1. Basic Principles of Investment
🟨 Do not trade without checking the chart: Never trade in the cryptocurrency market without viewing the price chart.
🟨 Avoid chasing highs on positive news: Never buy when positive news is released, especially when the price chart shows a significant increase before the news is published.
🟨 Do not bottom fish during price crashes: Never buy during a crash just because the price seems cheap. Under continuous selling pressure, the price is likely to go lower.
🟨 Stay away from downward trends: Never buy during a downward trend.
🟨 Do not hold onto declining currencies: Never hold cryptocurrencies that are in a downward trend, no matter how low their so-called 'valuation' may seem. When the price goes lower, you will understand the reasons for the decline.
🟨 Maintain trading consistency: Always adhere to the principle of trading consistency. If you buy sometimes and sell sometimes under the same circumstances, then your trading discipline has significant problems.
Investment is a battle of mentality and discipline; few can truly adhere to these seemingly simple principles.
2. Interpretation of Key Technical Indicators
Volume-Price Relationship: Price increases with volume increases and price decreases with volume decreases are positive signals. A price breakthrough with a significant increase in volume is very important, indicating that strong buying will push the price further up, just as a rocket needs ignition to take off; volume-less breakouts often struggle to sustain.
Long-term Price Chart: Quickly check the long-term price chart; if the price reaches a new high and breaks through previous resistance levels, this is a good bullish signal, as there is no pressure from trapped positions above, and the price is expected to continue rising; conversely, if it reaches a new low for the year, especially over several years, it is a clear bearish signal and should be avoided.
Relative Strength Line: If the relative strength line is sloping downwards, even if the price breaks upwards, it is not advisable to buy, as this indicates that the cryptocurrency is underperforming compared to the market average; if the relative strength line is sloping upwards, even if the price drops in the short term, one should not easily short sell. When the relative strength line turns from negative to positive, it is a bullish signal, indicating that this cryptocurrency is starting to outperform the market.
3. Buying Timing and Strategy
Breakthrough Buy Point: The first buying point occurs when the price of the cryptocurrency initially breaks through the bottom formation and enters the rising phase. However, to prevent missing the opportunity due to rapid increases in a strong cryptocurrency, one can buy half of the planned position near the first breakthrough point.
Pullback Buy Point: A safer buying point is when the buying pressure that pushed the first breakout is exhausted, and the price pulls back to near the breakout point. At this time, one needs to pay attention to whether trading volume is shrinking and whether the price is far from the breakout point; if the trading volume significantly increases and the price pullback is not large, it indicates that the price still has upward momentum, and one can buy the other half of the planned holding quantity.
It is important to note that if one waits solely for low-risk buying opportunities, they may miss out on a super bull cryptocurrency. Therefore, investors can adjust based on their investment style; for example, long-term investors can choose to buy a portion of their position near the initial breakthrough point.
4. Sector and Cryptocurrency Selection
Top-Down Screening: First, look at the overall market trend; if the market is poor, even if some cryptocurrencies show breakouts, operations should be cautious. When the market trend is unfavorable, the probability of success will be significantly reduced. Next, select the sectors that perform best technically; different cryptocurrencies within the same sector may perform vastly differently. Finally, choose one or two of the best-performing cryptocurrencies from strong industries to buy.
Pay attention to bottom formations: The larger the bottom, the greater the upward potential; this is analogous to 'the longer the horizontal, the taller the vertical.' Prolonged bottom fluctuations lead to more concentrated chips, reducing the resistance to subsequent upward movements.
5. Resistance and Support Level Analysis
Resistance and Support Conversion: Once the support level is broken, when the price rebounds to that position, it often becomes a resistance level. Because investors who bought here previously may be stuck, when the price rebounds to that level, they will rush to sell to break even, creating selling pressure.
Timeliness of Resistance Levels: The longer the resistance area is from the current time, the lower its effectiveness. As time passes, investors' holding costs and mentality will change, and long-unreached resistance levels will gradually weaken their impact on the cryptocurrency price.
6. Trading Volume Analysis
Trading volume is a key indicator of the strength of buying power. Price increases require strong buying force to push, just like pushing a boulder uphill requires enormous energy, whereas declines are relatively easier, like the boulder's own gravity. Therefore, do not easily trust upward breakouts without significant volume increase; such breakouts often lack sufficient upward momentum and are hard to sustain.
7. Stop-Loss and Risk Control
The Importance of Stop-Loss: In cryptocurrency investment, without protective stop-loss, one should never hold any cryptocurrency. After buying, immediately set a stop-loss sell order that is valid until canceled to ensure the investment is protected. The stop-loss point can be determined based on the price fluctuations and personal risk tolerance, generally suggesting to keep the stop-loss price within a certain percentage lower than the buying price while avoiding round number levels to reduce the risk of being deliberately triggered by the main force.
