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Advanced cryptocurrency trading: how to make money
Table of Contents
Once you start trading crypto, you quickly find a thirst for knowledge that will take your trading skills to the next level.
Providing you have already developed a stringent risk management strategy, your losses should be minimized - which is great.
That’s the first step to becoming successful. Risk management is the key to making sure your profits grow.
Your next focus should be on improving your knowledge of indicators and charts. There are lots of signs out there, but you need to learn how to spot them.
Now, there are just two things you need to sink your teeth into before we get started. You should keep these two points in your mind throughout your trading journey.
- All traders make losing trades
- Signals are not definitive
Every trader loses money on some trades. It’s not possible to be right all the time when it comes to the crypto markets.
The key is working to reduce the amount of losing trades you have, and cutting your losses short while letting your profits grow.
Throughout your trading journey, you will spot a lot of trading signals. They are not definitive, and never will be. Just because there are a lot of bullish signals at once, it does not necessarily mean the market is about to jump.
Look at what the market is telling you. If there are bullish signals, but there are also bearish signals, it might not be the best time to enter.
With that in mind, let’s get right into it.
In this guide, we'll explore:
- Trading and psychology
- Get started with margin trading
- How to short Bitcoin
- What’s the difference between technical analysis and fundamental analysis?
- How to use candlesticks
- How to use chart patterns for technical analysis when trading crypto
- What are support and resistance?
- Supply and demand
- How to use the volume indicator
- How to identify breakouts and fakeouts when cryptocurrency trading
- How to use mathematical indicators to trade cryptocurrency
- How to use moving-averages
- How to use Relative Strength Index (RSI)
- How to use the On-Balance Volume indicator
- How to use moving-average convergence divergence (MACD)
- How to use Bollinger bands
- How to draw Fibonacci Retracements
Trading and psychology
One of the most interesting things about trading is how other traders think.
A huge amount of the market moves we see every day are down to human psychology.
Sounds crazy, but it’s true.
So if we can understand what the average trader is thinking, maybe we can predict the next market moves - and secure a profit.
Check out the support line drawn on the Bitcoin chart below.
Bitcoin had a key resistance level of around 6,000 USD in 2018. The picture above clearly shows it was tested multiple times, and once it was broken, the price fell dramatically.
Observing a key resistance like this can open your eyes to the impact of psychology. The price continued to stay above 6,000 USD because traders saw it as a key resistance level, and placed buy orders there because they "knew" the price wouldn’t fall below it.
But what was keeping the price up? That was the very traders placing buy orders around this level because they thought it was a key resistance level.
This is what’s called a self-fulfilling prophecy – a prediction that causes itself to become true.
Since so many people believed that 6,000USD was a support level and traded it as such, it remained a support level for many months.
However, once the support was confirmed as broken in November, the price fell fast – the psychology surrounding the price had changed, and there was no key support holding it up.
Work on understanding how other traders think, what emotions they are feeling, and where their mental state is. It will help your trading.
Keep this in mind as we talk about other trading strategies.
Get started with margin trading
Margin trading is trading on leverage.
It’s a powerful tool you can use to grow your portfolio but it must be approached with care.
Just to make sure you know how it all works, we’re going to go over margin trading. If you want to skip this and start learning how to improve your trading, chart reading, and analysis then just click here.
Margin trading is borrowing funds to increase the size of your trade, which increases your potential profits (and also your potential losses).
Leverage refers to the amount you are going to borrow in proportion to the amount of your own funds you are putting into the trade.
With 2x leverage, you put in half the money and borrow the other half.
If you use 4x leverage, you guessed it: you borrow three-quarters of the money and supply the other quarter.
At first, it sounds too good to be true. If you are trading with money that isn’t yours, what’s to lose?
In fact, your potential losses when margin trading is larger than if you were using traditional spot trading. This is because your trade size is larger, so if your trade goes wrong, all of the losses from the larger trade fall on to you.
Borrowing money isn’t free either. You have to pay interest on the funds that you borrow.
Margin trading is therefore inherently riskier, but that opens the doors to much larger profits if you are successful. All of the profits from the larger trade go to you.
What’s also neat about margin trading is you can short an asset (short Bitcoin, for example). This allows you to profit from assets decreasing in price.
