A day trader must be able to trade successfully in a sideways market because most of the time markets move horizontally.
A trendless market in cryptocurrencies occurs when their price moves within a trading channel defined by a resistance and a support. This happens when there is a balance between demand and supply.
Resistance and support
- Resistance is a price level where, in the past, arising price changed direction to start heading downward. We can call it a resistance when this happens at least twice. Its importance increases when the price is rejected by this level several times.
- Support is a price level where, in the past, the price stopped decreasing and started moving upward. We can call it a support when this happens at least twice.
Breakouts and breakdowns
The breakout/breakdown is what happens when the price rises above a resistance or falls below a support. In these cases the price breaks the resistance/support. This is usually accompanied by an increase in volume. When it is temporary, we talk about a pullback (or false breakout/breakdown). In this case, the price goes back to the previous range. After a breakout, the resistance becomes a new support. If in the future the price stops decreasing at this level and changes its course, the support will gain more validity.
The trading range is a range within which the price moves. When the price moves sideways, between a resistance and a support, the range is well defined and easy to spot. In this case many traders try to buy when it is near the support and sell when it is near the resistance. Unfortunately, this is not as easy as it seems.
The tips for trading cryptocurrencies in a sideways market are:
- Only trade a sideways market with a wide price range between the resistance and support. Avoid markets with narrow price ranges because these can lead you to continuously chase false breakout signals, ending up with big losses.
- Make your investment buying and selling during a window of time and not in one single shot. This is a technique used by institutional investors in order to avoid the risk of buying high and selling low. Moreover, avoid market orders and use limit orders. The market order is the favorite tool of hasty traders who buy and sell following their emotions and not logic.
- Only trade well-known cryptocurrencies with market caps above $500 million. Less-known cryptos are easy to manipulate because they have smaller market caps and total volumes. In fact, they are usually subject to pump and dumps. Moreover, in most cases they don’t represent a long-term serious project. For these reasons they should be avoided.
- Buy with a discount on the current price. Don’t be in a hurry to buy a coin, especially when the price is quickly moving upwards. Remember that the market often pumps the price to induce inexperienced traders to buy on fear of missing out. These pumps are almost always followed by a dump where FOMO buyers end up with a loss.
- Set a profit target before making a trade. It’s up to you to choose your desired profit. You need to have a clear plan in mind or you’ll keep asking yourself, “When should I sell?”
- Set a stop-limit order to protect your capital from unexpected price drops. This order can be used both to prevent a big loss and to lock-in unrealized gains. When you set it, don’t place the stop price and the limit price at the same price level. In the case of a strong price drop, there is a risk that the limit order will not be executed. It’s advisable to place the limit price a bit lower than the stop price. In the case of a buy-limit order you should do the opposite.
- Identify the main resistances and supports. This is important in order to predict the range within which the price will probably fluctuate in the short term. Moreover, in this way you’ll immediately notice if a breakout/breakdown occurs and if it represents the start of an upward/downward trend.
- Follow the news of the cryptocurrencies on your watch list and of the market in general. Analyze price charts with different timeframes and monitor order books and market depth charts (learn to tell fake buy/sell walls from the real ones). All these methods must be used to make informed decisions.
- Take a pause after a big gain or loss. In the first case, if you trade even if the market doesn’t present real opportunities, you may risk losing the gains you just made. After a big loss, you may be tempted to take big risks to make up your loss, ending up with even bigger losses.
- Avoid overtrading or you’ll end up spending a lot on fees and making bad decisions.
Be patient and disciplined. Based on the experience you gain every day, write down the rules you should follow in the future to avoid making the same mistakes.
Disclaimer: I’m not a financial advisor and this is not financial advice. Take these tips with a grain of salt.
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