When trading cryptocurrencies, the first thing you will need as a trader is concrete money management even if you have gained knowledge about different chart patterns that can be applied. Crypto trading can be an emotional rollercoaster for your mind and senses, as the market can play tricks on anyone, be it a professional or a novice trader. Thus managing money or risk should be your primordial concern if you ever hope to succeed as a crypto-trader.
Factors to Consider Before Trading Cryptocurrencies With Charts
Traders must factor in a certain set of rules that can govern their actions before they consider trading using charts in the cryptocurrency market. Following all of these rules can lead to efficient and successful money management.
Avoiding Correlated Pairs
You should always avoid correlated cryptocurrency pairs as it is akin to taking multiple positions on a single currency pair. For instance, overtrading can be caused if a trader goes long on BTC/USD while buying other cryptocurrencies paired against the dollar at the same time.
Prepare a Weekly Trading Plan
You should have a weekly trading plan which includes checking economic events for the coming week which will help you decide what to trade after considering key aspects of US economic data.
Amount of Risk
As a trader, you should only risk a set percentage of your trading account on any given trade. Fixing the rate at 1 or 2% increases the trader’s chances of surviving in the long run.
The risk-reward ratio is the amount to gain compared to the amount which you can lose. For your trading to make sense, make sure that the reward must always exceed the risk, at least by a ratio of 1:5
You should use pending orders as much as possible. A pending order is a sign of a disciplined approach to trading and that the trader has a definite plan in mind.
Trading Cryptocurrencies using Rising and Falling Wedges
We see wedges form at the end of bearish and bullish market swings. A rising wedge is falling and hence is a bearish pattern while a falling wedge is rising and is a bullish pattern. When the wedge forms, the price finds it difficult to decline or advance any more. Even though it keeps making new highs and lows, it eventually reverses. Wedges can appear often on any chart and your approach to trade a wedge should be the same no matter what timeframe or market you are in.
The above is a 4-hour chart for IOT/USD with a wedge. Here a rising wedge is formed on a trend when the pair increases from $1.2 to $2.2. Normally traders would stay on the long side. However, there are traders that spot the wedge formation and just wait for the price to break to the lower side. They subsequently place a stop loss at the top of the pattern. You can do the same and integrate the risk using a stable money management principle and should target a risk-reward ratio of 1:3.
Trading Cryptocurrencies using Double and Triple Tops and Bottoms
Double and triple tops are classical technical analysis patterns, with double tops and bottoms being more common than triple tops and bottoms. Both these patterns are reversal patterns which means that the trend must exit before the formation of the pattern. Some of the key elements of double and triple tops and bottoms include:
- Being a measured move
- The market failing in the same area twice
- Depending on the pattern, it will resemble either an “M” or “W”
The above is an example of a classic double top in the four-hour chart for XMR/USD( Monero against the dollar), occurring in January 2018. It has all the elements needed for this pattern, such as a prior bullish trend, the market failing twice at the same spot, and subsequently breaking lower, filling the measured move. If we consider the fact that XMR/USD was trading below the $200 mark two months later, then the above is a reversal pattern.
In the case of the triple top or bottom, the same rules apply with the only difference being that the market fails three times in this case. However, triple tops and bottoms rarely hold, as the price has a tendency to return to the level after reaching the measured move.
Trading Cryptocurrencies Using Morning and Evening Stars
The morning and evening star pattern is a three candle pattern. This means three candles are enough for a trend reversal. A morning star is a bullish formation which forms at the end of a rising market. It possesses the following characteristics:
- The first candle which has a strong real body is bullish in nature
- The second candle has a small body
- The third candle has a real strong body and is bearish in nature
Morning Stars are very easy to trade. Simply go long at the closing of the third candle. After that, place a stop loss at the pattern’s bottom. Finally set a target that respects a risk-reward ratio of 1:3.
In the above chart for the XMR/USD pair, the morning star formed offers a tremendous risk-reward ratio which makes it easy to integrate the pattern into a solid money management plan.
Using Hammer Pattern for Perfect Trading Setup
The hammer is an impressively strong one candle pattern. IT offers solid risk-reward ratios while reversing bearish trends. The opposite of a hammer is a shooting star, which reverses a bearish trend.
For a hammer to form, it has to meet three conditions.
- The trend must be bearish
- The candle has to have a small real body
- In case it has a shadow, it should be at least double the length of the real body
You can trade a hammer in a similar fashion as you trade morning or evening stars. You should go long at the closing of the candle and set a stop loss at the bottom of it. If the risk-reward ratio is at least 1:3, you should set the take profit.
Below is an example of a hammer forming on the IOT/USD 4-hour chart.
By performing technical analysis on cryptocurrencies, traders can speculate. You should always consider both sides of the currency pair you are trading before starting to trade. Keep everything under control via proper money management and use the above patterns for more chances of success.