rely on an event called a crossover. Typically, when using either indicator, at least two EMAs or MAs are defined: one short and one long. Some popular examples are a 7/30 (default), 10/21, 18/28, and a 50/200. For this example we’ll use a 10/21. A crossover strategy involves waiting for market conditions to force a crossover of the short EMA (10) over top of the long EMA (21) to signal a buy. Then, after entering the position, waiting for a crossover of the long EMA (21) over top of the short EMA (10) to signal an exit.

Next on the list is the “Chart Styles” sub-menu, but to be honest, I don’t plan on ever addressing the other chart types simply because I don’t believe they are useful. Most of the time alternative charts are only used to make indicators like EMAs or MAs more visible. Candle Stick charts are by far the most widely used and informative types of charts for traders. When you do reach an experience level where indicator visibility is a concern you probably won’t need me to explain what the different chart styles tell you.

The third item on the parameters menu is where we start to get to the good stuff. The real holy grail of technical analysis– indicators.

MACD (Moving Average Convergence Divergence)

Parameters: Form (x,y,z) Defaults (12,26,9)

Where do you start with the MACD? it is probably one of the most useful, predictive, and diverse indicators you will ever use. If you only ever learned how to use the MACD, I’m sure you would still see significant gains, you could spend your entire life learning how to better use just this indicator and still be a very successful trader. The MACD indicator is a derivative of the moving average and exponential moving average indicators. It takes three parameters, the first two represent moving average values, and the last one is a value for an exponential moving average. The actual MACD is calculated by taking the difference of X and Y, the two MAs, and the EMA isn’t actually used in the MACD calculation at all–it’s plotted over top of the MACD and serves as a “signal line.”

The center line in the MACD indicator is the divider between positive and negative status. When the MACD line (or the signal line, depending on strategy) crosses this center line, that is a signal which can be compared to EMA crossover points.

So how do I use it? There’s infinitely many ways to use the MACD. As I mentioned before, it is probably one of the most widely used and diverse indicators you will end up using. Techniques can be as simple as crossover and momentum, or as complicated as matrix calculations and neural networks. In this section, we’ll just be covering crossovers and momentum.

Crossovers: Crossover trading using the MACD indicator is pretty similar to crossover trading EMAs. Wait for the short EMA to pass over the MACD to signal a buy, and wait for the EMA to pass under the MACD to signal a sell. This strategy is pretty reliable, and now that you’ve made it to the more advanced section of the tutorial we’re going to throw a few more considerations out there.

Crossover Angle: If you’ve been doing some crossover trading, you’ll notice that a lot of the time crossovers don’t always reliably predict market movements. Sometimes you’ll see a signal crossover, and shortly after your signal line will just cross right back under the MACD– and before you know it, you’re stuck in a losing trade. This is referred to as a “sideways” trend, meaning a decent buy signal and fair market momentum just went stale. To avoid getting stuck in a sideways trend, traders often use crossover angles as an additional indication of how much momentum the market has and how likely it is that the trend will go sideways.

Generally, you’re looking for crossovers with steep angles to signal your entry. When the EMA and the MACD collide, optimally you’d like them to be perpendicular. This signals a lot of market momentum and that the trend is very unlikely to go sideways. Unfortunately, I’ve never seen a crossover that was actually perpendicular– so the crossover angle at which you’re willing to enter a trade on is purely a judgement call.

Multi-Interval Momentum(MIM): Normally when you trade you want to decide early on what interval you’re going to trade on. Are you into the fast trades on the 5m interval? Maybe you can see the trends better on a 15m interval, or maybe you just don’t have the time to trade on short frequencies so you’re playing the 4h interval. But just because your trading on the 15m interval doesn’t mean you get to be blind to all other intervals. If your trading without some idea whats going on in different (usually longer) intervals, then you’re like a mouse living on a beach waiting for a tsunami.

