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# Cryptocurrency Trading Part I: Building Blocks

The objective of this guide for bitcoin investors is to serve as a one-stop, all-encompassing tutorial and primer to familiarize even someone with no prior exposure or initiation in the subject with the intricacies of trading in cryptocurrency markets, or any market at large. Trading arcana is often portrayed to be as complex, mind-bending and unfathomable as quantum physics. Soon, you'll come to realize that it's pretty simple mathematics.

Jack Bogle, widely regarded as the greatest investor in American markets, was often criticized for lack of diversity in his portfolio. Bogle focused almost exclusively on low-cost, low-turnover, passively managed mutual funds in the United States. When asked of his blinkered, US-centric approach, he would protest the notion of any such bias and assert that he invested only in markets he was thoroughly familiar with.

Putting your money only into markets that you're familiar with is perhaps the primary precept in trading. Thus, before trading in cryptocurrency markets, it's imperative that one invests adequate time observing the methods and machinations typical of these curious wild-west markets. That is not to suggest that these markets are anything particularly unexampled within the historical context of financial markets.

Jesse Livermore, another fabled investor from Massachusetts in the late 19th century and early 20th century, after making a small fortune as a 15-year-old betting against bucket shops, thought he knew everything about trading. Without much in the way of formal education, Livermore was the epitome of an autodidact. He was so successful with his trades that all bucket shops in Boston soon banned him.

## Crypto Trading Part IV: Candlestick Patterns

Analysts use chart patterns and technical indicators to glean a great deal of insight regarding trading activity over a sequence of trading periods. But for fewer trading periods and shorter time scales, these insights can often prove to be of limited consequence. In recent years, candlestick patterns have become the most popular tool for short-term traders. Candlestick patterns are also used in conjunction with chart patterns and technical indicators as further confirmation for expected breakouts.

We've learned the basics of a candlestick chart in the first part of this guide. We're familiar with the anatomy of a candlestick, we also know what bullish and bearish candles are and what they look like. It's now time to delve a little deeper.

Candlestick charts comprise more information for an individual trading period than any other type of chart. The shape and size of a candlestick and the relationship between the upper wick, the body and the lower wick can speak for how the market forces stacked up against each other and whether the buyers or sellers were in control of a trading period. This information is then interpreted within the context of preceding price action and adjacent candlesticks to determine likely short-term price movements.

### Single Period Patterns

#### Short Day

An uneventful trading period. The price moved very little from open to close and the period's trading range was rather brief. Regardless of the colour of the body, this type of candlestick on its own means that both bulls and bears are holding fire for the time being.

#### Long Day

A highly intense trading session in which the price moved significantly from open to close. A green body means the buyers dominated the session and is considered to be very bullish, while a red body represents complete control on the part of sellers and is a sign of strong bearish momentum.

#### Spinning Top

A neutral pattern regardless of the colour of the body. The body of the candlestick is similar to a short day but the shadows indicate a more significant trading range. Buyers and sellers traded some decent blows but the session ultimately closed near its open.

#### Long Shadows

The colour of the body is not particularly significant for this pattern, only whether the body resides near the top or the bottom.

A close near the top of the session's range with a long lower shadow is considered bullish. Although sellers tried to take control of the session, buyers ultimately pushed the price back up to close the session on top. Conversely, a close near the bottom with a long upper shadow is bearish, meaning that sellers managed to sway the session back in their favour, seeing off a fleeting foray from buyers.

#### Marubozu

A Japanese word translated as ‘shaven head', marubozu only has a body without noticeable shadows. This pattern forms when the open and close of a session are equal to the high and low.

When the session's open equals its low and close equals its high, it is represented by a bullish green marubozu. Buyers dominated the session from start to finish. A red marubozu is bearish. The session's open equals its high and close equals its low, meaning that sellers decisively trounced buyers during the period. The longer the body, the greater the momentum.

