Bitcoin’s relative growth and upsurge can greatly be attributed to the unique characteristics that are innately inscribed into each cryptocurrency. For those of you reading this now, you may have undoubtedly been on the hunt for a consistent trading approach to apply when investing with Bitcoin or other cryptocurrencies. Due to this possible truth the goal of today’s article is to provide you with the knowledge and tools needed to apply this consistent trading approach on a day-to-day basis when investing with a variety of cryptocurrencies.
If history has taught us anything it would be that as soon as something special comes into the fold it isn’t long until it is tampered by foul and illegitimate opportunities. In this case, we are of course talking about the world of cryptocurrencies and more particularly Bitcoin. Already there are countless trading approaches plastered throughout a wide number of shady blogs promising you endless spoils and riches. We understand it can be difficult to turn down these seemingly legitimate opportunities.
If anything it is testing your will power but one good rule of thumb to apply whenever you come across a trading software, investment approach or general investment opportunity would be that if it sounds too good to be true, then it probably is. Before we move forward to understanding and applying this trading approach, it is crucial that you have some fundamental knowledge in regards to cryptocurrencies. So with this being said, for those of you who are new to cryptocurrencies, we encourage you to read the brief introduction below prior to diving into the strategic portion of this investment approach.
Starting from a rudimentary level, a cryptocurrency is a type of digital currency that include bits of encrypted data that posses no intrinsic value. Intrinsic value, for those of you unfamiliar, is best defined as the actual value of an asset or company. These values are established from the true value that include both tangible and intangible factors and cover all aspects of business.
Perhaps the most appealing characteristic about Bitcoin and other related cryptocurrencies would be how they are not regulated by central banks. This means that cryptocurrencies can be sent from peer to peer without the need of having any financial institutions serving as the intermediary. Furthermore, since cryptocurrencies are essentially bits of encrypted data they cannot be printed to create fiat money (inconvertible paper money made legal tender by a government decree).
Due to cryptocurrencies having the inability to be printed into fiat money the likelihood of digital currencies being affected by inflation is much less significant. Simple economics tells us that when a large sum of fiat money is printed that inflation also rises with it making the value of the currency worth less. However, since there are only a limited quantity of bitcoins and other cryptocurrencies the supply cannot increase meaning that the probability of bitcoins value decreasing due to inflation is less likely to occur.
What You Will Need
Now that you have a more fundamental understanding of cryptocurrencies let’s get started. First and foremost, this is a technical analysis based trading concept which means access to a charting solution is a must. Keep in mind that we are investing with bitcoins and other cryptocurrencies so you will need a charting solution that includes cryptocurrency assets. One free charting solution that we recommend that includes everything you need for this trading approach would be TradingView.com.
Once you have your charting solution up and running make sure to select your targeted assets of choice. Throughout the upcoming sections the targeted asset we will mainly be working with is Bitcoin/USD, which is abbreviated as BTC/USD. After you have your desired asset selected the next step that you need to do is add an indicator known as On Balance Volume (OBV). This can be done by moving your mouse over “Indicators,” right-clicking then scrolling down until you find “On Balance Volume,” then right-clicking again to add to your chart.
For those of you unfamiliar, the On Balance Volume indicator is a rather handy technical analysis indicator that allows investors to better analyze the accumulative price flow in and out of an instrument. This is achieved by gauging price action and volume to provide chartists with a better understanding of the quantity of money flooding in and exiting the market.
Suitable Trading Conditions
Ensuring that market conditions agree in tangent with our On Balance Volume indicator is an imperative step that should not be overlooked lightly. An example of unsuitable trading conditions would be if the value of Bitcoin was rising but the value of the OBV indicator was decreasing in value. Ideal market conditions can be shown in the picture example below.
As you can see, the value of Bitcoin is decreasing while the value of our OBV indicator is rising. This is an indication that sellers are pushing hard while buyers are trying to rally the price higher. This creates volatile price activity for our targeted asset which is the last occurrence we want to happen.
Applying the Trading Approach
Throughout this strategic portion of this trading concept we will cover 5 steps that will ensure the proper set up, execution and withdrawal from a buy or sell investment. Before we get started though we should point out that this trading approach is most effective when the timeframe of the charting solution is set to a period of 1 hour. Understand that since we aren’t using shorter expirations that the quantity of trades won’t be as numerous, although they will be more effective.
Step 1: Add Ethereum Asset Into Charting Solution
Your charting solution should look similar to the image provided below. Where there are three separate windows each showcasing the BTC/USD, Ethereum, and OBV indicator. Next, just double check that your charting solution is set to a period of 1 hour then move onward to step 2.
** Important Note: In order to add Ethereum to the charting solution, you must right-click on “Compare,” which is next to “Indicator,” then you can type in “ETHUSD,” right-click on it then make sure you deselect “Overlay the main chart” otherwise you will have a jumbled mess, then select “OK.” **
Step 2: Analyze Smart Money Divergence Occurrences
Smart Money Divergences occur when there is a divergence between the value of Bitcoin and Ethereum. In general, these sort of situations occur when the price action of one cryptocurrency fails to confirm the action of the other cryptocurrency. So for instance, if Bitcoin fails to break above a resistance level but Ethereum does then we have a smart money divergence underway. The development of a smart money divergence is the first indication that a trading signal is about to be generated.
Step 3: OBV Indicator Must Concur with Trend
A situation that will often occur when a Smart Money Divergence occurs would be how the value of Bitcoin will “lag” behind the price of Ethereum. However, eventually the price of Bitcoin should move away from this divergence and follow suit with the price action of Ethereum. This is where the On Balance Volume indicator comes into play.
As mentioned earlier, the main function of this technical indicator is to help investors determine whether or not traders are buying or selling into the market. In this case, the asset under observation would be Bitcoin since it was the first asset we added to our charting solution. Ideally, what you want to occur would be that you want the value of our OBV indicator to increase in tangent with the direction of the trend while also moving beyond its pre-established resistance level.
Step 4: Execute Buy/Sell Investment
One mental note to make would be that the most effective set ups occur when a support level is generated while Bitcoin is still under the designated resistance level. However, as long as our On Balance Volume indicator concurs with the directional trend of both Bitcoin and Ethereum then are we allowed to execute an investment. For an example of how an ideal buy investment scenario would look like refer to the image below.
A strong advantage about this trading approach would be investors aren’t required to only execute one style of investing. Meaning that you can execute both buy and sell investments given that suitable trading conditions are met. All you need to do in order for a sell investment to occur would be to follow the same steps above but in reverse. To gather a better understanding of how a sell trade would look like refer to the image provided in step 5.
Step 5: Set Take Profit Price Level
An effective way to reduce risk when applying this trading approach would be to apply a stop loss above the breakout candle in a sell trade scenario. This ensures that if a reversal was to occur instead of a continuation of trend that your losses would be kept to a minimum. Setting a take profit is best advised once the On Balance Volume indicator starts reflecting a neutral trend. This is an indication that the buyers are giving the sellers a run for their money and are buying heavily into the market.
The possibilities revolving around the investment of Bitcoin and other cryptocurrencies are ever-growing and can turn into a rather lucrative venture when pursued cautiously and strategically. There are countless cryptocurrency scams circulating the Bitcoin realm which is why we advise investors to visit our Bitcoin and Cryptocurrency Blacklist to learn about dangerous cryptocurrency scams that should be avoided. For those of you who have any questions regarding this trading approach or have any other Bitcoin related experiences to share, please leave your feedback below.
Don’t already have an account with a brokerage? Feel free to consult with our Day Trading Guide for suggestions.
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