To go long or short – that’s the first decision to make.
- Long - you make a profit if the price of an asset increases.
- Short - you make a profit if the price of an asset decreases.
This is how each one works.
When you open a long position you borrow funds from the exchange to increase your buying power, which increases the size of your trade.
When you are open a long on Bitcoin, you will buy some Bitcoin with your funds and the borrowed funds.
If the price goes up, you can sell the Bitcoin for more than you bought it for and keep the profits, minus any fees.
Shorts work a bit differently. Let’s say you are going to short Bitcoin. The exchange lends you some Bitcoin, which you instantly sell, with the intention of buying it back later.
Providing your trade plays out and the price drops, you can effectively buy back the Bitcoin for less and return it to the exchange, keeping the profit.
Once you know your trade direction, you need to decide on the size of your trade, your entry price and your leverage.
As you know, leverage is the proportion of funds you will borrow, relative to your trade size. On Liquid you can trade with 2x, 4x, 5x, and 25x leverage.
The larger the leverage amount, the higher your potential profits are, but the higher the risk as well.
How to choose the right leverage
Your leverage choice should be somewhat based on how long you plan to keep the trade open.
If it’s going to be a very short trade, using 1 or 5-minute charts, higher leverage amounts like 10x and 25x may be suitable.
If it’s going to be a longer trade, more conservative leverage amounts of 2x or 4x could be better.
These are just guidelines, but while you're getting started it may be best to follow them.
Keep your head on straight and follow your rules
Remember, your liquidation price is directly correlated with your chosen leverage. The higher leverage you choose, the closer your liquidation price will be.
If you get liquidated, your position is closed by the exchange to ensure the loan is repaid, along with any interest or fees, without your balance turning negative.
Letting your emotion affect your trading will only cause issues in the long run.
Follow the volume. It shows market activity.
Remember, all traders lose money on trades, even the pros.
What sets a pro trader apart from an amateur is the ability to cut losses short, let profits run and read the markets
How to short Bitcoin
It’s time to execute.
All you need is an account on an exchange like Liquid that offers margin trading for Bitcoin.
Once that’s sorted, here’s the process:
- Choose the size of your trade
- Pick a leverage amount
- Find the right entry price
- Submit order
Your entry price is based on the current market price of Bitcoin. If you want to open a position now, your entry would be close to the current market value.
Alternatively, you may want to set up positions that will open if the price meets key levels - such as around support and resistance levels. We’ll talk about this later.
Once you have an open position, you will be watching the price and waiting for your exit.
To mitigate risk, you should set a stop loss.
If things go well, use take profits to lock in your gains.
Tip: If the price moves the way you want while your position is open, you can use your stop loss to prevent you from losing anything by setting it at a better price than your entry.
What’s the difference between technical analysis and fundamental analysis?
Fundamental and technical analysis are two approaches to studying and trading cryptocurrency markets.
While they are both very different methods, each has its merits – and they can be used in conjunction to profit from trading.
Technical analysis is based on the analysis of the price action of a certain asset. It is based on human psychology, chart patterns, supply and demand, and statistics.
Technical analysts have many different trading methods at their disposal. The basics remain the same, based mostly on supply and demand knowledge, but beyond that, technical traders follow a strategy best suited to them.
Technical analysis relies on three key assumptions:
- Price moves in patterns or trends
- Price action includes all public and nonpublic information
- History repeats itself
On the other hand, fundamental analysis is the evaluation of an asset's intrinsic value based on a number of factors, including financial reports, industry outlook, market size, market conditions and company management.
Essentially, fundamental analysis is intensively studying the background of an asset to quantify whether it is currently undervalued or overvalued.
Fundamental and technical analysis is not 100% reliable. In the case of technical analysis, ensuring you are studying a combination of trends, patterns and indicators across multiple time frames helps to validate your trading decisions and improve reliability.
The longer the time frame, the more reliable the technical analysis.
How to use candlesticks when trading
Candlesticks show price action. They show you what happened to the price of an asset based on a certain time frame.
Besides showing the price, candlesticks also have underlying psychological implications, which you can use to your advantage.
Candlesticks can be used in conjunction with other trading methods to improve your trading strategy.