#### Hammer

A pattern which forms following a spell of declining prices. The session closes near the top with no upper shadow and a lower shadow that is at least twice as long as the body. Hammer indicates that buyers are starting to fight back and is a bullish reversal pattern regardless of colour of the body. The only caveat is that the next candlestick needs to close higher in green to validate the pattern.

#### Hanging Man

The hanging man is morphologically identical to the hammer, only that we call it hanging man when it forms after a spell of advancing prices.

Like the hammer, it can be either green or red. In an uptrend, the hanging man is seen as a warning, short across the bow if you will, that although buyers managed to rescue the session towards the close, sellers are starting to fashion a reversal. Hanging man becomes a valid bearish reversal signal only if the next candlestick closes lower.

#### Inverted Hammer

An upside down hammer following a downtrend, considered a bullish reversal pattern only if the next candlestick closes higher. Although the session ultimately closed near its open, the long upper shadow of an inverted hammer is an early indication that buyers may be starting to challenge sellers.

#### Shooting Star

Looks exactly like an inverted hammer but forms in an uptrend and is therefore considered to be bearish. Despite further continuation of uptrend, as shown by a long upper shadow, the session closed near the bottom of its range. An indication of weakening upward momentum.

#### Doji

A neutral cruciform pattern which indicates either incertitude or a state of equilibrium. Despite trading high and low, the session closed almost exactly where it opened. The length of the upper and lower shadow may or may not be equal. Doji can also indicate relenting momentum or potential reversal when it forms adjacent to other patterns.

#### Dragonfly Doji

A doji with a long lower shadow and no upper shadow in which the open and close are equal to the high for the session. When this pattern forms in a downtrend, it's considered to be an indication of bullish reversal.

#### Gravestone Doji

A doji with a long upper shadow and no lower shadow in which the open and close are equal to the low for the session. Gravestone doji in an uptrend is a sign of bearish reversal. With both dragonfly and gravestone doji, the length of the shadow is a good measure of the momentum behind a reversal.

### Multiple Period Patterns

#### Bearish Engulfing

A two-period bearish reversal pattern in an uptrend. A candlestick with a short green body is followed by one with a longer red body. The body of the second candlestick fully engulfs the first candlestick's body, but not necessarily the shadows, thus the pattern's name.

#### Bullish Engulfing

The inverse of bearish engulfing, bullish engulfing is a two-period bullish reversal pattern in an uptrend. The first candlestick has a short red body and the second candlestick has a longer green body which fully engulfs the red body.

Engulfing patterns are among the strongest indications of a reversal. Not only do they depict a shift in the tide but significant attendant momentum.

#### Harami

A two-period reversal pattern, potentially. Harami is Japanese for pregnant.

As with some two-period patterns, the candlesticks may or may not be immediately adjacent. They only need to be sufficiently proximate.

A bullish harami forms in a downtrend when a long red candlestick is followed by a small green candlestick (as shown above), where the complete trading range of the latter is within the body of the former.

In a bearish harami, shown below, a small red candlestick is fully contained within the body of the preceding longer green candlestick.

Harami patterns typically indicate relenting momentum after a strong trend. The reversal from a harami is considered complete only if the next candlestick closes favourably, meaning that it's the same colour as the second candlestick.

#### Harami Cross

A two-period pattern very much like a harami, except that the second candlestick is a doji.

Harami cross is considered to be an indication of weakening momentum or indecision rather than a reversal. For the pattern to qualify as a valid reversal, a third candlestick following the doji must be in concurrence.

When a harami cross forms in an uptrend, the candlestick after doji must close below the doji’s trading range in red. If it closes above in green, that could mean the harami cross was simply a brief consolidation before further continuation of uptrend.

In a downtrend, the candlestick which follows the doji must close above the doji’s trading range in green to validate a bullish reversal.

#### Tweezer Top

At least two candlesticks with even tops, considered a potential reversal pattern in an uptrend.