Often times if you’re noticing a lot of good entry signals on a short interval going sideways, it’s because there’s something going on in longer intervals you haven’t noticed.

“Oooooh, so that’s what it is!”

When you evaluate interval momentum, normally it’s easier to organize the data in long and short interval signals. When you see a bunch of signals indicating downward momentum on long intervals, as a short trader you’ll want to look for lower entries then you normally would. If you see a bunch of buy signals on longer intervals, you may want to consider less optimal entry conditions so you make sure your in position to ride the big waves. In the example above, very few good buy signals are showing up even though the uptrend is pretty obvious, looking into the long MIM this inconvenience totally makes sense!

StochRSI
Stochastic Oscillation of the Relative Strength Index

Parameters: Form (w,x,y,z) Default (14,14,3,3)

StochRSI is an extremely useful and approachable indicator for new traders. It is easy to read, predictive, and accurate. You’ll learn as your trading strategy becomes more complex though that StochRSI’s true power isn’t in its abilities as a stand alone indicator, it is what I like to call an “enhancer”. When combined with other indicators it can refine the accuracy of your entry and exit signals and give you information, and early warnings you would likely miss if you were only looking at EMAs or MACD.

What is StochRSI?

If you’re not a math oriented person, this is a tough question to answer without getting lost in a lot of complicated jargon, and I’d probably recommend you skip this section unless your really curious. StochRSI is a derivative of a derivative of a derivative, but the basis of the indicator is Relative Strength. Relative Strength is calculated by taking the average gains of each candle over a given period, 14 by default on bitcoinwisdom, and dividing it by the average losses over that same period. Its easiest to think of the output as a scaled indication of price growth.

The next piece of this puzzle is the Relative Strength Index(RSI), and if you’er really dedicated to understanding StochRSI mathematically, this is probably the most important part of the equation. To calculate RSI, you divide 100 by one plus the relative strength then subtract all of this from 100– but if you really want to understand it you have to do more than just plug numbers in; you have to think about what your doing. You’ll notice that since the very end step of the calculation is 100 – (proportion), that the maximum output value is 100 and the minimum possible output value is 0. This is how the scaling of StochRSI, and RSI is achieved.

Also, if you look at the bottom of quotient, the denominator, you’ll notice the only variable in the whole equation is Relative Strength. So what happens when relative strength takes on bigger or smaller values? Well think about it a little bit, as Relative Strength grows so does the denominator, but the net result is the the proportion strength, since RSI = 100 – (proportion) this actually means that RSI takes on higher values when relative strength is higher. The inverse is also true, when relative strength is lower, the RSI output is also lower, but an important thing to note is that the denominator can never be equal to or less than zero because one is added to relative strength in the denominator.

The next step to get StochRSI is to apply the Stochastic Oscillator algorithm to the RSI, this is the fun part. The first step is to calculate a variable referred to as %K which is equal to the difference between the current closing price and the lowest price in the selected period, again by default 14, then divide the result by the different between the highest price in the period (14) by the lowest price in the period, then multiply all that by 100! After that all you have to do to get the next variable, %D, is take the simple moving average over a defined number of periods Y (default 3), of the variable K.

After that, all you have to do to get the next variable, %D, is take the simple moving average over a defined number of periods Y (default 3), of the variable K.

There you go, you’ve managed to calculate StochRSI– I bet you’re really glad you read the math section of this explanation!

So how do I use this?

Put as simply as possible, StochRSI is a measure of how overbought or oversold the market is. This is useful because uninformed traders, acting like the irrational animals they are, will all react to these conditions in the same way. In general, when the market ends up oversold, all those monkeys start buying, thinking that they’re going to get some coin on the cheap. when the market is overbought, everybody stops buying because they start to think the trend is over, and there’s no more money to be made. Values over 80 are considered to be extremely overbought, and values under 20 are considered to be extremely oversold.

