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While cryptocurrencies are a relatively new asset class, they do follow some of the traditional TA setups fairly well. But in some ways, cryptocurrencies (and in particular bitcoin), are behaving differently from traditional instruments.
Patterns, price action and strategies
In this post I want to show a particular “pattern” I use when day trading bitcoin, for almost all of my entries, and lots of my exists as well. Calling it a pattern may be a stretch, and calling it a strategy would be wrong. But its definately something that tends to work in my favor, and maybe it can help you too. Before I get to that, I want to cover a couple of patterns and price action moves – some that are only notoriously linked to bitcoin, and some we see in traditional asset classes as well.
The Bart Chart Pattern – a notorious bitcoin pattern
The best example of illustrates this is the infamous Bart chart pattern. This is something unique to bitcoin and not something we have witnessed before with traditional instruments.
Lots of traders are busy trying to explain the rest of us, exactly what the reasoning for this pattern is; we are often told this is because of “manipulation”, “false breakouts”, whale moves”, etc. The list is long. The truth is, no one really knows. From a trading perspective, the important part is, that it does not really matter much what is causing it, but that it happens.
Trendline breaks – in crypto currencies and traditional asset classes
A move like the one seen above in the bart pattern, is notoriously linked to bitcoins price action. Other typical setups from the world of tecnichal analysis, plays out perfectly “normal” for bitcoin – sometimes. But this is also true for TA setups in traditional instruments. Then work out as expected – sometimes.
Above is an example of bitcoin breaking a decending trendline and moving up to hit the measured move perfectly. There are lots of examples, playing out exactly like this, again and again.
Another move that is quite common for bitcoin, but also seen in other asset classes, is the whipsaw. Bitcoin usually takes this to new extremes though.
In the most simple form, it is shown as a strong spike either up or down and then immediately pulls back to the inception point of the spike. This is followed up with an equally strong move in the opposite direction and another pullback to the inception point. See the image below as a perfect example of this move.
So where am I going with this? Well there is one thing happening on bitcoin (and probably other other crypto currencies as well given the correlation between altcoins and bitcoin, but I am yet to study this in detaails) multiple times every single day, and it usually provides a solid point of entry.
Break of a previous (significant) swing high or low
I know I know! There is nothing groundbreaking here right? The break of a former swing high or low, is usually a very standard move which in the space of technical analysis – and it is normally considdered an indication of countinuation. In traditional technical analysis, a break of a former significatn swing high, would be considdered an indication of possible further upside.
Here is where things change a bit. I am arguing that the majority of times a former swing point is broken, it is an indication of a possible move in the opposite direction.
When this happens, it is commonly referred to as a fakeout or a fake breakout. It is often mentioned in a manner that makes it seems less likely to happen than a break or bounce, and as something to be considered a “one-off”. It is a move that technical day traders condemn, as it disconnects the fixed lines, mathematically measured moves, and points technical traders often adhere to.
In standard technical analysis you will buy at a support level and sell at the break of a support level, just as you would sell at a resistance level, and buy at the break of a resistance level. Just in case this is new to you, let me illustrate this with the image below.
The image above, shows a 4-hour chart of BTC/USD. This is a very classic example of how support and resistance tends to form, and how you can trade it. These formations tend to show themselves no matter what timeframe is applied. If you zoom in on say the 30-minute chart, you will see the same kind of formations again and again. This is also true for the instrument traded; it does not matter if you trade EUR/USD, DAX, Facebook, or Bitcoin. These setups are everywhere.
The Bitcoin pattern that stands out
So what is the big idea I am on about? Well specifically to bitcoin, almost every single time we have a break of a former swing point, we tend to get a move in the opposite direction. I personally trade this from the 5-minute chart. Let us take a look at a couple of of examples from the chart below (note there are many cases of this happening, but to make things simple, let’s focus on a few setups).
In the image above, there are a total of 8 examples. Each example has two arrows and a number between the two arrows. As mentioned, this example is a 5-minute chart on Bitcoin/USD.
If you look at the first example, see how bitcoin is setting a new low (for the image in question), indicated by the first arrow. Shortly after, it makes a new low, breaking the previous low, and imitiadely has a pullback and start to move quite strong in the opposite direction.
This scenario is exactly the same for all of the other examples. This chart shows a random day on bitcoin. I have not been searching hours to find this exact example. This is happening over and over again, every single day.
The key to trading this it to wait for the candle to close (in this case, the 5-minute candles), then place the trade and give it some room to move around. Every now and then, we get an imidiate move in the opposite direction, but more often than not, it will move around a bit. Optimizing the entries and find a proper stop loss level is something I currently spend a lot of time working on.
We do see this pattern play out with other assets and it can be argued its nothing more than profit taking taking place. This makes sense from a price action perspective. As mentioned, I dont know the underlying reason for this. It may be profit taking and it may be something else. Either way, it happens, and it happens often.