As price gets repeatedly rejected at the same level, this evinces strong resistance. With more candlesticks forming even tops, it becomes more and more likely the price cannot surpass this level. Reversal is confirmed by a bearish close in red below the midpoint of the first candlestick in the pattern.

#### Tweezer Bottom

The inverse of tweezer top, a potential reversal pattern in a downtrend. Tweezer bottom is formed by at least two candlestick bodies with even bottoms.

Successive candlesticks encounter rejection at the same low, indicating strong support. Bullish reversal is complete only when the pattern is followed by a higher close.

With both tweezer patterns, only the top and bottom of the candlesticks' bodies are taken into account to validate the patterns, without regard for the shadows.

#### Dark Cloud Cover

A two-period bearish reversal pattern in an uptrend.

A long bodied bullish candlestick is followed by a bearish candlestick which closes below the midpoint of the first candlestick's body. The second candlestick must close near the session’s low without too much of a lower shadow.

#### Piercing Line

A two-period bullish reversal pattern in a downtrend. The inverse of dark cloud cover.

A long bodied bearish candlestick is followed by a bullish candlestick which closes above the midpoint of the first candlestick's body.

Dark cloud cover and piercing line patterns are quite similar to bearish and bullish engulfing patterns but the momentum behind the reversal is less significant.

#### Morning Star

A three-period bullish reversal pattern, which differs from piercing line by the presence of a middle candlestick which is a short body.

The first candlestick has a long red body. The second candle represents a relatively uneventful session, which can be red or green. The pattern is complete and a bullish reversal is confirmed when the third candlestick closes above the midpoint of the first candlestick.

#### Evening Star

The inverse of morning star. A three-period bearish reversal pattern, which differs from dark cloud cover by the presence of a middle candlestick which is a short body.

A long green body is followed by a short green or red body. A third candlestick closing in red below the midpoint of the first candlestick confirms a bearish reversal.

#### Morning Doji Star

A morning star pattern where the middle candlestick is a doji.

The doji indicates a period of indecision among traders before eventual bullish reversal. For the pattern to become valid, the third candlestick must close above the midpoint of the first.

#### Evening Doji Star

An evening star pattern where the middle candlestick is a doji.

The pattern is confirmed and a bearish reversal is complete only if the third candlestick closes below the midpoint of the first.

#### Three White Soldiers

A three-period bullish reversal pattern which consists of three long green candlesticks following a spell of declining prices.

To qualify as a valid reversal, each candlestick in the pattern must close near the session's high, with only a short or shaved upper shadow, and be bigger than or at least the same size as the preceding candlestick.

#### Three Black Crows

A three-period bearish reversal pattern in an uptrend, comprising three long red candlesticks.

Each candlestick in the pattern must close near the session's low, without much of a lower shadow. The second and third candlesticks must be at least the same size as the preceding candlestick.

In both three white soldiers and three black crows patterns, the size of the bodies and the shadows are indicative of the force behind a reversal. These patterns usually appear at long-term support/resistance levels or under overbought/oversold conditions.

Rising Three Methods

A five-period bullish continuation pattern.

The first period is a long green candlestick, followed by three small red candlesticks contained within the body of the first. This is then followed by another long green candlestick.

The pattern indicates that although sellers tried to peg back and reverse the trend, momentum was insufficient to complete a reversal. The fifth candlestick closing higher than the first is essential to confirm that an attempt at reversal fell through.

#### Falling Three Methods

The inverse of rising three methods, a five-period bearish continuation pattern.

A long red candlestick is followed by three small green candlesticks contained within the body of the first and another long red candlestick. The fifth candlestick must close below the body of the first to confirm continuation of downtrend.

### Candlesticks Rule of Thumb

Now that's obviously a lot of patterns. Having to memorize everything can prove to be a pretty daunting proposition. A neat little candlesticks hack would be handy, right? I think I've got just the ticket!

