As mentioned in the previous post, it is now time to dive into the details of how I plan to approach the actual trading. I will day trade based on a combination of experience, new knowledge, and trial and error. While this is something that I will continue to develop over time, there are specific tactics I plan to implement from the get-go. Let’s take a closer look. 

Entering trades

Entering trades will be determined mainly based on technical analysis. I cannot deny I have a bias – I am a bitcoin fan, so solely based on this, I am probably more inclined to go long than short. With that said, I will do my best to take objective decisions – again, based on technical analysis. Because if not technical analysis, then what? 

My fundamental outlook is that over the long term, bitcoin will go up. Apart from this, I do not think there is any viable form of fundamental analysis we can apply to short term trading in cryptocurrencies. Keep in mind that there still isn’t any apparent correlation between cryptos and all of the “normal” asset classes. Interest rates, GDP, consumer price index, EPS, P/E Ratio, libor rates, and the likes, are not related to cryptos as they are with traditional assets. Most “experts” still cannot agree on any fair value for bitcoin or any other cryptocurrency. Some claims they are all on their way to zero, while others argue a bitcoin will be worth millions (of USD). 

In addition to this, I have tried to follow how various cryptocurrencies behave with regards to fundamental news which is difficult, to say the least. Most crypto related fundamental news is not scheduled in the same manner as fundamental news for classic assets. I am, however, reasonably confident I have seen enough to convince me, that short term trading in cryptocurrencies based on fundamental news is difficult. I have witnessed cryptos go both up and down on good news and the same for negative news. 

In my opinion, a fundamental view on various coins will mostly help me stay away from direct scams, but it won’t affect me much with regards to short term trading. In day trading, timing is of paramount importance. In my opinion, only technical analysis and price action can aid in the right timing. 

Price action and technical patterns

I plan on using a combination of technical analysis / price action and indicators. Note that the elements listed here are subject to change. For now, I plan to use the following;

  • Candlestick charts
  • Volume profile
  • Trendlines
  • Descending patterns in an uptrend
  • Accending patterns in a downtrend

I will not be using anything else for the moment. I don’t care much for all the other indicators, and I prefer a clean and simple chart. 

Risk : Reward

My plan here is to keep the risk at 2% per trade and keep a risk: reward ratio of 1:2. More specifically, this means that on any given trade, no matter how far the stop loss is from the entry, if triggered, it should “only” cause a loss of 2% of my account balance. While I may let profitable trades continue to run, they should result in no less than a 4% return of my account balance. Note that I may move the stop loss to break even after a short period of time. Because of this, I expect to see a bunch of deals hitting stop loss levels, the majority of trades running break even, and a small chunk of more prominent winners. 

Risk based on the balance

This way, when I take a winning trade, I will be compounding and the opposite when taking a losing trade. The idea here is that if I take multiple losing trades, I will lose less and less per trade, whereas if I get a steak of winners, I increase the btc amount won per trade. This approach may be flawed in some ways, but at this point, it makes more sense for me to do it this way, compared to that of trading a fixed BTC amount per trade. 

One trade at the time

Finally, I will stick to one trade at the time. While I might trade a few different pairs, I will not open more than one trade at any given moment. This is mainly to keep things simple. 

This is it for now. While there are other things I might explore in the near future (such as adding to a profitable position), this is the list of ideas I will follow for now. With that said, I will start to look at some trading opportunities and post them here on the site, along with some comments on the trade. 

Check back soon, to read more about my first trade.