Just because the market is overbought or oversold doesn’t necessarily mean you are for sure going to the trend you want though. The reason StochRSI is a lacking stand-alone indicator is because of a phenomena I call flat lining. Often times, even though the market is overbought or oversold, it will go a period without swinging the other way– it will remain equally overbought or oversold for many more periods. Meaning ultimately, if you were trading on StochRSI alone and if you bought hoping for an upswing, the market probably went really sour (if not full on crashed), or if you sold expecting a downswing, the market just kept going up!

To minimize this effect use other indicators in addition to the StochRSI, anything will work, EMA crossovers, MACD, MAs whatever you decide you like.
Crossovers: That’s right, crossovers.The same crossovers we told you about in the MA, EMA, and MACD section, and guess what? They’re never going away.

Crossovers can be used with just about every indicator you’ll ever use, and even if they’re not, you’ll still probably use another indicator that will use crossovers in addition to the ones you can’t, so get used to them–they’re here to stay! Crossovers can be used with StochRSI much the same way crossovers can be used with any other indicator. Wait for your signal line, the blue one, to crossover your long trend line, the orange one, for a buy signal. Then wait for your orange line to cross over your blue line for a sell signal.

But there’s a catch! StochRSI gives notoriously unclear signals. Sometimes you’ll notice signal line crossovers at seemingly random times, and sometimes it will just bounce back and fourth all the way through the trend. Unfortunately, this is just the nature of StochRSI and why an understanding of crossover angles is so important. StochRSI will allow you to catch trends very early on at the cost of sometimes very inaccurate signals.

All these crap spikes, dives, and fake crossovers are all commonly called signal noise, and even with perfectly adjusted parameters, there’s little you can do to reduce it, which is why StochRSI is best used as an addition to your trading strategy, not the entire strategy.

KDJ

Parameters: Form (x,y,z) Default (9,3,3)

If you have been using StochRSI for a little bit you’ve probably started to notice just how bad the signal noise can get, and often times even when implementing crossover angle analysis it’s difficult using StochRSI alone to determine the relative strength of a trend. This is where KDJ comes in. If you read the section explaining the underlying math of StochRSI you’ll remember StochRSI outputs two values: K and D. It’s no coincidence that these two variables are part of KDJ’s name– KDJ uses these same two variables.

So what is J? J is the divergence between K and D over a 3 interval average by default (parameter z). Its degree of variance gives an extraordinary amount of information about the momentum of trends. By adding the output J, much of the interpretive challenges presented by signal noise when using StochRSI can be bypassed. In addition, J gives you just about all the information you could ever infer from crossovers and crossovers angles. This makes KDJ essentially the “better mousetrap” when compared with StochRSI.

So how do I use this? Much the same way as you would use StochRSI if you’ve been practicing, but now you have even more information and some real time feedback on you analysis. Crossovers are still a valid method here, but now you’re looking for the J line to cross over both the K and D line, and you’ll know how strong the trend you’re hoping for is based on how wide the “belly” created between the J and D line is. The wider the belly, the better your doing! In one sentence, “follow the purple line!”

Advanced Topics

This section will assume some level of fluency with the topics mentioned above, along with the concepts of volume, slippage, and order execution. If you feel you don’t fully understand these topics yet, I would highly recommend continuing to practice crossovers and further familiarizing yourself with forex terminology.

Coming up with a Strategy:

Now that you’ve mastered reading the indicators above, it’s time to learn how to use them. “But wait, haven’t I already been using them?” No, I’m sorry to say you haven’t. You’ve been using pretty basic strategies that thus far we have been feeding you in order to orient yourself in the world of forex. Indicators and technical analysis are more then just a do this, then do this system, they are components of a language that we have been subtly trying to teach you.

Forming a strategy requires a deeper understanding of these indicators, you need to have an intuitive sense of how they work. If you can’t just look at a candlestick graph and have some idea of what the MACD, StochRSI, and KDJ look like without ever seeing them, you may not be ready for this section.