The candlesticks you see depend on the time you have selected on the chart. If you have 1h selected, each candlestick shows an hour of price movement.
Candlesticks are made up of a body, a lower shadow, and an upper shadow. The Y-axis of a candlestick shows the price movement, while the X-axis shows the time elapsed.
These three parts of a candlestick convey very important information. They show you the open and close price, and also the high and low of the time period.
OHLC: Open, High, Low, Close.
Open and close prices are shown by opposite ends of the body, but depend on whether the candlestick is bullish or bearish.
A bullish candlestick shows strong positive movement. On a bullish candlestick, the open price is at the bottom of the body, where the lower shadow meets the body. The close is at the top of the body.
The top of the upper shadow is the high, and the bottom of the lower shadow is the low.
On Liquid, a bullish candlestick is green.
On the other hand, a bearish candlestick is red on Liquid. It represents a negative price movement.
For a bearish candlestick, the upper part of the body where it meets the upper shadow is the open price, whereas the lower part of the body is the closing price.
The upper shadow limit still represents the high, and the lower shadow limit shows the low.
A candlestick shows more than you realize.
Watching the development of candlestick over time allows you to form an understanding of its psychology.
Let’s take a look at some examples.
BTC/USD has risen by 5% in the last hour, and you are considering buying in due to the bullish nature of the 1h candle.
In this case, a single hour of price action is not usually enough to change biases. Zooming out to 4h or 1D time frame will show the bigger picture. If the 5% 1h move is contained within a bearish candle, flipping biases may not be the best idea.
You have an open XRP/USD position which is up 15%. Should you close your position and take the profits?
A 15% rise is highly bullish, so you should be on looking for bearish candlesticks to time your exit. Any sign of a bearish candlestick pattern would be an excellent time to close your position.
ETH is in freefall against the USD, and you are interested in entering the market. When would be the best time to go long?
One of the best things to do in this situation would be to wait until you see a high-volume bullish engulfing candle, followed by a bullish candlestick pattern.
An engulfing candle is a candle that goes the opposite way the candle before it, and the body of the first candle is contained within the candle of the second candle.
A bullish engulfing candle is when a smaller bearing candle proceeds a larger bullish candle. A bearing engulfing candle is the opposite.
This is an example of a bullish engulfing candle.
For the last example, you would want the bullish green candle to be accompanied by high trading volume (see also: on-balance volume).
How to use chart patterns for technical analysis when trading crypto
A pattern is something that repeats in a predictable manner.
Just like recognizing patterns anywhere else in the world, in trading, you can spot setups on the chart that may suggest that a pattern you have seen before is forming.
If you see a chart pattern forming, you may know where the price is going to head next to complete the pattern.
There are tonnes of patterns to see and learn about. Here are a few of the most common.
A symmetrical triangle usually forms during a trend and acts as a continuation pattern. If you spot one during a proven downtrend, like in the picture, you would expect some downward movement once the triangle is broken.
A symmetrical triangle shows an area of consolidation before the continuation of a trend.
Ascending and descending triangles occur during strong trends. Ascending triangles are expected to form during uptrends and cause positive price movement once broken, much like in the picture below.
Descending triangles occur during downtrends. A break of the triangle should cause some negative price movement.
A cup and handle pattern looks like a cup with a handle. The price creates a curved U shape, before heading downwards in a parallel channel.
A cup and handle is a bullish continuation pattern, which can provide buying signals.
Look out for patterns, and use them to fuel your trading ideas.
Support and resistance
By now you should already be somewhat familiar with the basics of support and resistance. Just in case, we’ll go over a brief summary.
A support level is a price level where there is a strong buying pressure, preventing the price from falling below the level.
A resistance level is a level of strong selling pressure, preventing the price from rising above the level.
Traders use support and resistance levels to their advantage, and so should you.
Key support and resistance levels are very important in trading. If the price bounces off the support level, you need to be ready for it. However, you also need to know what will happen if the price manages to breakthrough.
If you know about a key support level, and the price is heading towards it, you could open a long position just above the support.
Since you had identified the support level as a key support, you would be fairly confident that the price would bounce back due to the increased buying pressure at this level.
This also reintroduces what we talked about at the start, the crux of technical analysis: human psychology. Since the support level is seen as ‘key’, most traders believe it will support the price, and they place buy orders around the level, which strengthens the level.
