5 Cryptocurrency Trading Tips (By a Trader)

The difference between an unprofitable or slightly profitable trader, and a wildly profitable cryptocurrency trader, are often just a few tiny tweaks to the trader’s mentality and strategy.

This guide shares 5 little talked about cryptocurrency trading tips to lift you to the next level as a trader. Logically, this article is not trading or investment advice, and you should treat it as educational material only.

Don’t set your stop loss at obvious points

At the time of writing, over $4 Billion is traded on Bitcoin margin exchanges every day. 

This means that Bitcoin futures and options are now significantly more liquid than the underlying spot market that is being used by derivatives products for their index price.

The sheer size of Bitcoin derivatives exchanges, coupled with the fact that most traders on these platforms use very high leverage, makes it relatively easy for large traders and hedge funds to briefly push the price in a certain direction and cause cascading liquidations.

This makes correct stop-loss placement a crucial component of every Bitcoin trading strategy. Most retail traders set their stop-losses at very obvious swing high or swing low points on the chart. 

Sophisticated cryptocurrency traders know this, and will often attempt to send the price through these key points to trigger stop-losses. 

If they are successful, they often trigger a squeeze that they can profit on by either taking a scalp trade in that direction or by using the liquidity to fill a position in the opposing direction.

To avoid getting stop hunted, do not set your stop-loss at obvious swing points on the chart. Instead, set the stop slightly above the swing point (if shorting) or below (if longing). Alternatively, you can also use a trailing ATR for your stop-loss.

Look for price compression 

Markets move from cycles of compression to cycles of expansion. 

When the market compresses, big traders are often filling their positions and a lot of “energy” concentrates in the market in a very tight range. Once the market leaves that range, all this energy is released akin to a spring, which results in market expansion and, more times than not, a trend.

Hence, a powerful trading tip is to look for these areas of price compression, and then trade a breakout in either direction in an effort to ride the subsequent trend.

Now you may wonder: how can you identify areas of price compression?

There are a few approaches. The simplest one is by looking for “inside candles” on the daily chart, a pattern where the high and low of the previous candle completely engulfs the current candle.

Traders can also make use of more traditional volatility indicators like Bollinger Bands or Donchian Channels, where a tight range between the high and low readings of the indicator indicates price compression.

Keep an eye on BitMEX funding

On derivatives exchanges like Bitmex or Deribit, funding is a fee that is exchanged between longs and shorts. This fee is not paid to the exchange itself.

The funding fee is based on how far the price on the exchange has deviated from its underlying “Index Price”, which is a price calculated through the market price of a composite of spot exchanges.

If the price is below the index price, funding generally turns negative, which means that shorts pay longs. On the other hand, if the price is above the index price, funding usually turns positive, meaning that longs are paying shorts.

Hence, funding can be used to gauge which side of the market has taken more aggressive positions.

For example, if funding is negative, we can deduce that shorts have piled in with significant leverage. This would make shorting at current levels less interesting, while negative funding persists, due to the possibility of a short squeeze.

That said, it’s important to note that BitMEX funding is NOT a price predictor, but it is a very effective statistic for traders to form a directional bias.

Don’t attempt to predict trend reversals

“Markets can stay irrational, for longer than you can stay solvent”, is famous Wall Street wisdom. Individuals that have traded cryptocurrencies for some time, know that trends usually last a lot longer than everyone expects.

Hence, before opening any cryptocurrency trades, keep in mind that what has been going higher will usually keep going higher, and what has been going lower, will usually keep falling.

In fact, in the stockmarket, exclusively buying stocks that are at an all-time high, outperforms a portfolio of just buy and hold.

So, the next time you are trying to catch a falling knife and predict the trend change of a coin, just know that it’s more profitable to follow the trend. Buy high and sell higher, or sell low and buy back lower.

Quantify your edge

One of the most underrated cryptocurrency tips is quantifying your trading edge. Only a small fraction of traders do this before they start trading, and it will give you a significant advantage over them.

Whether you are day trading, do cryptocurrency swing trading, or just invest, it’s key for you to have a strategy with a proven edge.

Whenever you open a cryptocurrency trade, you are competing against thousands of other traders that have been trading for years, or that are running bots with an automated strategy. Simple trading tips are not enough to win against these people, you need statistics to back your strategy.

If you are planning to quantify your trading edge, you have two main options.

The simple solution is to open a spreadsheet and manually go through past cryptocurrency charts while writing down all the trades you would have taken when you would have closed the trades and the results.

This approach, however, is not only very time consuming but also very prone to bias.

The better option is to learn a programming language like Pinescript or Python and run an automated backtest. 

Doing so will give you highly precise statistics about your strategy, like its equity curve, maximum drawdown, Sharpe ratio, and more.

Further, after you have turned your crypto trading system into code, nothing stops you now from fully automating it as a trading bot. This not only eliminates bias from your trading, but it also enables you to react a lot faster to crypto trading opportunities.

That said, keep in mind that if your technical analysis is based on indicators like manually drawn trendlines or other systems that are highly subjective, it can be troublesome to try to automate this.