Trading Financial Markets

Technical Analysis

Checkout the Tutorials menu for all the posts that I’ve written about Trading & Investing in Crypto & Financial Markets in general. I’ll be creating & adding more articles to the site over time. To begin with you should try to keep things as simple as possible when creating your charts, you don’t need a bunch of complex and exotic Indicators, Tools & Concepts to generate lucrative Trading Signals. The Indicators, Tools & Concepts listed below are all that you need to get started with setting up & drawing your charts. If I’ve written an article about something listed, then that list item is linked to my article about it.

Beginners

Advanced knowledge

Trade Management

Trade Execution & Risk Management

This article is the metaphorical money-shot of my site. It provides examples of how to Enter & Exit trades & how to manage your Risk. For this article, I’m showing the charts first followed by information about them. Please checkout my other articles in the Tutorial menu if you need more information about the tools etc. that I have drawn on these charts.

Chart #1

Chart #2

Chart #1: This is what a fully planned out trade looks like. You should never enter a trade without knowing exactly what you are going to do and when you are going to do it. Being a successful Trader is a mechanical process that requires consistency of execution. The Risk/Reward Ratio tool is indicating an R/R of 2.09. This is a good setup.

Chart #2: We can see that there’s an excessive amount of Short positions on the Bitfinex exchange at the same time that the Bitcoin Price is quietly Consolidating in a known region of Key Support. This is observable evidence that the probabilities are now stacked in favor of a bullish resolution of this consolidation box resting at Key Support. Checkout my articles about Institutional Order Flow in the Tutorials Menu.

Trade Execution

This is an example of how you could use this trade setup, the example Profit Targets & Stop Loss prices are on Chart #1. In this example trade, when the market is in Consolidation, like in the blue box I’ve drawn on Chart #1, we would enter a Limit Buy Order at $6,200. We would get filled at this price. The perfect time to enter a trade is during a quiet period of extended consolidation, when the volatility is relatively low. Here’s what this would look like on the BitMEX exchange.

As soon as we’ve placed our Limit Buy Order, we would then place our Stop Market Sell Order which would act as our Stop Loss Order on the BitMEX exchange.

When our Limit Buy Order & Stop Market Sell Order have been entered we should then wait for our Limit Buy Order to be filled.

When it’s filled, we can then enter some additional Stop Market Sell Orders which will act as our Take Profit Orders. These Orders will automatically sell off our Position if the market rises and reaches our Profit Targets. We could e.g. Take Profit in 3 chunks as shown in Chart #1. by entering 3x Stop Market Sell Orders like this:

Stop Market Sell Order 1. Quantity: 3,333: Stop Price: $6,358 – Closes 33% of our position.
Stop Market Sell Order 2. Quantity: 3,333: Stop Price: $6,538 – Closes 33% of our position.
Stop Market Sell Order 3. Quantity: 3,334: Stop Price: $6,830 – Closes the last 33% of our position.

If the market reaches our 1st target of $6,358, we should then take our risk off of the table by editing our Stop Market Sell Order that’s at $5,900 by changing it to $6,200 which is where we entered our Long position at. At this stage we have made some profit, we have zero risk left in the market and we are still exposed to making additional profits with the remaining 66% of our original position that we still have open in the market. Pretty cool right?

If the market reaches our 2nd target at $6,538 we have the option of moving our Stop Market Sell Order that’s at $6,200 up to the price of our 1st target $6,358. We now have 33% left of our position in the market. If the market were to drop down to $6,358 without first hitting our 3rd & final target at $6,830 the remaining 33% of our position would be stopped out in profit.

Risk Management & Position Sizing

We should never risk more than 2% of our portfolio on a single trade due to the potential of having a losing streak that could wipe out our entire account. Certainty doesn’t exist in financial markets and having lots of losing trades is an inevitability. The goal is to have a record of more winning trades than losing trades overall over an extended period of time. Never get emotionally attached to a trade. Even the best, richest traders that ever lived have experienced losing streaks due to the laws of randomness, however this didn’t matter to them because out of e.g. 100 trades, they would always win at least 50 of them or at least the trades that they did win, their wins were so big that they out sized all of the losses that they had due to having a proper risk reward ratio on each and every trade that they made.

