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Crypto Trading 101: The Fibonacci Retracements

New to crypto trading? Read CoinDesk’s full set of guides.


Fibonacci retracement. Sounds sophisticated? But what does it do? And does it work?

Luckily for traders, Fibonacci retracements are far more than just a nifty word. In fact, it’s the name of a tool used to predict potential support and resistance levels for price action.

First, let’s define what this so-called “Fibonacci” is so you have a better idea as to why it is a concept relevant to trading cryptocurrencies.

Leonardo of Pisa (A.K.A. Fibonacci) was an 11th-century mathematician responsible for introducing a unique sequence of numbers to the West, now known as the “Fibonacci Sequence.”

The Sequence

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584… (pattern repeats to infinity)

Each number in the sequence is derived from the sum of the preceding two numbers. Clever, right?

Not only that, but each number is roughly 1.618 times greater than the number before it. This creates a value known as the “golden ratio,” or “phi” and has a fascinating relationship with nearly everything in nature.

Take flowers, for example, the lily is arranged with three petals, buttercups with five, the chicory with 21, daisies with 34 and so on. Interestingly, the numbers abide by the Fibonacci sequence and each petal is even placed at 0.618 per turn (out of a 360-degree circle), allowing for optimal exposure to sunlight and other factors crucial to survival.

Examples of the Fibonacci sequence in nature are seemingly endless and this expands to trading when it comes to analyzing price action.

Specifically, a trader can derive levels in a trend that price is likely to respect by dividing a peak to trough or trough to peak distance by the golden ratio and other ratios in the sequence. Other important ratios include 0.382 which is any number in the sequence divided by the number two places to its right and 0.236, found by dividing one of the numbers by the one three places to its right.

As you’ll come to notice, price reacts to these levels on a regular basis, which can provide a trader with optimal entry and exit points, just like it provides a flower with the optimal structure to absorb sunlight.

Finding Support Levels

Before using the Fibonacci tool to identify potential support or resistance levels, a trader must first be able to identify a “swing high” and “swing low.”

A swing high is simply a candlestick at the peak of a trend in any time frame that has a lower high directly to its right and left. Conversely, a swing low is the low candlestick stick of a trend with a higher low on each side.

Once these points are identified, select the Fibonacci retracement tool in your trading software to connect a swing low to a swing high. Potential support levels will be generated, known as retracements.

Each retracement is derived from the vertical “peak to trough” distance divided by ratios in the Fibonacci sequence.


In the above chart, monero’s (XMR/BTC) swing high of 0.03815/BTC was connected to the swing low of 0.0111/BTC on the daily time frame using the Fibonacci retracement tool.

As you can see, the retracements of 0.236, 0.382, 0.5, and 0.618 were all respected as support, at least temporarily, as price rebounded from its September plunge.

If a trader was to take advantage of this tool from November on, he or she would have had an idea as to where price might land before making its next move, revealing ideal trade entry or exit points.

Finding Resistance Levels

The process to find potential resistance levels is largely the same as before, except this time you will be connecting the swing low to swing high.

The retracements will again appear by dividing the distance from trough to peak using ratios in the Fibonacci sequence.

In the above chart, the anticipated resistance levels for ethereum classic (ETC/BTC) were calculated using the Fibonacci tool by connecting the swing low of 0.001304/BTC to the swing high of 0.001304.

Once again, price reacted to the levels as advertised.

The 0.618, 0.5, and 0.382 retracements provided resistance on several occasions which would have provided a trader with optimal targets to take profits on his or her position.

Conclusion

It’s important to remember that while the Fibonacci tool can be useful in identity supports and resistances, the results are not guaranteed. In order to increase the probability of certain retracements acting as advertised, it is best to use the tool along with other indicators like moving averages or the relative strength index (RSI).

For example, if a moving average is in the same location as a Fibonacci retracement, price is more likely to react to the level given there lie two support or resistance obstacles, which when combined are more powerful than one.

If you went through the sequence calculating each ratio, you may have noticed 0.5 is not one of them yet, it appears as a level in the Fibonacci Retracement tool. Its true, 0.5 is not a ratio in Fibonacci sequence but is included in the tool because it marks a 50 percent trend retracement, which price has a funny way of reacting to as support or resistance.

Disclosure: The author holds BTC, AST, REQ, OMG, FUEL, 1st and AMP at the time of writing.