At first sight this looks like an amazing opportunity, and I personally think it is. There are however, lots of shortcomings to this idea. Hence you should not rely on this as a strategy. Its not. But it can form part of one.
It doesnt always work (surprise)
First of all, its needless to say that it does not play out this way, at all times. It does “work” a lot of times (I personally think it does “work” majority of times, but with no proper data to back up this claim, I will just leave that as a guesstimate), but not every time. So always trade it safe with a proper stop loss in place.
The flip side to this is, that when it does not work out as hoped for, it may be a chance to trade in the opposite direction (following the direction of the initial break, as a countinuation trade – more on this later).
As you can see from the image above, every time there is a breakdown you would have a chance to make a profit (although tiny in all cases), execpt for the last (lowest) break, had you traded the opposite direction (long in all examples) after the candle that breaks the previous low, closes. Not that this is not the optimal solution in a trending environment, but still here, you will get a chance for tiny a tiny profit.
When do you enter
As mentioned above, the entry point is key, and its tricky. For now, I follow an idea of getting when there is a close of the candle that breaks, on the 5-minute chart. Per default I will apply a 100$ stop, but this depends a bit on the size of the candle that breaks.
The potential profit per trade may be (very limited)
As you can see from the image above, profit may be very limited, using these breaking points as an entry. This is especially true if you trade against the trend, but it can easily be the same case in a choppy market. Because of this, it is of paramount importance to move stop loss to break even, as soon as this is possible while still giving your trade some room to breathe.
Subjective (what is a significant swing point)
The title says it all. I mentioned above that I trade this when a “significant” swing point is breached. But to be perfectly honest, there are often times where a former high or low is breached, which I under normal circumstances would not consider significant – and the setup still works in my favor (and the opposite is true as well – breaching what looks like a significant level, and still resulting in a loss). This very aspect makes it difficult to use this idea in any sort of automation and also limits the possibilities for backtesting. I am still trying to perfect this; to find some solid rule as to what kind of high or low that needs to be broken in order to generate a valid signal. Right now, tI base this on nothing more than my own perception of what looks like a solid setup.
Lack of a meassure move for potentiel profit
I am yet to find a reliable way to measure when to take profit and where to place my stop loss on these trades. There may be a way to come up with some meassured move, but up untill now, I have not been able to pinpoint a pattern on this, that seems reliable. The good thing is that the pattern itself is a pretty reliable method for exits. If I get in on a long trade, a possible exit will be by the break of the next significant swing point. See the image below with an example.
Big Moves and getting in on a trend
This is the flipside to the shortcoming mentioned above (possible limited profit per trade). It is needless to say the profit potential can be massive. This is true for any trade you get into, but the thing with this setup is, that if you happen to get in on a trend, you will be in from the very beginning. You may think the chance of this happening is close to winning the lottery. Well that depends on how we define a trend. But keep in mind that this exact pattern tends to play out, right before the start of many large moves.
The occur multiple times every day
This setup happens multiple times every single day. If you are into short term trading, this is a good thing. With that being said, the setup seems work equally well on larger timeframes, so if you prefer position trading, or longer term trading, this idea should be applicable to that as well. You will naturally need to account for this when placing stop losses and take profit targets.
It will help you your FOMO. It will! This is probably the best part of this idea. I have struggled with FOMO and it has cost me quite a bit. Once you get used to trading based on this idea, FOMO will be a thing of the past. It is no secret that FOMO tends to kick in, when an instrument spikes. This is when impulsive trading kicks in and we jump into trades with no plan on where to place a stop loss, how much to risk or where to take profit. When a spike happens (specially with bitcoin), it usually fades within a few minutes, and you will be left holding the bag. By applying the idea of trading this the other way, will be good for your mind, and hopefully for your account balance.
Other notes on this
This idea seems to be applicable on lots of different instruments, but I have been focusing on bitcoin. I have skimmed the charts for a couple of alt coins where this also seems to work perfectly. While it may be useful on other asset classes as well, my focus is on crypto currencies in general, and mostly on bitcoin.
I have tried to run some backtests on this, but due to the above mentioned subjective parts, it is difficult to say the least. This is something I will continue to work on, and I will make sure to share my progress about it, here on moneyminds.net.
While profits may be small on many of these trades, I think it’s fair to say that the % of winning trades will be quite high. This is subjective as well, as it naturally depends on TP and SL levels. With that being said, you will be significantly better off using limit orders, getting into these trades, as you profit from the maker fee. If you use market orders you will pay a taker fee, and the PL of the trade needs to make up for this (this is based on the idea that you trade via ByBit).
Finally, if you want to follow and see how I trade these setups, you can follow me on telegram here.
I think that’s it for now. If you got any comments or questions, feel free to drop a comment below or send me an email at hello at moneyminds dot net.