The Short Squeeze

 

For the Ultimate Short Squeeze you need the market to be both Ripe* and Juicy*. Ripe: An extended time period of Price Consolidation/Low Volatility. Traders are hungry for Volatility and many of them will quickly react to the Volatility when it finally arrives. Juicy: The Long:Short Ratio is heavily weighted on the Short side, there are far more Shorts in the market than there are Longs. In this example below we have the perfect example of a Short Squeeze in Bitcoin. I’ll explain exactly what happened below these charts.

On October 15th 2018 the level of Shorts in the market had hit an area of Resistance, when shorts were this high historically the market had changed direction. Knowing this we could search for the other key ingredient in a perfect Short Squeeze, a period of low Volatility, sideways Price Action. That’s exactly what we had October 11th – 14th. Volatility is like a spring, when it’s compressed tightly it will release it’s energy violently. Low Volatility leads to High Volatility and vice versa, it’s mean reverting.

Now lets get down to the mechanics of what happened. Market Makers (MM) took advantage of the situation using the techniques described in my article: Institutional Order Flow. When price broke out of it’s Consolidation Box on Bitfinex ($6,220 – $6,399) either naturally or by MM intervention we saw several things happen all at once:

  • Forced Selling / Margin Call Cascade: The Liquidation Bots of the Exchange had to execute thousands of Market Buy Orders all at once to ensure that Traders who were Short didn’t end up with negative balances, to make sure that Traders didn’t end up owing the Exchange any money.
  • MM Intervention: Institutional Order Flow.
  • Panic Buying / FOMO – Fear of Missing Out that came from human traders executing thousands of Market Buy Orders who watched the price explode, who simply chased the market or rushed to cover their Short positions.
  • Hundreds or more of Automated Trading Bots that are following various strategies such as simply following Momentum or Price Breakouts executed thousands of Market Buy Orders all at once.
  • Human traders manually executed Market Buy Orders trades to hedge whatever position or strategy
  • Massively increased Liquidity in the Order Book. Humans & Bot traders also inputted thousands of new Limit Buy & Limit Sell orders. As can be seen in the Crypto chat rooms such as the Troll box of an Exchange, the phrase of something like “Oh look, it’s the whales putting up or flashing the buy walls”, those Buy Walls are referring to increased Liquidity in the Order Book via stacks of new Limit Buy Orders. This fresh Liquidity in the Order Book helps to extend the length and size of a Short Squeeze.

Support & Resistance

Support & Resistance are prices that the market has observably reacted with or will likely react with. Support prices are prices where buyers have stepped into the market in large enough numbers to stop downward movement and have forced the market higher. Resistance prices are prices where sellers have stepped into the market in large enough numbers to stop upward movement and have forced the market lower.

When the market has moved into unchartered territory, where no preexisting Support or Resistance prices have been defined we can use the Fibonacci Retracement tool to draw Fibonacci Extensions to find new price points that the market will very likely react with, this is useful for setting Take Profit targets on our positions, entering new trades and for making sure that we aren’t entering our trades at a sub optimal price.

Support & Resistance prices derived from the Higher Time Frames (TFs) are always more important than those found on Lower TFs. The Higher TFs are the 4 hour, Daily, Weekly & Monthly charts. If e.g. you’re entering Bullish trades based on Support prices found on Lower TFs (e.g. 1/5/15/60 minute charts) when the Primary Trend is Bearish, when the Daily & Weekly Moving Averages are showing that the market has a Bearish profile, then you are stacking the odds against yourself. Chances are that price will break below those Lower TF Support prices more often than not. Checkout my articles about Moving Averages in the Tutorials menu.

As we can see in the chart above there is a clearly defined area of Support at $5,860 > $6,000. If price were to have a sustained drop below such a clearly defined area of Support this would signal to us that Bullish probabilities have been drastically cut at least until the observable evidence has improved. A sustained drop below Support can be defined as a closed Daily Candle with a closing price below the clearly defined Support price.

When clearly defined points of Support & Resistance have been found such as the prices at A & B on the chart below we can draw a Fibonacci Retracement as soon as a few days after point B has formed to project Resistance levels in to the future, if this lines up well with known Resistance levels then that adds further to the probability that price will react with this level. As indeed is the case below, we can see that the Fibonacci Retracement tool predicted the future sell off that happened at the 0.618 Fib level. Checkout my article about the Fibonacci Retracement tool in the Tutorials menu.