Golden ratio via Shutterstock; Charts via TradingView

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Crypto Trading 101 – Calculating Moving Averages

Maybe you’re the type of trader that keeps metrics to make important life decisions?

If you fit the description, you may want to add moving averages to your aresenal to discover just how much they can improve your trading strategies.

Not sure where to begin? Moving averages are a useful tool for tracking the direction and strength of a trend by capturing specific price data points over a specified period of time (as defined by the timeframe you are looking at) to constantly update the average price as it moves along the chart.

Indeed, the position of the moving averages depends upon the nature of the asset you are looking at.

Generally, when prices are below a particular moving average, it signals to traders that the price has lost momentum and the trend has turned bearish (meaning price and sentiment are trending down).

Conversely, if prices are above a moving average it can generally be considered bullish, as long as prices remain on top and have the backing from other indicators such as the Stochastic Oscillator or Relative Strength Index to add to your layers of confirmation.

Simplifying your averages

A good introduction to moving averages and your journey to understanding the basic concepts begins with the simple moving average, which is calculated by taking the mean of a given set of values and plotting it on the chart.

For example, let’s say you were looking at a simple 5-day moving average. You take the closing price of each day, add those values then divide by the number of days, in this case, 5.

It would look something like this:

5, 2, 3, 5 + 4 + 9 + 7 + 5 / 5 = 6   ← Ignoring previous datasets from past days and taking only the recent 5 sets, hence the term moving average.

The average result of 6, takes into account the previous 5 data points and provides a general idea of how an asset is priced relative to the last 5 days.

Take bitcoin’s recent move for example. The blue line mapped on the chart is the simple moving average representing 5 days or 5 sets of data points.

We can assume, at least in the short-term, that prices turned bullish as the blue line passed underneath the close on August 16 and remained so when prices broke another $100 higher.

We can also spot when prices began to turn bearish back in July as the line moved above the candlesticks’ closing periods, signaling to traders a bull-to-bear trend change and a loss of momentum for any further upside action.

As prices dipped below the line, the bulls were unable to ‘break’ above it and a short-term downtrend ensued lasting 16 days until prices shifted back above, signaling once more, a change in the short-term trend.

The most common periods used amongst traders are the 50, 100 and 200 averages as these have proven and predictable results due to their ability to collect a larger portion of data points.

However, there is no perfect solution for your simple moving average setup, analysts usually devise their own strategies, often employing multiple moving averages in order to provide greater understanding and depth to their analysis.

In time you will get to know each type of moving average and their various uses but for now, you should familiarise yourself with the simple moving average, experimenting on different timeframes to see how each chart reacts.

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Crypto Trading 101: An Introduction to Support and Resistance

New to crypto trading? Read CoinDesk’s full set of guides.


Are you a crypto trader struggling to find a footing in a volatile crypto market?

If yes, then the first thing you need to master is the art of identifying support and resistance levels.

Imagine bouncing a ball inside your house. There are two barriers that will limit the flight and fall of the ball – your floor and ceiling. In trading, there are similar barriers that limit the movement of price action known as support and resistance.

Such barriers in trading can have long-lasting effects on an asset, since price action rarely forgets its past. If traders regard a certain price level as a great entry or exit point, it will likely continue to act as a barrier for prices until all of their respective needs are satisfied.

Support

For example, buyers will generally continue to buy at a specific price, given the asset is perceived as undervalued, until all of their demand is fully absorbed by the market. So, if buyers engage at X price and the price moves upward only to later return, the same buyers will look to defend their positions at X and potentially add more to their positions.

New buyers will see that price fell no further than X before, so are likely to consider it a safe entry. This concentration of buy pressure will prevent price from falling any further, creating a temporary floor known as support.

Resistance

On the other hand, if an asset is perceived as overvalued at a certain price level, sellers will be sure to take advantage. Here, those large buyers from before will look to exit their position and take profit. It’s also possible traders will enter “short” positions at this level, given the perceived over-valuation, increasing the market’s sell pressure.

Just like when there was high buy pressure, this concentration of sell pressure will force the price level to act as a barrier, except this time it will act as a ceiling, rather than a floor, known as resistance.

Horizontal Support & Resistance

The most important and easiest to identify support and resistance levels take the shape of horizontal lines as a result a trend being rejected repeatedly at a very similar price point.