It’s another self-fulfilling prophecy.
Trades like to look for "confirmation" that a support or resistance level has been broken before trading based on that assumption.
For example, if Bitcoin has been respecting a support level on the 4h chart for weeks, and then the price dips below the support level on the 15-minute chart, this is not confirmation. You need to wait for the close.
Once there is a 4h close below the support line, then you can consider it broken, and alter your trades accordingly.
The close is key.
Supply and demand: the trading basics you need to make profits
Trading is fueled by supply and demand.
You may have noticed on a chart before that there are certain areas that tend to cause trend changes. This is most likely a supply or demand level.
If demand exceeds supply, the price will increase. The inverse is also true.
Being able to identify supply and demand zones can really step your trading up a notch. But just like any other trading concept, it’s something to use in conjunction with other methods to verify your market stance.
A supply zone is an area you identify on the chart where supply exceeds demand – there are more sellers than buyers.
A demand zone is an area on the chart where there are more buyers than sellers, so demand exceeds supply.
Supply zones typically suppress prices, while demand zones tend to cause positive price action.
Supply and demand zones function similar to support and resistance lines. It is known that a higher amount of directional pressure is required to push through the zones.
If price breaks through a supply zone it is expected to become a demand zone. Once again, the inverse is true. If price breaks a demand zone, it is expected to become a supply zone.
Take a look at the zones in the picture below.
As you can see, Bitcoin falls into a demand zone, and when the price reaches the bottom of the zone it rises all the way up to a supply zone, which acts as resistance.
The supply zone then causes the price to fall, which ends in another rough demand zone which then bounces back up to the supply zone briefly, before falling back into the middle demand zone.
This center zone is clearly not as strong as the other zones, as the demand isn’t strong enough and the price falls into the bottom demand zone, which then causes this center zone to switch to a supply zone.
As the price moves up it has to push back through this zone before attempting to test the top supply zone once more.
Observing volume to improve your trades
As you probably know, trading volume shows the amount that has been traded over a certain time frame. It shows market activity.
You may not be aware that volume is a very powerful tool for traders.
For starters, a higher volume market is more liquid, and should be less volatile as a result, which is a good thing.
When you are looking at a chart, keep in mind that the color of the volume bars isn’t really relevant. It just represents the color of the candle above.
Green volume does not show only buy volume, and red volume does not show only sell volume.
Having a keen eye on the volume can help you spot potential reversal points.
In the picture below, volume increases during periods of large decrease and then decreases when during a slower market decline. During the high volume periods, the bears are selling. During the low volume periods, bulls are hesitant to enter the market.
In the third lower volume period, shown in green, volume increases compared to the other two lower periods, which is then followed by a price upswing with higher bull volume.
Price movements are validated by volume. Stronger price moves will have higher volume behind them and will carry more momentum.
Spotting real and fake breakouts
Traders like to look for confirmations. They confirm that something is happening, be it a support line breaking, or a major price increase starting.
The volume indicator can be used as confirmation a breakout is occurring, rather than a fakeout.
- A breakout is a large price increase, possibly through resistance levels.
- A fakeout is a price increase followed by a further decrease, often a failed breakout.
The usual key difference between a breakout and a fakeout is simple: Trading volume.
Look for trading volume to confirm major price moves.
How to use mathematical indicators to trade cryptocurrency
Indicators on a chart are calculated using mathematics and statistics, and they can help you assess previous price movement and plan for future price moves.
They indicate where the price may be moving to.
Indicate is the keyword, it’s not an exact science.
Different mathematical indicators describe different things. Price direction, strength, volatility, or support and resistance levels are all things you can observe with indicators.
As is the case with anything in trading, one indicator is not enough to fuel your trading plan. Using indicators in conjunction with each other, and with other trading tools like chart patterns, is the best way to verify your thoughts.
We can fit most indicators into two distinct categories: Leading and lagging.
Leading indicators describe the momentum of price trends.
Lagging indicators follow confirmed trends.
Something interesting to keep in mind with indicators is that they can follow support and resistance, much like price can. It’s something to look out for.
See in the below example that when the long term support of the On-balance volume indicator is broken, the ETH price drops soon after.