Without a strategy, you are a gambler not a trader. Having a strategy isn’t about making the maximum amount of money you could have made during every shift in the market, it’s just about consistently making money. I miss trends all the time, but that doesn’t break my heart because I have a system that consistently results in gains.

If you’ve been using the strategies above you’ve probably noticed that at some points you’ve ended up exiting trends early or entering trends too late, a single signal is not enough. You are missing something– like all the pieces fit but you can’t quite make out the full picture on the puzzle yet. This is how you refine your strategy.

Essentially, we all start with EMA crossovers and build more and more complex models for how to predict market movements, but when your strategy fails to predict something, it’s time to evolve. It’s time to take notes, continue with your system no matter how basic it is but whenever you feel something went wrong, even just a little bit, take notes and a screenshot of the graph at the time. Check out whats going on with all three indicators you’ve been familiarized with and try to figure out what you missed.

Was there a crossover you missed?
What was the momentum like on longer or shorter intervals?
Where was the market at relative to a week or even a month earlier?
What was the volume like at the time and what time of day and day of the week was it?
Was there some news, or some other catalyst? If so from what news source?

Feel free to write down the questions above and keep them handy. These are just some basic considerations, as you go on your models will become more advanced.

After you think you’ve figured out what you missed, backtest! Scroll back in the graphs and try to find a time when the market was showing similar behavior and make a prediction, then see how accurate your prediction was. If you were right, its time to integrate your refined model into your existing strategy. If you were wrong, toss it in the garbage and try again. I’m wrong at least 90% of the time– its all part of the scientific method.

Some Strategies To Consider

Swing Trading
Indicators: MACD (major), EMAs (minor)

I would actually consider myself a swing trader. Swing trading is typically done on intervals no less then 15 minutes and no longer then 1 day. Your main interval will probably be 1 hour with a required awareness of 2, 4, and 6 hour intervals. The idea behind swing trading is to take advantage of the minor waves in a market that happen within larger trends. Theoretically, this means you not only benefit from the larger trends, but the shorter swings within them. Keep in mind this is theoretical.

The reality is swing trading is a moderate risk trading strategy that requires a disciplined adherence to stoploss. Although the idea with any strategy is to be right more then you’re wrong, unfortunately, in order to profit from swing trading, you need to be quick to give up . If a trend doesn’t go your way almost immediately close your position and look for a new trade. I always tell newer traders if you’re going to swing trade, make sure you love every position to enter all the way through, or kill it.

Although the ‘purists’ swing traders would say all you need to swing trade is a candlestick graph, I think the MACD indicator has undeniable value when swing trading. The idea here is to get in the heads of traders– try to take advantage of their optimism and pessimism. Always keep in mind MIM and try to figure out the big psyche walls and supports. The idea is to hop on trends after they’ve just begun, not to hop on before anyone else.

Spread Betting
Indicators: Market Depth (major), StochRSI/KDJ (minor)

Spread betting is all about the nickles and dimes of trading, if done right it is a very low risk strategy and requires an almost religious adherence to stoploss. The idea behind spread betting is to evaluate periods in which the changes in market buy/sell depth allow micro trades that return extremely quick, however small the profits. This is a low risk strategy because your not actually hoping for anything to happen, you’re just profiting when it does. Although awareness of larger trends always helps, all you should really care about is “can I profit off of this trade in less than a minute?” Your main intervals will be 1 and 5 minutes, with at least a minor awareness of intervals up to 15 minutes. When I was spread betting I would check the 15 minute interval for a general idea of where the trend was going, then immediately start watching the market depth.

As soon as I saw a break in either the buy or sell depth that adhered to the larger trend I determined from the 15 minute interval, I would buy a small amount and set a limit order just below the densist area in the sell spread. The real trick is coming up with a way to manage stoploss. I was always a fan of QT Bitcoin Trader, but spread betters can’t afford to wait and see if the market will swings their way. If you go even 1 cent in the red, close your position and try again. Spread betting is especially effective when done with a bot, and should always be done with amounts small enough to ensure your order won’t cause a slip in market prices.

