Module #7 - Introduction to Trading
If you have managed to get this far, you will hopefully be feeling pretty comfortable with your Bitcoin investments and will be getting a feel for the market. If you are thinking about becoming a trader then you might want to start looking at is Technical Analysis (TA).
Now let me say two things, firstly, gaining an understanding of technical analysis does not mean you can or should become an active day trader. Understanding TA and how to use it to trade is a journey, it is hard, but this doesn't mean you shouldn't be aware of it or learn it. Secondly, there are many advanced TA courses out there; this IS NOT an advanced TA course. I am going to show you the absolute basics of TA to get you started.
Note 1: I have retired from trading, I personally think it is a full-time job and is highly risky. While it isn’t for me, I have no issue with others trading, you just need to be prepared.
Note 2: Technical Analysis is no guarantee of what will happen with price, it merely paints scenarios of what may happen.
To start using Technical Analysis, you will need a tool which shows the charts for the coins you are either invested in or interested in investing in. My recommendation is to use Trading View, and I will show you how.
What is Technical Analysis (TA)
Technical Analysis, also known as TA, is the study of pricing charts to look at potential scenarios for the price of Bitcoin. To understand TA, first, we are going to look at a chart.
The chart to the right is the pricing chart for Bitcoin against the US$ from the Coinbase exchange. I'll explain candles later, those green and red columns.
Experienced traders use these charts and something called indicators to attempt to predict price movements. Trading with TA is complicated, and it takes time to become proficient at it. This course is just an introduction, and for now, I am only going to teach you the absolute basics and how you can use one indicator to help you with entering and exiting trades. Later I will work on more advanced lessons, but for now, we are going to keep this simple.
How to Use Trading View
This chart is from a website called Trading View, there is another popular one called Coinigy, you should try both, but my preference is Trading View. For now, I am going to explain the layout of the page and the most important options and buttons you should be aware of.
Again, please note I am not going to show you everything, in time you can learn and get to grips with the options, for now, we are going to keep this simple.
Top Menu Bar
We'll start with the menu bar at the top, which you can see below:
From left to right:
BTCUSD: this is the current chart you are looking at, you find new ones by typing in the box the trading pair you are looking for, for example, BTCUSD or XMRBTC (which is Monero, an altcoin). You will notice that when you type in a trading pair, you might have multiple options, for instance with BTCUSD, you will have lots of choices, there will be one for each exchange Trading View has access to, you should choose the exchange for which you are buying and selling on. While prices are similar for most exchanges, they are independent of each other, for the chart above I selected Coinbase.
D: this is the time frame the candles are for, those green and red columns. As it is D, this represents Day, and thus each candle is the price action for that day. You can click on the D and change it to any of the following:
Minutes: 1, 3, 5, 15, 30 and 45
Hours: 1, 2, 3 and 4
Longer: day, week and month
Candle type: don't worry about this for now
Compare: again don't worry about this for now
Indicators: this is where you can add different price indicators to the chart, we will come to this later
Templates: ignore for now
Alert: this is where you can set yourself up alerts when specific things happen, we won't use this just yet
Ideas: ignore for now
Replay: ignore for now
Back arrow and forward arrow: this is for undoing and redoing changes you make to the chart
Layout (white square): ignore for now
Name of saved chart: if you have not saved the chart it will say 'Save', mine says "BTC - Daily..." because this is a chart I have saved using a naming convention I like
Down arrow: next to the name of the chart which allows you to switch to other charts you have saved
Settings cog: we will come back to this later
Full-screen mode: letting you to change your chart to full screen
Left Side Menu
The menu down the left-hand side of Trading View, which you can see on the left here is all the tools you have for adding custom markers to charts; we'll explore these in more detail later but for now you can click around on them and add things to the chart.
The items are as follows, though notice that by clicking on one you are presented with additional options:
W: is where I click to enter my profile settings an options
Mouse indicator: change the mouse indicator style
Lines: option for different trend lines
Pitchfork: options for different pitchfork and Fibonacci lines
Shapes: options for adding different shapes to the chart
Text: options for adding notes and text to a chart
Patterns: options for charting different patterns
Ranges: various range options for the chart
Icons: a selection of icons you can add
Magnet: using this snaps your indicators to key points
Stay in drawing mode
Locks all drawing tools
Hides all drawing tools
Show the object tree
Delete all drawing tools
It can be quite overwhelming but don't worry, for now, over time you will start to get comfortable navigating around the interface and which tools and indicators you like to use.
There are a few other tools and buttons which are useful, but I will show you them when we need them.
Before we look at some indicators, I want to explain the basics of candles for you. Firstly let's deal with the colours first. Remember when we said this is a daily chart, therefore each candle represents a day of price action, thus:
Green candle: the price finishes at the end of the day higher than it started
Red candle: the prices finishes at the end of the day lower than it started
Now you have probably noticed that the candle is made up of a thick bit which is the body and a thin bit which is the wick. The wick above the body is known as the upper shadow, and the one below the body is known as the lower shadow. What these all mean are:
Top of the upper shadow: the highest price that was reached during the day
Bottom of the lower shadow: the lowest price that was reached during the day
The body is dependent upon whether it is a green or a red candle:
Bottom of the body: is the opening price for the day
Top of the body: is the closing price for the day
Bottom of the body: is the closing price for the day
Top of the body: is the opening price for the day
There are ways of reading candles and patterns of candles to indicate where price may be heading; we will though cover that in an advanced lesson another day. For now, it is good to understand what is happening with these candles.