Relative Strength Index

The Relative Strength Index is one of the most widely used indicators that traders & investors use on their charts. Below is an example of how it can provide accurate Buying and Selling confirmation signals when used in conjunction with other tools such as Support, Resistance & Fibonacci Retracement.

Caveats: The RSI can be Oversold or Overbought for extended periods of time and doesn’t always indicate an exact bottom or top in the market. Like all other indicators, you should use it as one of the aspects of your analysis, it’s not a complete package by itself.

Fibonacci Retracement

The Fibonacci ratios are a set of critically important mathematical constants in the Universe, these ratios are even found inside our own bodies and our own DNA as shown in the title image for this article. It is therefore no surprise that these ratios are also of critical importance to Financial Markets. The Fibonacci Retracement is a powerful tool for navigating price action and finding optimal trade entries & exits. It can also be used to find repeating patterns that occur over various periods of time. I’ve included a long time period example from Bitcoin below. In this chart we can see that the crucial 61.8% fib level is acting as strong resistance for Bitcoin on higher time frames. If Bitcoin were to rally from a Major Low and break & hold above the 61.8% Fib level this would tell us that probabilities have shifted in favor of the bulls and we should now draw up higher targets on our charts.

Institutional Order Flow

Do you want to go swimming in the Liquidity Pools, deep diving for those bargain basement deals? The Market Makers (Exchange operators and their insider circle of people) can see the entire order book, they can see exactly where the clusters of stop loss orders are located. Using techniques such as spoofing and wash trading they can drive the price to where these stop loss orders are located. They can also take advantage when certain conditions arise such as thin order books and low volume to cheaply drive the price to the desired location. Big range Low volume candles printed on the chart at this time are known as Liquidity Voids. Once the stop loss cluster (Liquidity Pool) price has been hit this provides liquidity for the insiders to fill their buy or sell orders depending on which direction they are about to push the market (or which direction they know the market is going to move due to insider knowledge). With this knowledge you can hunt for likely Liquidity Pool locations on your charts and enter your trades at these liquidity pools rather than being whale food yourself.

Moving Averages #2

Checkout this wizardry. It’s possible to display MAs from higher time frames (TF) on your lower TF charts. The 60 minute chart below is showing the 9 Daily Exponential Moving Average (9 DEMA). How is this possible?

It’s possible thanks to a special indicator available on TradingView:
https://www.tradingview.com/script/OQs2lVvr-Ultimate-Moving-Average-Multi-TimeFrame-7-MA-Types/

It’s extremely useful to see higher TF MAs on lower TF Intraday charts because price will often react exactly or near exactly to these MAs. I’ve put some arrows on the above chart to show some of the times that the price reacted exactly or near exactly to the 9 DEMA.

As an example of how to configure a TradingView indicator I’ve included my settings for this indicator below:

Click the format button:

Dial in these settings on the Inputs tab:

Dial in these settings on the Style tab:

Moving Averages #1

The Moving Average Indicator is the most popular tool used by Traders and Investors who want to quickly and easily determine the Trend of any Financial Market. Long duration Moving Averages (MAs) such as the 50,100,200 Daily Moving Averages (DMAs) and the 30,40,50 Weekly Moving Averages are useful for visualizing the overall primary trend of a market. When the long duration MAs bundle up together after being spread out it tells us that the momentum of the primary trend has observably weakened and it tells us that we should be cautious and open to the possibility that the primary trend could be about to reverse.

As you can see in the above chart, the long duration MAs signalled to us that momentum had weakened when they bundled up together. Following that we saw the MAs roll over in a bearish manner with the fastest (30 period) MA drop below the other MAs. The MAs were then used as resistance, with price dropping hard from this resistance during May > Jul 2008. This signals to us that we should avoid trades and investments on the Long side of the market until the observable evidence has improved. We can consider shorting the market if it has a primary bearish trend like this.

Shorter duration Moving Averages such as the 9 DMA and the 21 DMA are useful for finding counter trend movements and taking advantage of them for Day & Swing trading. Checkout my Moving Averages #2. post for information about how to use MAs in your Day, Swing & Long Term Trading & Investments.