Doji Trading (Also Called Japanese Speed Trading)
Indicators: Candlesticks (major), Volume Bars (Minor)

Doji Trading is not a strategy I plan on discussing in detail because I don’t believe it is all that effective. Although an understanding of Doji’s can help enhance a base strategy you already have. The idea of Doji Trading is using only subtle clues given by a candlestick chart to determine what the market might do. To truly understand this strategy though you have to understand the underlying thought process behind its inception.

Think of the market like a battlefield and a candlestick chart as your birds eye view of an eternal struggle between bulls and bears. Each candle represents a battle fought over the course of you selected interval, the body of the candle tells you where the fight began and ended, and the wicks give you an idea of heroic victories or crushing defeats that happened in the interval. A solid bodied candle with small wicks doesn’t mean much to a Doji Trader, but wicks can serve as important signals of the moral of fighters on the battlefield.

Take this recent market movement for example, picture those big red candles as legions of bears charging through the ranks of hapless bulls. For about 3 hours the battle is uncontested with solid victories going to the bears, but at around ~470 something happens. The bulls fall back and regroup, and the bears have become so caught up in a blind rally they didn’t see it coming. The bears initially push through into the wick of the first green candle but the bulls cut them off and finally halt their advance.

It sounds dramatic, but this is pretty much the way a Doji Trader thinks, and I’d agree that seeing markets as a battlefield gives good insight to a trader.

***Under Construction***
More info on Doji’s and types of Doji’s here.

Plotting Support and Resistance

Establishing support and resistance levels is more of an art than a science but there are a few guidelines all professional traders follow. Generally major resistances are best established on longer intervals, 1 hour or longer is a good rule of thumb. The real trick is to identify areas where major market movements started and ended, you should be looking big sell offs or big buy ins, these transitional areas are very often accompanied by very high trading volume.

The lines are a bit crooked, but its easy to see this big red candle on the 1h interval was marked by a majority of the volume over the entire downtrend

Supports can be established in a very similar way, except they don’t always have the characteristic high volume of resistance levels. To find supports you want to look at your graph and find areas where the market would not go. Often times the market will ‘test’ the same supports multiple times and after touching them will quickly reverse. Look at the graph above and see if you can identify the ‘major’ support before you look at the following graph.

Well that wasn’t that difficult

Support/Resistance on Longer Intervals

Support and resistance is a lot like MIM we talked about earlier in this guide. No matter what interval you trade on it pays to be aware of support and resistance on longer intervals. Don’t hesitate to mark up your graphs all over, print them off if its more convenient, but always be aware of support and resistance levels on every interval you can. I recommend when you sit down to trade to start off looking at the 1 Day interval, mark all your important support and resistance levels then work your way through all the shorter intervals doing the same. Make note of every one of the really major reversal points and always have them in the back of your mind.

Here’s some to start you off:

Support on the 4H interval
Some very major resistance on the 12H interval

Evaluating Market Depth

This is an especially important skill for swing traders and spread betters. Even though I primarily use Metatrader for long term analysis I will always use Bitcoinwisdom just for those little squiggly lines mentioned at the beginning of this article. Market Depth gives you extraordinary insight into what people are thinking. I’ll have to add pictures later because Bitcoinwisdom only offers live market depth data, but for now, we’ll have to do with our imagination. The market depth lines show you the density of order in a certain area, most often the red and green lines are just about flat lined around either side of the last candle, but sometimes one of the lines may be more broken up or spread out than the other. When this happens during a trend the graph might as well be screaming at you. When the green line trails upward and is more broken up then the red line, this typically means very little sell resistance, as in very few buy orders could drive the price up significantly. The inverse is also true, a red line trailing downward that is far more broken up then the green line means that the price is hanging by a thread, and just a little bit of panic could send the market into a downward spiral.