Divergence is something to look out for between some indicators and price. There are four divergence patterns you will see, known as bullish, bearish, hidden bullish, and hidden bearish.
Divergence can provide some excellent bullish or bearish indicators that you can use to pick your trades.
Here’s how to spot each of these divergence patterns.
Bullish divergence is seen when the price prints lower lows, but the indicator prints a higher low.
A hidden bullish divergence is found when a higher low in price corresponds with a lower low in the indicator.
A bearish divergence is found when the price shows a higher high, but the indicator reaches a lower high.
Finally, a hidden bearish divergence is when the price reaches a lower high, but the indicator reaches a higher high.
With divergence, the longer time scale you are on, the stronger the signal is. So, a bullish divergence on the weekly chart is stronger than on the 15 minute chart.
With that out of the way, let’s have a look at a few examples of mathematical indicators. We’ll let you know when divergence is relevant.
A moving average takes recent price action and smooths it out. This assists traders with spotting trends, including the identification of support and resistance levels.
A moving average is based off historical trading data, and therefore has a delayed response to current price movement. As such, moving averages are classified as lagging indicators. This doesn’t mean they aren’t useful.
There are two common moving averages: Simple Moving Average (SMA) and Exponential Moving Average (EMA).
SMA is simple, it takes the closing prices from the specified period and works out the average of them.
EMA is designed to be less of a lagging indicator than SMA, so it is more affected by current price movement.
This means it produces more signals, but traders must keep in mind that this also increases the frequency of false trading signals or ones that are too early.
Moving averages come in different forms, which differ by "period", or length.
50, 100, and 200 are all popular periods for moving averages, where "period" refers to the timeframe you are viewing on the chart. If you are using the 1-day chart, 50SMA refers to averages of the last 50 days of price movement.
Similarly, if you are on the 1-hour chart, 100EMA uses the last 100 hours of price data.
What are we looking for?
The most common signal to look out for with moving averages is when the price crosses a moving average line.
A moving average is a trend indicator, so once the price crosses the moving average it’s seen as a break in the trend.
The longer the period of the moving average, the ‘stronger’ the perceived support or resistance of the indicator.
The BTC/USD chart below shows the EMA100 acting as a strong support level up until it was broken and Bitcoin fell below 6,000 USD.
Moving averages of different periods can be used together for signals. If a shorter moving average, such as EMA50 moves below a longer moving average, like EMA100, that’s a bearish signal.
If a shorter moving average rises above a longer moving average, that’s a bullish signal.
If a shorter moving average is above a longer one, this signals that the uptrend is still going. On the other hand, if the longer moving average is above the shorter one, this signals a downtrend.
Moving averages are highly versatile, and there is more to learn there if they interest you.
How to use the Relative Strength Index (RSI)
RSI is one of the most popular momentum oscillators for trading cryptocurrency.
The RSI compares the strength of a markets recent increases compared to recent decreases and is strictly confined to the one market you are looking at, for example, BTC/USD.
Commonly on RSI charts, you will see horizontal lines at the 30 and 70 marks. These help you identify overbought or oversold conditions.
If the RSI falls below 30, this is broadly viewed as oversold. If the RSI rises above 70, this is seen as overbought.
Generally, these are viewed as signals but are taken with a grain of salt.
If the market is overbought, one would expect at least a slight price correction/decrease.
Similarly, if the market is oversold, a price increase would be expected.
What you can do is use these RSI levels as a view on the general health of the market, and then begin to recognize overbought and oversold when the RSI crosses above 80 or below 20 respectively.
Since these levels are more extreme, the signal will be more reliable.
Bear in mind that just because a market is viewed as overbought or oversold, this does not mean that a reversal is guaranteed. The price could continue moving in the same direction and wipe you out before a retrace begins - so be careful.
Divergence is a key thing to look out for when you are using RSI as an indicator. Study the divergence rules we went over earlier. They can give you some powerful signals.
How to use the On-Balance-Volume indicator
The On-Balance-Volume (OBV) indicator is great for spotting periods of ‘smart money accumulation’. OBV can also be used with our divergence rules.
OBV looks at the positive and negative volume flow, presented on a line graph.
Volume increase often precedes price action, and since OBV shows volume momentum, observing OBV divergence with price can show areas where the smart money is buying or selling.
