You may have heard the common adage in trading: “Buy low, sell high.” This saying can be difficult to navigate in that high and low prices can be relative, although the adage does give a basic representation of the incentives of buyers and sellers in a marketplace.

Simply put, if you want to purchase something, you want to spend the least amount possible. If you want to sell something, you want to make as much out of the deal as possible. While this is generally good wisdom to follow, there is also the added dimension of longing an asset vs. shorting an asset. 

How to trade cryptocurrency

Technical analysis

Technical analysis (TA) is a method of analyzing past market data, primarily price and volume in order to forecast price action. While there are a wide variety of TA indicators, ranging in complexity, that a trader could use to analyze the market, here are some basic macro- and micro-level tools.

Market structure and cycles

Just as traders can spot patterns within hours, days and months, they can also find patterns over years of fluctuating price action. There is a fundamental structure to the market that makes it susceptible to certain behaviors.

Market structure and cycles

Chasing the whale 

Price movements are largely driven by “whales” — individuals or groups who have large funds with which to trade. Some whales operate as “market makers,” setting bids and asking on both sides of the market in order to create liquidity for an asset while turning a profit in the process. Whales are present in virtually any market from stocks and commodities to cryptocurrencies. 

A cryptocurrency trading strategy must be aware of the tools of the trade favored by whales such as their preferred TA indicators. Simply put, whales tend to know what they’re doing. By anticipating the intentions of whales, a trader can work in concert with these expert movers to turn a profit with their own strategy.

Psychological cycles

With a zoo full of metaphors, it can be easy to forget that real people — for the most part — are behind these trades and, as such, are subject to emotional behaviors that can significantly affect the market.

This aspect of the market is represented in the classic chart “Psychology of a Market Cycle:”

Psychology of a Market Cycle

Basic tools 

Being able to detect patterns and cycles in the market is crucial for having clarity from the macro perspective. Knowing where you are positioned in relation to the whole is paramount. You want to be the experienced surfer who knows when the perfect wave is about to arrive instead of paddling listlessly in the waters hoping for something great to happen.

But, the micro perspective is also crucial in determining your actual strategy. While there are a vast number of TA indicators, we will only go over the most basic.

Support and resistance

Perhaps two of the most widely used TA indicators under the terms “support” and “resistance” relate to price barriers that tend to form in the market, preventing the price action from going too far in a certain direction.

The support is the price level where the downward trend tends to pause due to an influx of demand. When prices decrease, traders tend to buy low, creating a support line. Conversely, the resistance is the price level where the upward trend tends to pause due to a sell-off.

Support and resistance

Trendlines

While the static support and resistance barriers shown above are common tools used by traders, the price action tends to trend higher or lower with barriers shifting over time. A sequence of support and resistance levels can indicate a larger trend in the market represented by a trendline.

When the market is trending upward, resistance levels begin to form, price action slows and the price is pulled back to the trendline. Cryptocurrency traders pay close attention to the support levels of an ascending trendline, as they indicate an area that helps prevent the price from dropping substantially lower. Likewise, in a downward trending market, traders will keep an eye on the sequence of declining peaks to connect them together into a trendline.

Trendlines

Moving averages

With a market history of support/resistance levels and the resulting downward/upward trendlines, traders often smooth out this data to create a single visual line representation called the “moving average.”

Moving averages

Chart patterns

There are various ways to chart the market and find patterns within it. One of the most common visual representations of market price action is the “candlestick.” These candlestick patterns present a sort of visual language for traders to anticipate possible trends.

candlestick patterns

Technical specifications

Not to be confused with market technical analysis, the core technical specifications for a crypto asset include the network’s choice of algorithm (how it maintains security, uptime and consensus) and issuance/emission features like block times, the maximum token supply and the distribution plan. By diligently assessing the protocol stack of a cryptocurrency network along with the monetary policy enforced by the protocol, a trader can determine if such features support a potential investment.

Innovation

While Bitcoin’s intended use case upon its launch was electronic money, developers and entrepreneurs have not only discovered new use cases for the Bitcoin blockchain but have also designed entirely new protocols to accommodate a wider range of applications.

Liquidity (and whales)

Liquidity is critical for a healthy market. Are there reputable exchanges that support a particular crypto asset? If so, what trading pairs exist? Is there a healthy trading/transaction volume? Are large stakeholders present in the market, and if so, what is the impact of their trading patterns?

However, generating liquidity takes time, as a new innovative protocol may be live but may not have instant access to liquidity. Such investments are risky. If volumes are low and there are little to no trading pairs available, you are essentially betting that a healthy market will eventually form around the project.

Branding and marketing

Most cryptocurrency networks do not have a central figure or company facilitating the branding and marketing around their technology, resulting in branding that may lack a cohesive plan or direction.

This is not to discount the branding and marketing that does emerge from a protocol over time. In fact, a comparative analysis of the marketing efforts of core developers, corporations, foundations and community members can provide a detailed overview of how certain players communicate value propositions to the masses. 

Infrastructure

This quality of a crypto trade can be seen as the manifestation of a project’s technical specifications. Despite what is written in white papers or presented at conferences, what is the actual physical manifestation of the protocol in question?

It’s worth mapping out the stakeholders: the developers, block validators, merchants/companies and users. Additionally, it is crucial to understand who the stewards of the network are, their role in securing the network (mining, validation), and how power is distributed among these stakeholders.

On-chain analysis

Given that all cryptocurrencies operate on blockchain technology at a base level, a new type of analysis that relies on data from blockchains has emerged — on-chain analysis. 

By looking at supply and demand trends, transaction frequency, transaction costs and the rate at which investors are holding and selling a cryptocurrency, analysts are able to make precise qualitative and quantitative observations about the strength of a cryptocurrency’s blockchain network, and its price dynamics in a variety of markets. 

On-chain data also provides valuable insight into investor psychology because analysts are able to align various macro and microeconomic events with the actions of investors which are immutably recorded on the blockchain. 

Analysts look for crypto trading signals, patterns and anomalies in buying, selling and holding behavior in correlation to market rallies, sell-offs, regulatory events and other network-oriented events. This is to make forecasts of potential future price movements and investor reactions to upcoming events like network upgrades, coin supply halvings and actions taking place in traditional financial markets. 

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