Dealing with False Breakouts: If the price touches the stop-loss and then quickly rises, if the cryptocurrency still meets the buying conditions, one can treat the previous stop-loss cost as 'insurance' and buy back. Because if one does not buy back, one may miss subsequent upward trends, but this operation requires the investor to have a certain ability to judge the market and risk tolerance.
Stop-Loss Strategy: Investors can choose stop-loss strategies based on their investment styles. Aggressive investors can set their stop-loss points below the trend line; conservative investors can set the stop-loss points for half of their positions slightly below the continuously rising trend line, and the stop-loss points for the other half at the recent low point of the last adjustment.
8. Investment Mindset and Discipline
Rational View of Profits and Losses: Investors should understand that making money through poor methods is merely luck and does not represent strong investment capability; losing money through reliable and disciplined methods does not mean foolishness. The key is to find replicable profit-making methods rather than blindly operating based on luck.
Learn to be responsible and improve: Take responsibility for your investment behavior; if the behavior leads to good results, continue to maintain it; if the results are poor, think about the reasons and improve. During the investment process, avoid arrogance, and do not engage in irrational investment operations just to boast in front of others.
Overcome Greed and Fear: In cryptocurrency investing, one must overcome the psychology of greed and fear. When the price rises, do not sell too early and miss subsequent profits; when the price falls, do not blindly panic sell, but make rational decisions based on the stop-loss strategy and market conditions.
9. Short Selling Strategy (Use with Caution)
Short Selling Principles: Do not easily short sell due to excessive price increases, widespread bearish sentiment, low trading volume, being in a rising phase, or belonging to a strong industry. Additionally, when short-selling, a stop-loss buy order must be set to protect against unlimited losses.
Short Selling Timing: When the price breaks down and the relative strength line falls into negative territory, it is a good time to short sell, but one must note that at this time, trading volume is not the main consideration; price and strength are key.
10. Respect the Cycle; Everything Has a Cycle
Everything has a cycle, and the cryptocurrency market is no exception. First, it is essential to clarify a basic fact: any cryptocurrency must be in one of these four stages. The key is to understand which specific stage it is in.
🟨 Stage One: Bottom Phase
Graphical Performance: The 200-day moving average (a commonly referenced long-term moving average in the cryptocurrency market) stops declining and gradually flattens. The price often oscillates between the bottom support level and the upper resistance level of the trading range, and this process can last for several months or even years.
Causes: After a prolonged decline dominated by selling power, the downward momentum gradually weakens, the forces of buyers and sellers approach balance, and trading volume begins to shrink, even nearing exhaustion, thus forming a bottom formation. However, at this stage, we do not recommend buying, as it may require holding for a long time. Many people often cannot be patient and sell before the price rises significantly, wasting time costs.
🟨 Stage Two: Rising Phase
Graphical Performance: The price breaks through the resistance area and steadily stays above the 200-day moving average, with trading volume significantly increasing. The lows continue to rise, and after breaking through, the 200-day moving average begins to turn upwards. In this phase, all adjustments in price can maintain above the rising 200-day moving average, and each increase can push the price to new highs.
Causes: The buying power holds an absolute advantage, far exceeding the selling power. This is an excellent buying opportunity, and the ideal buying point is usually near the initial breakthrough position, generally looking for suitable buying points near the 10-day moving average. (Regarding the specific buying point details, '(Laughing at Bulls and Bears)' explains them rather briefly, while O'Neil's '(Laughing at the Stock Market)' describes the patterns in more detail, so we won't delve deep into that here; a dedicated article will be posted later for detailed elaboration.)
🟨 Stage Three: Top Phase
Graphical Performance: The momentum of price increases gradually fades, and it begins to enter a sideways state. Typically, trading volume is high, and price fluctuations are unusually intense (showing a high-volume sideways trend). At this time, the price fluctuates around the 200-day moving average.
Causes: The forces of buyers and sellers tend to balance again. This is the stage where one should decisively exit, regardless of how tempting the project's fundamentals may seem or how convincing the positive news is, one should never buy this cryptocurrency at this time, otherwise, one is very likely to be caught at a high position.
🟨 Stage Four: Downward Phase
Graphical Performance: After a period of fluctuation, the price eventually breaks below the lower limit of the support area, then begins a smooth downward trend. Even if the trading volume is not large during the decline, it does not hinder the continued downward trend. In this phase, each decline will refresh new lows, and each rebound's high point will be lower than the previous rebound's high point, which is a typical downward trend.
Precautions: Ensure not to buy any cryptocurrencies in the fourth stage, and do not foolishly hold onto them during this phase, as the consequences will be severe.
11. Never mistakenly believe that all cryptocurrencies will rise during a bull market.
🟨 When we confirm the entire market shows an upward trend by checking market indicators, we should focus on the 1-2 types of cryptocurrency sectors with the highest upward potential or the lowest downward risk in the coming months.
This step is crucial; if the sector is chosen correctly, the success rate of investment can reach 60-70%. It is essential to realize that sector analysis and actual judgment of market trends are equally important, and in many cases, even more critical.
