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Congratulations, you’re at the final step of your journey to becoming a top crypto trader! In this chapter, we will look at some of the more advanced and technical aspects of trading and when and where to use certain strategies. We’ll start by examining another useful technical indicator, cup and handle patterns.
Cup & handle patterns
Cup and handle patterns are called so because they resemble a cup with a handle. The cup is in the shape of the letter “U,” and the handle has a slight downward shift. It is a bullish signal, with the handle usually experiencing a lower trading volume. However, there is an opposite version that signals a bearish trend: it’s called the reverse cup and handle.
The shape is formed when the price begins to drop after an uptrend. This dip generally retraces about 30–50% of the previous uptrend. Once it’s at the bottom, the price begins to rise again.
This increase is within about 10% of the previous high. This point signals the formation of the cup. With prices back around their previous high, traders often wait to see if the trend continues moving up or if there is another reversal coming.
Due to nervousness from a lack of activity and fears about prices dropping again, some weaker, less experienced traders will start selling, causing a small drop. Once these investors are out, the price rises again, and the pattern is confirmed once the price goes above the previous high of the handle and continues its way up.
The cup and handle pattern with support and resistance lines
Cup and handle patterns are more long-term, usually forming within 7–65 weeks. Cups with longer, more U-shaped bottoms provide a stronger signal than cups with a sharp V-shaped bottom.
Ideally, the cup shouldn’t be overly deep, with the same going for handles too. Handles should form in the top half of the cup pattern.
Traders often wait until the price breaks the top of the handle to buy. Once the price moves past the handle, the pattern is complete and usually continues in an upward trend. However, that is not always true, and the price could drop too.
Therefore, stop-loss orders are often recommended. A stop-loss order will save traders if the price drops, even after the cup and handle. It will sell off the stocks as soon as the price goes down to a specific level set on the handle. The best tactic to use with stop-loss orders is to set it up so that your investment doesn’t end up in the bottom half of the cup pattern.
For example, if the cup forms between $50 and $40, then the stop-loss order should be set above $45 since that is the halfway point of the cup.
Setting it up in the upper third of the cup pattern will keep the price closer to the entry point and help to improve the trader’s risk-reward ratio. It is also important to have an exit strategy. More cautious traders may limit the height for a safer, more achievable target.
If we take the same example of a cup forming between $50 and $40, the exit strategy here would be set at around $51/$52 for a cautious trader. However, it is possible to use a larger height if you are riskier and aim for a bigger target.
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A stop-loss order, also known as a stop order, is an order to buy or sell (usually, to sell) a security once it moves past a certain point. We often use a stop-loss order alongside a take-profit order to reduce risk and minimize losses.
A take-profit order is a type of limit order used to secure your trading profits once they reach a certain price or percentage.
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Fibonacci retracement levels
Fibonacci retracement levels are another extremely popular and useful tool when it comes to technical analysis.
They are horizontal lines that indicate where support and resistance are likely to occur. Each level is associated with a percentage illustrating how much the price retraced after the prior move.
The Fibonacci retracement levels are 23.6%, 38.2%, 61.8%, and 78.6%.
50% is also used even though it is not an official Fibonacci number. In its simplest form, it helps traders identify key levels for placing buy and sell orders.
For example, let’s say the price of Ethereum rises by $10 and then drops by $2.36. In that case, it has retraced 23.6%, which is a Fibonacci number. To use the Fibonacci retracement levels, you should first draw a line between the swing low, the lowest point of the trend in a given time period, and the swing high, the highest point of the trend in a given time frame.
The horizontal lines that appear are the Fibonacci retracement levels, which are automatically calculated by the platform.
Fibonacci retracement levels
They can be useful in risk management, with traders being able to place a stop-loss order just below the low swing of a long trade or just above the high swing in a short trade setup. When the price increases, it’s a Fibonacci extension.
To enter an upward trend with Fibonacci levels, see if the price gets support at the most popular levels (38.2%, 50%, and 61.8%), wait for confirmation with a move back into the original upward trend in the next candlestick, and then enter.
For downtrends, when we see the price hit resistance and then get confirmed in the next candlestick with a drop, we can start to sell. Fibonacci retracement levels aren’t always entirely reliable, giving just a glimpse of the market and not offering any guarantee that the price will stop where they say.
