I'm learning to read the charts
When actively trading it is important to understand there are different traders in the market trying to influence price.
My strategy is one of long-term belief in the technology, therefore, a long-term hold of any coin, until either one of two things happens:
- I reach a price point I am targeting which I do not believe can rise much further in the long term, I will then sell part or all of a coin.
- A coin makes an unexpected parabolic move, where the coin is clearly pumping without the backdrop of any real news. Here I will sell all or part of my holding but look to reenter once the price drops.
The strategy of holding is a long-term play, ignoring price fluctuations and avoiding emotional reactions. You will though notice that the price will move around, quite spectacularly at times, this is down to various factors at play. For this article though I am going to focus on traders who are actively trying to move the price.
To keep this as simple as possible, you have two types of trader, the bull and the bear, the bull wants the price to go up, and the bear wants the price to go down.
The bull owns a coin and benefits from a price rise, known as being 'long'. Bulls will, therefore, hold or continue to buy a coin, increasing demand, setting price signals, which influence the market to drive the price up. The bear will be 'shorting' the coin, whereby they benefit from a price drop and will, therefore, be trying to drive the price down. Essentially it is a battle between the two, in the middle of a complex market with many other signals and things at play.
When shorting, you essentially borrow the coin and sell it into the market. To close out the short, you must then buy the corresponding volume of the coin. Your strategy is to borrow and sell into the market at a high price and then buy back low, your profit being the difference.
Personally, I do not short though I understand it is a useful instrument as it provides better market information. Shorting is a specialist strategy and can be dangerous. With Crypto it is even more dangerous, there is considerably more room for a coin to move up than down in a new and growing market.
What I really want to do here is help identify an additional reason why a price can go up and down in the short term. I am always of the firm belief that the biggest coins such as Bitcoin, Dash, Ethereum are accurately priced but in the short-term, their price movements can feel irrational. These movements are where the traders are making money on hourly, daily, weekly price changes.
It is, therefore, important to understand support and resistance lines, where prices are tested, usually outside of significant news. Any particular good news will always drive a price up, for example, the recent implementation of Segwit for Lightcoin, conversely, particularly bad news will always drive a price down. When there is little news at play, then the traders are likely testing support and resistance lines with some traders acting as both bear and bull, are buying coins in the dips and shorting at the peaks.
The following article from Investopedia is worth a read about this:
Even if you do not intend to make many trades, understanding support and resistance lines can help you understand why prices move so dramatically. It has helped me stay calm and unemotional when prices are moving.
This is particularly relevant with Bitcoin right now, where it will likely retest resistance at around $1,856, which if it can break will likely lead to +$2k this month, equally will probably test support at around $1,650, which if it breaks could see a drop back down to near $1,300. I think it will more than likely break through the resistance, but we will see. See the chart.
It is between the support and resistance lines than many traders, and automated bots make healthy margins.
What does this mean? Personally, Bitcoin is still just a hold for me, I am not increasing my position or selling.
Any questions, then please give me a shout.