Horizontal support or resistance lines can be created by simply “connecting the dots” between trend peaks or valleys as seen in the chart below.

In the upper frame of above chart, sellers of XMR/BTC continually push down price from the 0.00451/BTC area, establishing it as strong resistance. Simply put, traders continued to take advantage of this area of concentrated sell pressure.

In lower the frame, buyers continually held up the price of XLM/USD at $0.17 fortifying it as strong support.

Once again, traders repeatedly took advantage of the level given the chart has told them time and time again price is more likely to bounce than fall through.

Porlarity

So, what happens when these levels are eventually surpassed?

As mentioned earlier, these barriers do eventually break once either the buying or selling efforts have been completely absorbed by the market. When this occurs, a major shift in sentiment can take place – a concept known as polarity.

When the selling behind an established resistance level is fully absorbed, it is no longer perceived as an optimal point to take profit, rather it is viewed as a good entry point for buyers due to the disappearance of sell pressure, as a result turning the resistance level into support.

Conversely, when the buying pressure behind a support level is fully absorbed, it will turn to a resistance level given traders are no longer interested in buying at this price.

It’s important to note that when price breaks through major support it is regarded as bearish development, that is, an asset usually drops further until sellers reach a point of exhaustion. The subsequent rebound due to profit taking or bargain hunting ends up creating a new support level.

Conversely, surpassing resistance is bullish in nature and price tends to follow the breakout until its next resistance level is identified.

The above chart depicts the effect polarity had on the price of XMR/USD once its resistance level of 0.00451/BTC was broken. You can see that what was once established as strong resistance, given it rejected price action on several occasions, became weaker the more it was tested until it could no longer hold down prices.

Price rose emphatically once the resistance was breached due to the large shift in market sentiment that was taking place. Even after prices action cooled off, it fell to the prior resistance left, but this time it held as support – the essence of polarity.

Conclusion

Price trends are expected to take a breather when coming in contact support or resistance lines due to the concentration of buying or selling pressure that awaits. While the levels can act as a barrier to price action for a lengthy period, they don’t last forever as the market will eventually absorb their efforts.

Once this occurs, polarity takes effect and converts the support to resistance and vice-versa.

Long story short, support and resistance levels help identify areas of strong supply and demand. So, identifying major supports and resistances is perceived by many to be the most important aspect of trading.

Disclosure: The author holds BTC, AST, REQ, OMG, FUEL, 1st and AMP at the time of writing.

Support and resistance image via Shutterstock; Charts via TradingView

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Crypto Trading 101: Simple Charting Patterns Explained

In the world of crypto trading, recognizing patterns can yield more than insights.

In fact, this skill is what traders use to determine the strength of a current trend during key market movements and to assess opportunities for entries and exits. In short, patterns can be useful in determining which direction price is likely to go.

Further, they can help distinguish between what is real and what is false when a break occurs, by using certain formations to dismiss particular price movements. However, you should dedicate a decent amount of time in getting to know particular patterns that form during different time frames around the particular asset you are interested in.

The better you become at spotting these patterns, the more accurate your trades develop, with the added ability to dismiss false breakouts as they appear.

Below are three examples to help you along your journey to mastering the charts:

1. Head and Shoulders

The infamous head-and-shoulders pattern is a bearish reversal pattern that signals to traders that there’s been a particular change in the current trend.

Identified by its three peaks (with the highest peak as the “head” and the other two peaks representing the “shoulders”) the pattern also features a “neckline” or “trendline” that is drawn between the two shoulders (at the top of their respective peaks) showing the key support level you should look out for in case of breakdown.

If prices pass below the neckline and continues to fall, it is likely you are staring at a head-and-shoulders pattern completing its formation and bucking any current bullish trend.

Generally, the price is likely to break down further, once the pattern has been completed.

The head-and-shoulders pattern usually provides the strongest confirmation on the daily or intraday 4-hour charts as smaller time frames offer up less conviction.

2. Cup and Handle

The cup-and-handle pattern is a bullish continuation sign identified by a “bowl” or “half round” cup that forms the basis of the pattern with relatively equal highs on either side of the edges.

The handle should resemble a bull flag, in which the price appears to be heading in the opposite direction of the current trend. This is usually followed by continuation and a breakout from the bottom of the handle.

While cup-and-handle pattern formations are rare, they are best identified on the daily chart as this avoids possible confusion with intraday cup-and-handles that offer less conviction than their longer-term cousins.