Again, divergence is key here, much like with RSI.
Learn the four types of divergence, and look out for these between OBV and price.
Here is an example of a bullish divergence between XRP/USD price and OBV.
This is a bearish divergence with OBV.
You can also monitor support and resistance levels and channels of OBV to predict price moves.
These lines and channels are plotted in the same way you would on a price chart, but the OBV moves can proceed price moves, so they are an invaluable tool in your trading kit.
How to use moving-average convergence divergence (MACD)
MACD is preferred by many traders because it has less lag than SMA and EMA.
Signals from MACD show whether shorter-term price momentum is in the same direction as longer-term price momentum.
If it’s not, you can use MACD to determine whether a longer-term trend is about to change.
There are three parts of the MACD:
- Signal line (longer EMA - shorter EMA)
- Average line (9 day EMA of signal line)
- Histogram (difference between signal and average line)
The MACD is different to other oscillating indicators because it doesn’t have an absolute range, which makes it tricky to quantify overbought and oversold levels.
Nonetheless, MACD is great for providing some trading signals that you can build into your market insights.
Here’s what to look for:
- MACD and Price Divergence
- MACD Average Line Crossover
- MACD Centerline Crossover
If there is a positive divergence, the price of an asset will be decreasing while the MACD histogram appears to have bottomed, and negative momentum is falling, seen as the MACD trending upwards in the negative region.
This signals a new uptrend is possible.
A negative divergence is recognized when the price is rising, but the momentum on MACD is falling, so the MACD is trending downwards and the histogram is falling.
MACD average line crossover
When the MACD signal line crosses the average line it’s a signal.
If the MACD signal line moves above the average line, take this as a bullish indicator.
If the MACD signal line moves below the average line, it’s a bearish indicator.
Keep in mind that crossovers are highly common, so this leads to a number of false-positive signals. Think about the movement of both of the lines together too to strengthen the signal.
If both lines are rising this reflects increasing positive price momentum and is viewed as bullish. Conversely, if they are falling together this is viewed as bearish.
MACD centreline crossover
A rise of the MACD signal line past 0 on the Y-axis is viewed as a bullish signal. A fall of the signal line below 0 is bearish.
Each cross represents a momentum shift but can lead to unreliable signals so use it as a supplement to other signals you have generated.
How to use Bollinger bands
Bollinger bands (invented by John Bollinger in the 1980s) are an overlay to a price chart made up of two lines, one on each side of the price. Each line is two standard deviations away from the price.
If the price movement is volatile the Bollinger bands will be wide apart. When the market is calm the bands converge and form a tight channel.
Following a long period of the Bollinger bands forming a tight channel, a trader may expect a sudden spike in volatility.
If the price is very close to the upper band this is a signal that the market could be overbought. On the other hand, when the price is very close to the lower band the market may be oversold.
The price mostly remains within the bands. If the price does raise outside of the bands for some time, this is viewed as an extreme. As a trader, you would expect the price to move back into the range shortly.
It is rare that the price will remain outside of the Bollinger bands for a week on the daily chart.
You may have heard of the golden ratio.
It’s everywhere in nature: flowers, shells, fruits, even on your face.
It’s a mathematical rule and phenomenon that can also be applied to trading and help you earn profits. Pretty cool.
Fibonacci retracements suggest that after a market trend move, the market will retrace a percentage of the move.
If you know the upcoming market retracement size, you will be able to earn a profit.
The Fibonacci retracement levels are at 38.2%, 50%, 61.8% and act as key support and resistance levels.
Fibonacci levels are drawn from the top shadow of the highest candlestick of a move to the lower shadow of the lower candlestick.
In the example above, the start of 2016 was used as the low point, and the top shadow in late 2017 was used as the high point. The resulting Fib levels show potential retracement support levels.
You can use these retracement levels in your trading, just like you would utilize traditional support and resistance levels.
Fibonacci extension levels can also be used for your profit targets. They work in the same way, but go above the current price instead of below and indicate areas of potential resistance.
Use Fib extension levels to plan your take profit levels.
If you've taken on board all the trading tips and ideas in this guide, you should be well on the way to becoming a better crypto trader. Sign up on Liquid today and start putting your ideas into practice.