Like with all indicators, Fibonacci retracement levels are best used together with other tools to give a more complete view and encompassing of the market and its trends.
Stop-loss & take-profit orders
Fibonacci retracement and extension levels can help you understand where to place your stop-loss and take-profit orders. They can provide us with an insight into where prices might reverse and give us an idea of when uptrends/downtrends might occur. It can come in handy when planning at which level we’d like to either cut our losses or take our profits.
With these two orders used together, it’s possible to create a strong risk-to-reward ratio formula that will work for your investment in the long run. Most people often recommend a ratio of 1:2 in terms of risk/reward.
As an example, let’s say you bought $500 worth of Polkadot at $50 per coin, and you set your stop-loss order at $40. This means that if Polkadot drops below $40, the stop loss will be converted into a market order that will be executed at the best price. So, if Polkadot drops down to $39, then your coins will be sold off at this price, leaving you with a loss of $11 per coin.
Take-profit orders work in a somewhat similar way, but just on the other end of the scale. Keeping with the Polkadot example of $50 per share, if you set your take-profit order at $70 per coin, sticking to the 1:2 ratio, then once it rises to this price, an automatic sale of your shares will happen at $70, with a profit of $20 per share.
The big problem with take-profit/stop-loss orders is that they are working on prediction. So, if you are too conservative with setting your prices/levels, you may miss out on opportunities for even greater profits in the long run because you weren’t adventurous enough. The line between risky losses and missed opportunities from being too conservative is very fine, but if you can get it right, you will be very successful.
Crypto whales
If you really want to get ahead of the curve, you’ll have to go beyond standard technical analysis. One of the easiest ways to do this is to use on-chain analysis, with tracking whale movements being one of the most dynamic forms of on-chain signals. Smart traders monitor whale activity and follow their moves in an attempt to avoid losses.
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A whale, sometimes also known as a crypto whale or a Bitcoin whale, is a term used for individual investors and trading firms with large amounts of crypto, mainly BTC. They are both feared and respected among crypto traders for their ability to impact the movement of prices. There is no official threshold at which someone is called a whale, but in terms of Bitcoin, we generally see it as someone who has at least 1,000 BTC. For altcoins, this number is usually much higher.
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Whales can temporarily drain liquidity and increase market volatility.
It’s fair to assume that their transactions result in manipulating markets in ways that benefit them at the expense of others, particularly those on the other side of the trade. A group of whales, or even a single whale, could orchestrate a crash by selling a considerable amount of coins. They do this in order to trigger a wider market sell-off, only to swoop back in and buy back coins at a much lower price.
They could trigger a short squeeze so that the asset’s price soars, attracting individual investors whose buying pressure drives up the price even more, thus increasing the value of their supply of the asset.
Monitoring whales can provide traders with insights into potential moves before they happen. This gives them the chance to act pre-emptively and position themselves in a place where they can benefit once the movement occurs.
Monitoring whales lets us see their trading patterns and get an idea of their holdings. If whales reduce their holdings as the market price goes up, you could interpret that as a sign that the market top could be near, especially if individual investors are still increasing their supply of the asset at the same time.
For on-chain analysis and tracking Bitcoin whales, we usually look at wallet addresses with a minimum of 1,000 BTC. We can identify these wallets on the blockchain and then monitor them for activity.
All incoming/outgoing transactions involving these wallets could be of potential interest. There are three main types of whale activity to watch out for when monitoring the wallet addresses of whales:
- Waller-to-exchange transactions, aka exchange flows. They are important because of the way cryptocurrency trading works. Since exchanges are the most popular platform for trading, any movement of coins from a whale usually means that they have deposited coins into their exchange account and intend to trade them in the short to medium term. A large Bitcoin deposit implies that the whale is considering selling coins on the market, whereas a large deposit of a stablecoin, like USDT, may indicate a potential purchase. Any sign that a whale could be preparing to sell coins puts downward pressure on the market and vice versa.
