Bitcoin, a time considered the king of cryptocurrency, is a revolutionary asset in the financial market. You might have read many articles on investing in BTC but significantly less on trading this asset.
The crypto market largely depends on the overall fundamentals. That is, the price moves significantly by any critical news or influencers’ tweets. But this does not mean you cannot use technical analysis on BTC.
What is Bitcoin?
Bitcoin was the first cryptocurrency that came into existence way back in 2007. Cryptocurrency is a digital currency that you cannot see, touch, or feel as it all exists virtually, just like digital gold or oil.
Bitcoin exists on top of a secure and robust technology called the Blockchain — a highly secure network that uses cryptography for transactions. Bitcoin is a medium of exchange for goods and services, decentralized games, and many other applications.
Trading vs. investing in Bitcoin
Trading is very different from investing. In trading, you need to have a strategy, look into the fundamentals and sometimes sit in front of the charts for late hours for that perfect trade setup. While investing is more of an ease putting your money into an asset and leaving it for an extended period.
If we talk about trading, it is more of a stressful job as you have to be focused and psychologically strong to cope with the losses on the same day if you are a day trader. While seeing the decentralization concept growing so drastically, investing in Bitcoin can also be considered a long-time investment.
But whatever the case is, it all depends on your goals, needs, and time to dedicate to the whole process. Trading takes a lot of time while investing does not.
Using price action to trade Bitcoin
Suppose you are a technical analyst and use indicators. In that case, you might make a profit but not all the time, as many indicators are lagging and do not handle Bitcoin’s high volatility. So probably the best strategy to use while trading can be the naked price action, using the support, resistance, and trend lines to trade Bitcoin.
- Trading Bitcoin using support
While trading Bitcoin using support, you first need to draw your dynamic support, and you will do it by using a horizontal line from the toolbar.
For doing it, you will first need to set your chart on a 4hr time frame and then select the horizontal line from the toolbar and draw it by making sure it has three price touches. After that, you have to move to a 30min time frame to look for rejections and trade setups.
In the below BTC/USD example, you can see the horizontal line — support touching the price and then bouncing back upward.
Note: you will not always take the trade when the price is near the support instead of a trade setup. For that, you will need to move to a lower time frame to look for rejections.
Suppose you are a technical analyst and use indicators. In that case, you might make a profit but not all the time, as many indicators are lagging and do not handle Bitcoin’s high volatility. So probably the best strategy to use while trading can be the naked price action, using just the support, resistance, and the trendlines to trade Bitcoin.
- Trading Bitcoin using resistance
Trading Bitcoin using resistance is very similar to using a support zone. For resistance trade setup, you need to enter a sell trade.
In the above example, you can see the price movement in 4hr, price touching the resistance and bouncing back down.
Moving to the 30 min time frame, you can notice the price has continuously been rejected near the resistance zone, and at last, the price could not break the high and a drastic movement downside.
Note: you will wait patiently for the trade setup and only trade after receiving the first confirmation of price, making lower high and lower low. You might get the entry late, but it will be worth waiting for.
- Trading Bitcoin using trendline
While trading Bitcoin using a trendline, it is always better to add it with support or resistance for better trade confirmation. In the below example, you can see a diagonal trendline zone with four price touches. Here the price was moving upward, which signifies we will only take buy trades and no sell as we want to move in the direction of the trade.
Now you need to make dynamic support and wait for the price to touch the trendline and the support, here you are getting two confirmations in a 4hr time frame. Moving forward, you will switch the chart to a 30 min time frame to look for rejections and trade execution.
In the 30min time frame, you can see the price showing bullish pressure as the price was touching the support twice without breaking the support zone. Moving forward, you can see the price could not break the low and instead made a new high and then made a higher low, giving a potential buy signal.
Pros of trading Bitcoin
Although BTC trading is famous, there are a few pros and cons you must want to know before trading this asset.
- High potential returns
As Bitcoin is volatile, it has the potential to give good returns if traded properly.
- Lower inflation risk
As Bitcoin is decentralized and is not affected by any government, making it immune to inflation, unlike world currencies.
- Highly volatile
Bitcoin is highly volatile, which is bad for beginners and intermediate traders.
Like other assets and currency pairs, Bitcoin is not much correlated with other assets but S&P 500. The correlation between BTC and S&P 500 returns is positive and more robust than the correlation between gold and S&P 500 returns.
- Largely affected by the news
Bitcoin is highly affected by news and influences tweets, thereby not respecting the support and resistance levels.
- Unregulated and unbacked
As of now, there are countries where BTC trading is not legal, making it untradable for the trading community at large.
Trading or even investing is hazardous and is not a full-proof task. Bitcoin is volatile, which means it can sometimes not respect indicators or even the support, resistance, or the trendline.
You will first need to look for the price, making a lower high and lower low for selling opportunities and a higher high and lower low for buying opportunities.
The confluence and multi-timeframe analysis strategy work best in any form of trading, take it stocks, forex, or even crypto. You can use the above strategy and add up your own for a more accurate winning ratio.