INTRODUCTION.The 22nd of May has been dubbed Bitcoin Pizza day due to the infamous incident that happened on this day in 2010. On May 22, 2010, the first Bitcoin transaction was recorded, whereby Laszlo Hanyecz agreed to pay 10,000 Bitcoins for two delivered Papa John's pizzas. On the eighth anniversary of this transaction, the Bitcoins would have been worth over USD 80 million had he kept them.
The new order of cryptocurrencies is upon us and the world has been forced to accept the new reality. In the past the Bitcoins were traded on Bitcoin exchanges on a long only basis, with the exchange taking place between a willing buyer and seller. But as more and more participants enter the market and its depth increase, we have witnessed the introduction of Bitcoin CFDs meaning that it is possible to short sell the asset. This article gives the author’s personal strategy when it comes to trading the Bitcoin (BTC/USD).
TRADING CONDITIONS.
Bitcoin has gone through an explosive price increase over the past couple of years and it is important to note that this cannot go on forever. As time passes, the type of trading strategy that will be most useful to Bitcoin traders will change as the market dynamics also change. As the Bitcoin comes of age, some of these strategies will probably become more effective while others become obsolete. Therefore the strategy about to be discussed below, is useful to the current trading conditions but will need to be further scrutinised and revised in the future before being used.
TIME FRAME.
Due to the high volatility in the trading price of BTC/USD a longer time frame is appropriate as it eliminates most of the trading noise. Activity is still low when it comes to trading Bitcoin as evidenced by the high average spreads. For these reasons, the 4 hour chart will be used in making the trading decisions.However, in future if trading becomes more active and the market more liquid, then shorter time frames can be used.
INDICATORS.
* The following indicators will be used:
* Relative Strength Index - RSI 14.
* Simple Moving Average - SMA 18 and SMA 60.
* Highest Value Over Specified Period – Max 60
* Lowest Value Over Specified Period - Min 60
TRADING.
Due to the long time frames being employed it should be noted that the strategy will have a low trading frequency.
CONDITIONS FOR LONG TRADES.The first step will be to check of the price is higher than it was in the past 60 candles. A long time period can be employed to check the trend in the market by this information will not be used to make the actual trading decision but gives a feel of the trends in the market.
At candlestick close check if the following conditions are met:
1. RSI 14 is greater than or equal to 50 and
2. SMA 18 is above SMA 60
Chart 1: BTC/USD 4 hour chart showing the conditions necessary to go long.
Chart 1 above shows three shaded regions where the conditions to enter into a long position where met. As also can be seen in the chart the price was constantly increasing setting new highs as compared to the previous 60 candles indicating an upward momentum in the price.
CONDITIONS FOR SHORT TRADES.As was the case before the first step is to check if the price is lower than it was in the past 60 candles. Again this step will not influence trading decisions but helps understand the direction the market is trending.
At candlestick close check if all of these conditions are met:
1. RSI 14 is less than or equal to 50 and
2. SMA 18 is below SMA 60
Chart 2. BTC/USD 4 hour chart showing the conditions necessary to go short
The shaded regions in the chart show the conditions that are necessary for the trader to go short being met. Again the price decline was setting new lows compared to the past 60 candles.
THE EXIT STRATEGY.The exit strategy for trading BTC/USD is not as straight forward as may be the case with Forex. A warning on the Dukascopy website regarding trading cryptocurrencies reads,
" Due to limited ability to hedge its positions with external counterparties Dukascopy does not permanently guarantee trade execution during trading hours. In such cases where client is willing to close exposure he is required to call support"
Due to this reason it is prudent to close the position in the more active hours of the market especially during the European and US sessions. Therefore the exit strategy will vary from individual to individual depending on the risk appetite of the trader but it is critical to err on the side of caution when trading BTC/USD to avoid wide swings in prices.
CONCLUSION.
Sometimes simple solutions work best to solve complex problems. The strategy discussed in this article uses very simple indicators and can prove to be very useful in trading complex cryptocurrencies. However as trading is dynamic it is important to constantly review the strategy for good results.