- Exchange-to-wallet transactions. For security reasons, most large-scale crypto holders usually prefer cold wallets for long-term storage. So, a large withdrawal from an exchange wallet into a whale wallet indicates they don’t intend to sell those coins in the future. Such outflows also reduce the supply of coins on exchanges and can cause price appreciation, especially during times of high demand. Alternatively, an outflow of stablecoins could be seen as a negative sign, suggesting that whales prefer to remain in cash and that they judge the market conditions as being unfavorable for investment.
- Wallet-to-wallet transactions. Other than exchanges, whales frequently perform over-the-counter (OTC) trades for privacy and liquidity reasons, as OTC trading services can often manage large trades while mitigating liquidity issues. OTC trades are untraceable, and their effects on prices are not as prominent as those caused by regular trades. However, a large transaction from one whale wallet to another might be an OTC trade.
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An over-the-counter (OTC) trade is a direct exchange between two parties that goes without being listed on an exchange.
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As for actual tools to track whales, there are a number of options available on the market.
Blockchain explorers, like Etherscan, are one option. There is also a Twitter account, Whale Alert, dedicated to notifying people of whale activity. And there are also some whale trackers available.
While tracking whales helps you understand market movements and patterns, you shouldn’t base your investments and trading decisions solely on such metrics and methods. The crypto market is still largely unregulated and lacks the checks of traditional markets.
This means market manipulation is much easier and far more common, with whales always trying to stay ahead of the curve at all times. Ultimately, you need to always back your trading decisions with your independent research before making any major moves.
Crypto indexes
If you don’t have the time or energy to be constantly watching the market, then perhaps a crypto index fund is for you. It works just like any other index fund in the financial market, except that it follows digital assets instead of stocks and bonds.
Given the number of different coins on the market nowadays, it’s difficult to tell which of them are good and which are bad. Crypto indexes take a lot of the hassle out of things by offering you a usually predetermined selection of several tokens gathered together in various combinations, or baskets.
Instead of investing directly into several different coins individually, you can invest your money in multiple coins depending on the fund’s index. Investing with a crypto index can also help you reduce your level of risk. How? You will own a more diversified portfolio than if you were to build one by yourself, especially if you are a new investor.
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A crypto index is a method of tracking the performance of a number of assets. Each crypto index is made up of a selection of cryptocurrencies that are grouped together and weighted by market capitalization.
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Another major benefit of such indexes is that the fund itself does all the work. They track the variables, like price performance and a market cap of multiple coins, saving you a lot of time and energy.
They also save you from the stress and hassle of tracking daily performance, calculating risk, and making difficult decisions. You don’t even need to worry about setting up a wallet because each fund has its own secure wallet.
In recent years, there has been a rise in world-famous exchanges and indexes like S&P Dow Jones, CMC Markets, and Nasdaq.
Designed to measure the performance of a diversified pool of digital assets, Nasdaq’s crypto index consists of 8 different cryptos:
- Bitcoin
- Ethereum
- Litecoin
- Chainlink
- Bitcoin Cash
- Uniswap
- Stellar
- Filecoin
CMC Markets offers a number of different options, including the All Crypto Index, the Major Crypto Index, the Emerging Crypto Index, and the CMC 200 Crypto Index. Meanwhile, S&P Dow Jones provides 8 different indexes to choose from.
S&P say that they are aiming to bring accessibility and transparency to the digital asset market with their range of indexes.
There are downsides to index trading too. It can be quite a costly method of investment as management fees can reach around 2.5%. There can also be an entry barrier to such indexes — a requirement to make a minimum investment before being allowed to join, with such an investment being as high as $250,000. Additionally, in terms of returns, it is not a tool for short-term day traders who work with small returns in short timeframes. This tool is more suitable for traders looking for long-term gains from passive investment options. And finally, like all of our investment advice so far, you must carry out your own research and select a product that suits your needs, means, and financial goals.
So, now that you know how to track crypto whales, place stop-loss and take-profit orders, and analyze Fibonacci retracement levels and cup & handle patterns, you are pretty well stocked. And if all that is too much for you, you can start off by investing in crypto indexes and build your way up to becoming a top independent crypto trader.
Keep reading to find out how to protect yourself from crypto scams and learn about the future of cryptocurrencies and the crypto sphere!
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