3. Double Top

The double-top pattern is one of the most recognizable and common charting patterns traders use to determine a change in a current trend.

The pattern forms when the price attempts to test a particular resistance level and gets rejected, then goes on to trade sideways for a bit before attempting yet another rally to the same resistance level whereby it is rejected a second time, sending prices into a deeper recession.

The pattern usually indicates a reversal in the current trend over a much longer period where traders can expect prices to continue to fall.

Double tops function over most time frames, however, they are best viewed and confirmed on the daily or weekly chart as well as the higher intraday charts such as the four or eight hour.

Conclusion

Remember, patterns are best used in conjunction with other indicators to add layers of confirmation to your analysis.

They are a formidable tool to add to your trader’s kit so use them wisely and knuckle down for a hard study. Indeed, charting patterns are generally best used in conjunction with other technical tools such as the Stochastic Oscillator to help judge the momentum of a trend and candlestick analysis to determine an assets current price action.

Wallpaper image via Shutterstock; Charts via TradingView

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Crypto Trading 101: How to Read an Exchange Order Book

It takes two to tango in the world of crypto trading, where a dynamic relationship between buyers and sellers is always on display in something called an order book.

A tool that visualizes a real-time list of outstanding orders for a particular asset, order books represent the interests of buyers and sellers, offering a window into supply and demand.

But while all order books serve the same purpose, their appearance can differ slightly among exchanges. That said, they are all built with the same features and functions.

Examples from Coinbase Pro, Binance, Bitfinex and Kraken are shown below:

To become comfortable reading order books, it is essential to understand four main concepts: bid, ask, amount and price. This information is displayed on two sides of the order book known as the buy-side and sell-side.

For the purposes of this explanation, we will be using the BTC/USD order book from one of the world’s largest cryptocurrency exchanges, Bitfinex.

Price and Amount

Although the two sides display opposing information, the concepts of amount (also referred to as size) and price are relevant to both. Simply put, the amount and price per order display the total units of the cryptocurrency looking to be traded and at what price each unit is valued.

In the example below there is an open buy order in the amount of 20.24 at a price of $8218.50.

This means the entity who opened this order would like to purchase 20.24 units of bitcoin at a price of $8,218.50 per unit.

In the Bitfinex order book, you will also see the terms “count” and “total.”

The count refers to how many orders are combined at this price level to create the amount, whereas the total is simply a running total of the combined amounts.

The Buy Side

The buy side represents all open buy orders above the last traded price.

This offer from the buyer is known as the “bid.” It effectively voices the trader’s interest, stating something like, “I am bidding on X units you own at a specific price in the hopes of purchasing them.”

Once the bid is matched with an appropriate sell order, the trade can be facilitated.

When there is an abundance of buy orders (demand) at a specific price level, something known as a buy wall is formed.

Buy walls have an effect on the price of an asset because if the large order cannot be filled, neither can buy orders at a lower bid. The price will not be able to sink any further since the orders below the wall cannot be executed until the large order is fulfilled – in turn helping the wall act as a short-term support level.

In the example above, we can see a large order of 500.2 BTC units waiting to be filled with a bid of $6,263.

Since the order is rather large (high demand) compared to what is being offered (low supply), the orders at a lower bid cannot be filled until this order is satisfied – creating a buy wall.

In this case, the buy wall is helping the $6,263 price level of bitcoin act as short-term support.

The Sell Side

Conversely, the sell side contains all open sell orders below the last traded price.

This price is known as the “ask.” It states, “I am asking someone to buy X units I own at a certain price.”

The opposite of a buy wall is formed when there is an abundance of sell orders (supply) at a specific price level, known as a sell wall. If there is a very large sell order unlikely to be filled due to lack of demand at the specified price level, then sell orders at a higher price cannot be executed – therefore making the price level of the wall a short-term resistance.

Conclusion

All in all, the order book gives a trader an opportunity to make more informed decisions based on the buy and sell interest of a particular cryptocurrency.

Essentially, it provides a “behind the scenes” view into live-action supply and demand which may reveal order imbalances, market manipulation and support/resistance zones – all of which can be used to a savvy trader’s advantage.

Disclosure: The author holds BTC, AST, REQ, OMG, FUEL, 1st, and AMP at the time of writing.

Text on page image via Shutterstock; Charts by Trading View

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.