About the spread:

The spread is simply the difference between the top buy order and the bottom sell order. Lag on an exchange’s servers can cause market orders to be visible in orderbooks – the telltale sign is a spread of 0 or a negative spread.

About slippage:

If a market order is placed during periods of extreme volatility, the price which had been available when the order interface loaded may no longer be available. If the price is moving away from the trade (making entry less favorable) this will leave a “stale” limit order on the books. A market order to sell at 350 when the price has already moved down to 349 will leave a limit order for 350.

One option for dealing with slippage is to wait 5-15 minutes or longer for the order to be filled in a ranging or oscillating market; if the order is in the middle of the current price channel in those timeframes, this can be a great choice to get the trade you want as trades are often filled with a delay if the market swings back.

Aggressive strategies for slippage:

Another approach for extremely volatile periods is to cancel after some brief period of time and place another order: this time, perhaps an extreme limit order that will be filled at whatever price the market is at when the order is received. If the price is 350, moving at 5 per minute, a trader could sell at 100 and get partial fills at 349, 348.5, 347, etc.

Quick cancelling may result in losses of up to 2-3% or more on a single trade depending on rate of change of price, and is not a good strategy if losses consistently outweigh gains from winning trades. On the other hand, if 25% or less of trades incur that 2% loss, while quick cancels allow 3 wins for 2% for every losing trade, it can be best to simply get back into the market and take the loss.

A more advanced way to deal with slippage, which requires more familiarity with the market, but works in all types of markets both fast and slow, is to place a limit order at a price calculated to land inside the available limit orders at the time it is received. So for example, if the price is at 350 and moving down at the rate of 1 every minute, and a trader can profit by an exit at 349, that trader might place an order to sell at 349 with the possibility of making the best possible exit.

Stop-Loss and Risk Management

Risk management is probably the single most important consideration to a trader, statistically speaking you are at best 40% likely to be wrong about every trend you enter a position on. If you cannot effectively manage risk you are doomed to fail.

***This Section is Currently Under Construction***
***Please Refer to the Links Below for a Great Buffer on whats to come!***

Mitigating Risk, the Only Thing You Need to Know!
Trade Execution, Position Sizing, and Risk Management
Position Management: Trailing Stops

Robots and automated trading

Robots never sleep

The idea of running a bot is that it can trade for you, without you being at the keyboard. This has obvious advantages, like allowing the trader to sleep at night like a normal human being.

The bot can trade based on market charts, using technical analysis – for example, pairs trading bots that might trade a specific currency pair on 10/21 EMA crossovers on 15m timeframes are common.

Or the bot can make whatever choices you want – like “sell BTC/USD if the price drops by more than 5%.” Any indicator can be used in combination, a variation on the commonly exploited EMA setting might be “10/21 EMA 1h timeframe if 50 EMA angle is greater than 20 degrees.”

Bot farming

The unwary bot operator who uses default settings, especially on a popular robot which many people are using, will be slaughtered in the markets by organized groups of bot herders (also known as the pump and dump teams). These fine folks will paint the tape with their orders to manipulate the price lines into a 10/21 crossover, or whatever the bots use, and take advantage with cheap buys or high sells.

Programming forex robots

Some bots have special macro languages you can use to script these actions. If you’ve done Excel or OpenOffice spreadsheet work you should have little trouble with this stuff. Trading programs like QtBitcoinTrader (one of our favorites here at Wall Street Crypto) also allow automatic trades, aka ‘stealth limit orders’ – especially useful for stop loss, moving stop loss, and take profit points.

Many bots are open source, and often written in Python, PHP, Ruby, and other popular languages. We like open source robots because you can extend them, fix them, and trust them.

If you have more programming experience or want to get it, there are many advantages to writing your own bot, like avoiding the strategies used against the default trades of the popular bots. You will also gain experience with using remote APIs.

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