Let's just forget all the fancy names for candlestick patterns for a minute. What we need is an easy way of determining why any particular pattern is considered bearish, bullish or neutral. What really informs the way we interpret the relationship between a session's open, high, low and close? That should help us at once recognize what any given pattern signifies.

We only need answers for three simple questions to know what any single candlestick or successive candlesticks indicate with regards to the balance of market forces,

1 – What was the preceding trend? This will inform us if there is a trend to be reversed.

2 – Where did the session close with respect to its trading range? A close near high is bullish and a close near low is bearish. Longer shadows represent brusque price rejections.

3 – How big was the candlestick's body relative to adjacent candlesticks? Larger body indicates greater momentum, effecting a major shift from open to close. A small body after a strong trend is a sign of either relenting momentum, respite or indecision.

In a declining trend, a long-bodied close near the top of a session's range is a sign of strong bullish reversal. Likewise, in a rising trend, a long-bodied close near the session's low represents a firm bearish shift.

Now it's important to note that although candlesticks pack a lot of information about each session, they don’t quite tell us everything.

A candlestick offers no insight into the chronological sequence of price action during that particular session. We know where the session opened, closed, the session's high and its low but not how the price moved ad interim or where it was at any given time during the session between open and close. By using a line chart, we can learn how a particular session played out from open to close.

### Applying Candlestick Patterns

Just like chart patterns, candlestick patterns don't always play out. The ability to ascertain the likelihood of a pattern coming to fruition comes with experience.

Candlestick patterns become more significant when they confirm other indicators. In scenarios where a price breakout or trend reversal is imminent, they can help us identify the most opportune entry or exit point.

Take the example of the BTCUSD chart below,

RSI stops breaking down just above 40 during the second week of November, enters overbought territory within a week and keeps steadily surging for a month.

RSI stays overbought for weeks and we know a bearish reversal is imminent but there's no indication of a reversal. It's obvious that sell pressure is non-existent at this point.

However, in the second week of December, price makes a new high but RSI diverges to a lower high. Soon enough, here comes confirmation of sell pressure in the form of an evening star candlestick pattern.

Hang on! There's a doji between the star and the last candlestick in the pattern. Candlesticks in certain patterns need not always be immediately adjacent, as we've covered previously. Doji is neutral and simply indicates a period of indecision. In these scenarios, we can merge two candlesticks, star and doji, and the result would still be a star.

The last candlestick closes a long way below the midpoint of the first candlestick's body. Together with bearish RSI divergence, this constitutes strong indication of bearish momentum gathering steam.

We can take a short position here with a stop at the most recent high. We don't yet know if the head and shoulders (H & S) pattern is going to complete but despite a couple of fleeting rallies, RSI continues to diverge bearishly so we'll stick to our guns.

In the second week of January, H & S top pattern does play through and the neckline is broken with attendant surge in volume. This is just further confirmation of our position. We can now move the stop to the most recent swing high within the pattern to cover our profits.

### Different Ways to Trade

#### Micro Trading or Scalping

Micro Trading or Scalping involves trading small price movements and accumulating profits throughout the day. Scalpers use either 5 or 15 minute charts, identify a local range and typically trade based on candlestick patterns. The practice is quite risky and one bad trade can undo the profits gleaned from numerous successful scalps.

#### Day Trading

Day Trading is the practice of identifying the trading day's potential range through various indicators and capitalizing on price fluctuations. Day traders use hourly charts to set their entry and exit positions. Common tools used are candlestick patterns, momentum and volatility indicators.

#### Swing Trading

Swing Trading is a type of short to mid-term trading, lasting anywhere between a few days to a few weeks. It involves identifying local support and resistance levels for a short-term trading range, typically during a consolidation spell, and riding the waves between high and low within the range.

#### Position Trading

Position Trading, known as HODLing in crypto jargon, is the practice of… well… not trading at all but investing in an asset based on a combination of fundamental analysis and weekly or monthly charts with a view to realising long-term profits.