The specific operation steps are as follows:
Judging Market Trend: First, check the main trend of the entire cryptocurrency market to determine whether the current market is in an upward channel or a downward channel, which is the basis for subsequent investment decisions.
Screening Potential Sectors: Identify one or several cryptocurrency sectors that perform well technically. For example, one can observe the price trends, volume changes, and moving average arrangements of cryptocurrencies in the sector to find those that show stable trends and signs of upward movement.
Establish an Initial List: Include cryptocurrencies in this potential sector that have upward potential but are still in the trading range, and record the price levels at which each cryptocurrency may break out. Cryptocurrencies in these trading ranges are often accumulating strength, waiting for the opportunity to break out.
Refine the List: Further narrow down the list by eliminating cryptocurrencies that will encounter significant resistance areas shortly after an increase. Resistance areas may be previous highs, round price levels, or regions with a high concentration of selling pressure, and encountering these resistances will make it more challenging for the cryptocurrencies to continue rising.
Consider Relative Strength: Narrow down the list further by checking the relative strength. Relative strength can be understood as the performance of a cryptocurrency relative to the entire cryptocurrency market or specific indices. For example, if a cryptocurrency rises more than the overall market when the market is up and falls less than the market when the market is down, then its relative strength is strong and deserves attention.
First Position Establishment: For several cryptocurrencies that meet all buying standards, place a stop-loss buy order that is valid until canceled, buying half of the intended holding quantity. This way, one can establish a certain position while controlling risk, not missing potential upward opportunities.
Second Position Addition: If the cryptocurrency shows increased volume during the upward breakout and decreased volume during the pullback, buy the other half of the intended holding quantity when the price falls back to near the first breakout point. However, if the volume changes are not ideal, that is, if there is no significant volume increase during the upward breakout, then sell after the price increases for the first time. If this cryptocurrency not only fails to rise but instead falls back below the breakout point, it must be sold immediately to avoid further losses.
Further tips on buying: The following important technical formations are very useful in cryptocurrency investing.
Bottom Formation: The wider the bottom, the better, because a wider bottom indicates a large amount of turnover during this stage; after investors who were previously stuck sell their chips, the cost for new holders becomes relatively concentrated, reducing the resistance to upward movement, and the later increase tends to be higher. In contrast, the wider the top, the greater the selling pressure during the decline, and the deeper the potential drop.
Double Bottom: This is a common bottom reversal pattern, resembling the letter 'W'. When the price of the cryptocurrency falls twice to a similar level and gains support to bounce back, and the second rebound breaks through the line connecting the intermediate highs, it forms an effective double bottom pattern, which often indicates the arrival of an upward trend.
Head and Shoulders Bottom and Head and Shoulders Top Patterns: The head and shoulders bottom pattern is a relatively reliable bottom reversal signal, consisting of a left shoulder, head, and right shoulder. When the price breaks through the neck line, it may start an upward trend. The head and shoulders top pattern is a signal for top reversal; after this pattern appears, the price of the cryptocurrency often faces significant downward risks.
🟨 At the same time, we must also be clear about when not to buy in the cryptocurrency market and some prohibitions on buying:
When the overall market trend is bearish, absolutely do not buy any cryptocurrencies. In a bear market, most cryptocurrencies are in a downward trend, and the risks of buying are extremely high.
Do not buy cryptocurrencies in weak sectors. Weak sectors usually lack attention from funds and market enthusiasm, leading to insufficient upward momentum and a higher likelihood of decline.
Do not buy cryptocurrencies whose prices are below the 200-day moving average (a commonly used long-term moving average in the cryptocurrency market, similar to the 30-week moving average for stocks). Cryptocurrencies below the long-term moving average are often in a weak state and difficult to reverse the downward trend in the short term.
Do not buy cryptocurrencies that have a downward trend in the 200-day moving average, even if their current price is above the moving average, they may still be suppressed by the moving average and continue to decline.
No matter how strong a cryptocurrency has been in the past, do not buy during its late rising period, as the price is likely already far above the ideal buying point, and the room for further increase is limited, while the risk of decline is increasing.
Do not buy cryptocurrencies that do not show significant volume increase during upward breakouts. If one accidentally buys such a cryptocurrency with a stop-loss buy order, they should quickly sell it. Because the lack of increased volume indicates doubts about the breakout's validity, it may be a false breakout.
Do not buy cryptocurrencies with weak relative strength. Cryptocurrencies with weak relative strength are more likely to decline during market fluctuations, and their upward movement is relatively small, making them less valuable for investment.
Do not buy cryptocurrencies that have strong resistance zones above. Strong resistance zones can hinder the price increase of the cryptocurrency, increasing the uncertainty and risk of the investment.
Do not speculate on the bottom; do not blindly bottom-fish. At least consider buying only after the cryptocurrency breaks through the resistance area, as this can increase the success rate and safety of the investment.
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