For the last year, when analyzing Bitcoin, to the untrained eye, it may seem like the cryptocurrency market is going sideways. This is far from the case. When you know where and what to look for, the opportunities to make money from the market are less complicated than most people realize. This is an educational piece to help you stop acting like a retail trader, and trade like a whale.
Bulls Vs. Bears
There are 3 states of any market. A bear market, a bull market, and a sideways market.
A bearish trend or a bear market is when the price action (PA) of a currency goes trends down over a select period of time. The characteristics of a bear market are a series of lower highs and lower lows, an example of a bear market is what happened to Bitcoin in 2017/2018
On the contrary, a bull market is when the price trends up and the PA prints higher lows and higher highs.
A sideways market, otherwise known as a ranging market is when there is no clear direction to where the market is going, this is what the price action of bitcoin has shown over the last year. No clear long-term (macro) direction will be dictated until the PA breaks out to either the top or bottom of this box.
Why do they Happen?
The PA of cryptocurrency can best be described as a hype cycle in conjunction with human emotion. When the market goes up in a bullish trend, or down in a bearish trend, the fundamentals around cryptocurrency stay the same. Bitcoin is seen as a superior form of currency no matter the state of the market, however, because it is so new, we have a present-day gold rush on our hands to fight for as much bitcoin as possible. The only reason for the appreciation or depreciation of the price is down to how fearful we are about the market.
For example, if one of the wealthiest or biggest companies in the world were to tweet or publicly say that they have bought a cryptocurrency and have started accepting it as payment, then the market participants will feel comfortable buying it at current prices as in the short term they feel like it is a legitimate risk-free asset to invest in, this can create buying pressure and start a bull trend. However, if the same company were to come out and say that they are no longer accepting payment in bitcoin then the market participants would become fearful about what they’re invested in and then sell, causing a depreciation in price. When the news is timed at the perfect point, the effect can be strong enough to flip the trend.
How to Spot a Bull Market
Typically, when Bitcoin is in a ranging market, this tends to be good for altcoins. There are so many altcoins out there, it’s good to compile a watch list of them on trading view. When looking for a market to buy into, scan through your watchlist, zoom out on the daily, or even weekly time frames.
LUNA for example has been in a strong uptrend since May 2021. A good rule of thumb to remember is; “what has been hot, will continue to be hot.” or, “the trend is your friend”.
The red line on this image is the 200 exponential moving average (200 EMA) on the daily time frame. This shows an average price which has been on the previous 200 days. When the price is above or under the 200 EMA, we can say that we are in a trend, either Bull market or Bear market.
How to Trade in a Bull Market
The best way to trade in a bull market is to buy into weakness (when the market is dropping) and sell into strength (when the market is pumping). If you are unsure if the market is going to keep dipping, it’s best to dollar cost average (DCA) in which you add little bits to your position over time to help lower your overall buy-in level.
When you find an asset that is in a strong uptrend, it’s good to spend some time identifying some key support and resistance levels. Because of the high volatility of the crypto markets, it’s good to use zones instead of relying on specific prices. When looking to enter a position, it’s best to wait for the price to hit the zone and wait to see how it reacts. Before you enter a position it’s good to decide at which point your plan fails and set a stop loss (SL). Upon failure, it’s time to exit your trade and wait for another opportunity. When the price is between zones, I like to call this the “no trade zone”, It’s best to sit on your hands until a clear signal of direction presents itself.
When in a bull market, it’s good practice to have 30% of your funds in stable coins, this is so you can take advantage of any significant pullback in price. These pullbacks which feel scary, are the ones, whales, and institutional investors DCA into.
How to Spot a Bear Market
Not all altcoins will be in a bull market at the same time, to look for a bear market you do the same as you would look for a bull market. Scan through your watch list and find those which are trending down. when the price is below the daily 200MA this shows weakness.
Ethereum for example has been in a medium-term bear trend since the highs of early November, you can spot this by recognizing the series of lower highs and lower lows since then.
When zoomed out on the Ethereum chart, it shows a slowing of upwards momentum. You can also see that at the time of writing, Ethereum is below the daily 200MA for the first time since July 2021. This indicates that caution should be used when entering as it could be the beginning of a bear market.
How to Trade in a Bear Market
When trading in a bear market, you should look to open short positions in strength and close them in weakness. If actively trading these resistance/support swings is not your piece of cake (after all, shorting bitcoin is longing the US dollar) then there are other ways to increase the size of your bags during this time. A lot of projects offer to stake rewards for locking up their coins for liquidity on their platform; this means you can take a back seat while the market is trending down and still benefit. One example of this is that you can earn a 20% a year return on staking the UST stable coin on the terra luna ecosystem. Doing this can also increase your chance of airdrops in the future.
Now you are aware of the different states of the market and how to trade them, remember to:
- zoom out whilst scanning through your watch list
- buy weakness, and sell into strength when trading up trends.
- Identify key zones
- respect your stop loss
One valuable resource which has helped me is Twitter, however don’t trade based on the sentiment of the tweets in the cryptocurrency space as it’s common that they get bullish at resistance. Let the tweets guide you towards altcoins that are hot and with your own technical analysis identify key levels to enter.
“The faster you are to enter a trade, the faster your money will find another owner”.