#### Margin Trading

Margin Trading is commonly used by day traders and swing traders. Using leverage borrowed from an exchange/broker, margin trading allows betting on the price of an asset going up (long) or down (short) with more money than is possible with spot trading. The trader’s own funds used towards a margin trade order is their margin and leverage refers to funds borrowed from the exchange or broker.

Profits and losses are multiplied by the ratio of leverage borrowed to the trader's margin. If the price moves unfavourably to equal the percentage of the margin, the trader's position gets liquidated and the funds are lost. Although margin trading can be highly profitable, using leverage more than three times the margin is not recommended and a tight stop loss order is imperative at all times.

#### Algorithmic Trading or Algo Trading

Algorithmic Trading or Algo Trading is an automated trading method using trading bots which carry out orders based on pre-specified criteria or algorithm. The trading algorithms are typically based on moving averages, range, momentum and volume indicators.

Additionally, algorithmic traders also look for arbitrage opportunities which are too complicated to execute manually – simultaneously buying an asset for a lower price in one market and selling for a higher price in another. Originally popular among hedge funds, investment banks et al., recent technological advances have made this type of trading more readily accessible to retail traders.

### Ten Commandments of Trading

#### 1 – Study Charts

Study a lot of charts, then some and then some more. There's only one way to perfect the ability to read charts – through reading charts. Do not start trading with real money until you're sure you are fully capable of identifying patterns in any given chart.

#### 2 – Refine Your Methods

Paper trade to refine your methods. If you're unable to resist the itch to trade while perusing charts, you can test yourself by paper trading live charts in real time. It's not real money, there's nothing to lose and you'll get to figure out whether or not your methods work.

#### 3 – Trend is your friend.

Never bet against the trend in a trending market without multiple confirmations of a reversal. Never!

#### 4 – Stop loss is your saviour.

There's no telling when the market may turn on you. You may think a pattern complete but a retest following breakout could cave. The only way to protect your money is stop loss. Always use a trailing stop loss order to protect profits earned.

#### 5 – Avoid Complacency

One swallow does not a summer make. Beginner's luck is a real thing in trading. One good trade does not make you a pro trader and your last trade entails no implication on the next trade. Successful traders avoid complacency, stay dispassionate and retain an equanimous disposition at all times.

#### 6 – Avoid Trade Patterns

This is not a hill for you to die on. Knowing when not to trade is as important as knowing when to trade. This is the fundamental reason why good traders lose money. They tend to get carried away and trade patterns incessantly without confirmation. Be patient and wait for the right opportunities to trade.

#### 7 – Greed Kills

Another reason perfectly capable traders fail to retain their profits is greed. Greed can be good, but within reason. Set your targets, stick to them, take profits, get out and wait for the next good opportunity.

#### 8 – Bitcoin is King

Bitcoin is the king, altcoins merely his subjects. Altcoins derive liquidity and exposure largely through Bitcoin, which means altcoin trends invariably follow Bitcoin trends. Without Bitcoin, altcoin markets may even cease to exist.

#### 9 – Avoid Chasing the Moonshot

Unregulated markets necessitate greater caution. This is particularly true for low-liquidity markets which can be rabidly erratic. Therefore, it's best to avoid trading obscure cryptocurrencies in the hope of that elusive ‘moonshot'.

#### 10 – Not Your Keys, Not Your Bitcoin

You may not get to keep your profits if you don't keep your keys. Don't leave your money on a centralized exchange, however secure and trusted the exchange may seem to be, any longer than you absolutely need to. Your coins don't belong to you if you don't control the private keys to your address.

With that, you're all set to embark on your trading voyage. Fair trends and following sats!

Useful Links

Buy Bitcoin – Coinbase, Bitstamp

Buy Bitcoin (peer-to-peer) – Bisq Network, LocalBitcoins

Buy Altcoins – Binance, OKEx, Huobi Global

Charts and Paper Trading – TradingView

Margin Trading – BitMex, Deribit

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