Remember though; the candles are for the period selected, if you then change a day chart to an hour chart, you will see 24 red and green hourly candles that makeup that one daily candle, click around and see for yourself.
One Basic Indicator You Can Use Today - Trend Lines
TA is for advanced and professional traders, so I don't want to overload you with too much for now. All I want you to do is learn a few fundamental tools which may help you with your entries and exits. For this we are going to learn the most basic tool, the trend line.
In the future, I will introduce more lessons, but for now let's just stick with this.
Note: there is a range of different views on TA, from people who believe in it before anything else to those who think it is nonsense and everything in between. Also with TA, there are preferences around indicators, some like to use lots of indicators and others who like to keep it to the basics. Preference can also depend on what type of trader you are; day traders tend to use TA more.
Personally, I use little TA and keep it basic, firstly because I am not a day trader, so I am looking for long-term positions and therefore good entry and exits, secondly, because most indicators are just an indicator of price.
So let's start with trend lines, and there are two types of trend line to think about:
With trend lines we are looking for, guess what? Trends, specifically pricing trends, such as upwards momentum, downwards momentum or even sideways. What we are going to focus on here is support and resistance:
Support: being an area where the price struggles to drop below
Resistance: be an area where the price struggles to break through
In the market, there are all types of traders, those who are making multiple trades per day to those who make a few a month. Specifically, we want to focus on three types of traders, the bulls, the bears and the whales. I'll explain these in a second, but something which took me a while to get my head around is that the market isn't just some free-flowing supply and demand model based on utility. We are in a market where people make money when market prices move in the direction they want, as such, there are investors with deep pockets who can, or at least are trying to push market prices in specific directions, these are known as whales.
Bears and bulls are slightly different though a whale can be a bear or a bull, confusing right? Let me explain:
The bulls: either believe or want the price to go up as they are invested in a long position
The bears: either believe or want the price to go down as they are invested in a short position
A whale: is an investor with significant financial resources to move the prices, or have a marginal impact on the movement of a price
Sometimes the whales are battling each other, fighting to move the prices. So, unless you are a whale, your investments are based on where you believe the market is going, this is your job as a trader, to be investing ahead of market movements.
Historically, I have only invested long, buying into solid projects which I was happy to hold for any length of time. What I know now is that, while this can work, there is more money to be made by following or pre-empting the trends.
One great tool for monitoring and investing in trend are the support and resistance lines I mentioned previously,
I have a preference for horizontal trend lines as they highlight specific prices which have acted as support and resistance. To get started please do the following:
Head over to Trading View
Open up the trading pair for BTCUSD for Coinbase
Make sure you are on the daily chart
Please take a look at the chart below, I have drawn a simple set of support and resistance lines:
Red line: resistance
Green line: support
Note: as a personal preference I have changed the colours of the candles. While green and red indicate price moves up and down, I prefer something known as a naked chart, with all indicators removed. As such, I use a white box for a price move up and a black box for a price move down.
Now while I have drawn a green support line and a red resistance line, they can flip. The green support line could fail, and if the price drops under and can't get above it, it becomes resistance and vice versa.
So how do you know where to draw lines? You are looking for specific points which the price bumps up against, the more, the better. So, let's take a look at the green support line:
Mid-November: after breaking through the line it fell back below and bumped up against it twice before breaking through again
Early February: after the big move to $20k and subsequent drop, it became a support line
Late March/early April: the line was tested a few times again, even dropping below and then moving off
What this tells you, is that this area appears to be a significant area of support, as such, it could be considered a nice price entry point if it holds.
Now we will look at the red resistance line:
Late November: after the support held this line became resistance before breaking through
Early Feb/mid-March: the line flipped between support and resistance
Mid-April: the line is now resistance
If the price breaks through the resistance and holds as support, this will also become a good entry point.
If the price breaks through the resistance and holds as support, this will also become a good entry point.
Lastly, I want to show you a diagonal trend line; this can be used to identify price movements in an up or downtrend. Now I must warn you; some people don't like these, I believe they have value. The simple rule is that two touches is a potential trend, three is a confirmed trend.
Look at the chart below.
What I am highlighting above is the downtrend from $20k, as you can see the resistance line has been hit three times and therefore is confirmed. What I am waiting for here is for the resistance line to be broken. Once it is, this will highlight that the downtrend might be broken and would become a good entry point.
Module #7 Summary
Technical Analysis (TA): is a way of monitoring price action for a coin to help with buying and selling decisions
Trading View has lots of tools you can use: you should keep to the basic to begin with to get a feel for how it works
A chart has something called candles: which tell you the price action for a coin over a specific time period
You can use trend lines to help with understanding price: these will indicate areas of support and resistance
Now you understand what Technical Analysis is, you can move onto Module #8 and finish the course with important tips and reminders.