Short-Term Analysis Methods for Cryptocurrency Investing

You can’t become a successful short-term trader just by reading the news. Short-term trading is an art that combines active risk management with a great understanding of crowd psychology and price actions. Also, the cryptocurrency market isn’t as established as other markets, so trading the lesser-known cryptos on a short-term basis can be even riskier.

You can compare that to trading penny stocks or gambling, which are almost sure ways to lose money. Regardless, the following sections present some analysis methods that professional traders with large accounts and a high-risk tolerance can use.

How to decipher chart patterns

You can use the majority of the chart patterns for short-term trading as well as medium- and long-term trading strategies. All you need to do is to set your chart view to a shorter time frame. I normally check with three different time frames when developing a trading strategy.

If I’m analyzing the markets for more rapid profit-taking, I look at three short time frames. For example, if you’re looking to profit within hours, you can analyze the price action on these three time frames:

• 30-minute chart (to get a sense of the market sentiment)
• Hourly chart
• Four-hour chart (to get an understanding of the bigger picture)

If you see different forms of bullish reversal chart patterns across all three time frames, you may have a higher probability of a new uptrend starting, which can lead you to a successful bullish trading strategy. The following sections show an example of the Bitcoin/U.S. dollar (BTC/USD) crypto/fiat pair on September 5, 2018.

A 30-minute chart

You’re looking at the 30-minute chart, and at 9:30 a.m., you suddenly see a massive drop that brings Bitcoin’s price down from approximately $7,380 to $7,111, as you can see in the figure. This formation is called a bearish engulfing candlestick pattern among technical analysts. Is this the beginning of a new downtrend?

An hourly chart

By switching from the 30-minute chart (see the preceding section) to the hourly chart, you notice the same drop (shown here). But because now you can see the bigger picture, you discover that this drop was after a period of uptrend in the market, which may be a signal of a pullback during an uptrend. But how low can the pair go?

A four-hour chart

By switching from the hourly chart to the four-hour chart, you notice that the bearish engulfing pattern is formed in a much longer uptrend that has been moving up since the middle of August. By observing the four-hour chart, you can pinpoint the key support levels, shown at $6,890 and $6,720, that the price can pull back toward within this newly established bearish market sentiment. In this figure, I’ve used the Fibonacci retracement levels to identify the key price levels with higher accuracy.

Following the technical analysis guidelines, you can expect a bit of a correction after this sudden drop, followed by more drops to key support levels on the four-hour chart. With this, a potential trading idea may be to sell at correction or at market price and then to take profit at one or two support levels.

After sudden drops in the markets, sometimes the market corrects itself before dropping more. Often, it corrects itself to key pivot levels (a level that’s considered trend-changing if the price breaks below or above it), which in this case is the 23 percent Fibonacci retracement level at $7,090. The reward for waiting for a correction is that you may be able to take more profit short-selling at a higher price. The risk with it is that the market may not correct itself, and you may miss out.

Personally, if I think the market is really going to shift into a bearish sentiment, I sell some at market price and set a sell limit order at the key pivot level just in case the market corrects itself before further drops. This way, you can distribute your risk. A sell limit order is a type of trading order you can set on your broker’s platform, which enables you to sell your assets at a specific price in the future.

For a short-term profit-taking, I consider setting buy limit orders at both key support levels at 38 percent and 50 percent Fibonacci retracement levels. In this example, I aim to take partial profit at around $6,890, and then exit the trade completely at $6,720. Again, this approach may limit my gains if the market continues to drop, but it also limits my risk if the price doesn’t fall as low as the second key support, so it gives me a proportionate risk-reward ratio. This figure shows how the market actually performed.

The BTC/USD price did correct a little bit, but it didn’t go as high as the 23 percent Fibonacci retracement level. So, if you had only waited for a correction to sell, you would’ve missed out on the trading opportunity. The market did drop to both key support levels at 38 percent and 50 percent Fibonacci retracement levels. So, if you had sold at market price, you would’ve taken profit at both key support levels. On the other hand, the price continued to drop beyond the 50 percent Fibonacci retracement level, so that may represent a missed opportunity to maximize your returns.

However, in my opinion, it’s always better to be safe than sorry. That’s why I always recommend that my students avoid being greedy when it comes to strategic developments.

How to use indicators in short-term cryptocurrency investing

Another popular technical analysis method is to use indicators such as the relative strength index (RSI), Bollinger Bands (BOL), and Ichimoku Kinko Hyo (ICH). I call such indicators elements of a beauty kit. By adding them to your chart, you make it more beautiful and accent the important features just as you would by putting on makeup on your face!

Indicators are mathematical tools, developed over the years by technical analysts, that can help you predict the future price actions in the market. You can use these indicators in addition to chart patterns to get a higher analysis accuracy. But in short-term trading, some traders use only one or two indicators without paying attention to chart patterns. In fact, you can create a whole trading strategy by using only one indicator in short-term trading.

Avoid illegal pump-and-dump stuff

As a cryptocurrency trader, you need to be aware of what can happen among illegal group activities that manipulate the markets, take profit, and leave others shirtless.

A pump-and-dump scheme happens when a group of people or an influential individual manipulates the market prices in its own favor. For example, in an unlikely illegal act, a highly influential person named Joe goes on TV and says, “I think Bitcoin is going to reach $60,000 tomorrow,” while he already has an established buy and sell strategy to trade a ton of Bitcoin. The moment his speculation hits the news, everyone else who’s watching TV gets excited and starts buying Bitcoin based on this suggestion. The hype helps Bitcoin’s price go up and Joe’s strategy to go through. But before the rest of the market can catch up, Joe sells (dumps) his Bitcoins, taking a ton of profit but sending Bitcoin’s price crashing down.

Pump-and-dump schemes can happen in any market. But at least with traditional markets like equities, the Securities and Exchange Commission (SEC) actively tries to go after the bad guys. In the cryptocurrency market, the regulations have yet to be fully established. According to a study published by the Wall Street Journal, dozens of trading groups manipulated cryptocurrency prices on some of the largest online exchanges, generating at least $825 million between February and August of 2018.