People in the crypto world may increase their value by 50 or even 100 times overnight, but they can also instantly go to zero and lose everything.
Trading contracts in the crypto world is thrilling, more intense than a roller coaster ride.
Have you ever experienced consecutive losses and frequent liquidations?
Then you feel depressed and regret your decision?
Are you eager to recover losses, but end up sinking deeper?
You repeatedly imagine the scene after success, but reality repeatedly slaps you in the face?
This is something every trader has experienced; you and I are no exception!
The difference is that some people give up in such torment, some lose all their capital, and very few persist. But what is the meaning of persistence without a complete realization?
I have watched countless tutorials, understood many summaries from traders, and analyzed numerous reasons for failure! Here are my summarized points that I believe can help you:
One, mindset and emotional management
Mindset and emotional management do not mean that you cannot be happy when you profit, nor can you be dejected when you incur losses; it does not mean becoming an emotionless robot!
Instead, it is to make you firmly believe in your success and that the losses you see now are only temporary, creating a positive belief system. Secondly, when losses occur, maintain rational and calm thinking, avoid impulsively placing orders, and be able to analyze correctly and operate rationally; this is crucial!
II. Continuously improve the trading system.
Remember, trading is not gambling, but it does have probabilistic attributes. You must continuously summarize and explore your trading system in long-term trading, specifically in terms of indicator analysis, position, profit and loss limits, and long/short cycles to establish your own trading rules to restrain yourself and determine your trades rather than going in blindly; otherwise, you will end up in an unrestrained cycle!
Three, capital management
There is a saying: 'As long as the green mountains remain, one need not fear the lack of firewood.' You must not have the mentality of going all in; this is very dangerous because once you have this thought, in most cases, the market will fulfill you, causing you to lose all hope! You must strictly control this, summarize your maximum consecutive loss to manage your funds, ensuring you have a chance to turn the tables. This requires extreme calm; only if you still have chips can you have the opportunity to be reborn!
Four, technical analysis
This is crucial; if you lack any technical skills, do not place any orders because that is gambling, and you will inevitably fail, which is very scary! Learning technical indicators is a gradual process of improvement, but once you overly rely on various indicators for your judgments, you may frequently make mistakes and then doubt the technology. Finding what suits you among so many indicators and simplifying it is essential; commonly used naked candlestick patterns, Bollinger Bands, moving averages, MACD, volume bars, OBV, etc., grasping the inner essence of simplicity is vital!
To cut a long story short
Perpetual contracts, also known as perpetual futures contracts, are a type of derivative trading method. Users can use perpetual contracts to go long, go short, or arbitrage, to achieve trading returns that are many times higher than the invested capital.
Through perpetual contracts, one can not only make money from rising coin prices but also profit from falling prices. Moreover, by using leverage, one can use a small amount of capital to generate significant returns.
When trading perpetual contracts, if the price trend is predicted incorrectly, one may face liquidation, resulting in the loss of the entire invested capital.
Whether you are a novice investor or experienced in cryptocurrency trading, this article will give you a deeper understanding of perpetual contracts.
The principles of perpetual contracts
The underlying logic of perpetual contracts is: allowing investors to borrow virtual currencies to buy or sell virtual currencies at a specific price at a specific time in the future.
For example, if Xiaoyu has 100 USDT and believes that the price of Bitcoin will rise from 100 to 200 tomorrow, Xiaoyu can borrow 900 USDT from the exchange and use this 1000 USDT to buy 10 Bitcoins. When the price rises to 200 tomorrow, Xiaoyu can sell it. After selling, Xiaoyu's account will have 2000 USDT, and after paying back the 900 USDT borrowed from the exchange, the profit from this transaction will be 1000 USDT.
If Xiaoyu only used his original capital of 100 USDT for trading, the profit would only be 100 USDT. Therefore, in this example, Xiaoyu used 10 times leverage to trade Bitcoin and earned 10 times the profit.
However, if Xiaoyu predicts the price direction incorrectly and the next day Bitcoin's price drops to 50, then the 10 BTC in Xiaoyu's hand would only be worth 500 USDT, resulting in a nominal loss of 500 USDT. Therefore, perpetual contract trading, when leveraging, can magnify both gains and losses.
Why is it called 'contract'?
The trading of virtual currency contracts is derived from traditional bulk commodity futures trading. In traditional futures trading, when traders go long or short on the price of a future commodity, they are indeed required to sign a contract. This is also why it is called 'contract' trading.
For example, if McDonald's predicts that potato prices will rise significantly next June, to control costs, McDonald's will sign a futures contract for potatoes for next June through the exchange. Regardless of how potato prices fluctuate at that time, they will purchase a batch of potatoes at the agreed price.
This way, regardless of how potato prices fluctuate in the future, McDonald's can stably purchase potatoes at a fixed price to ensure a stable supply of fries. If market prices rise, McDonald's can still purchase at the contract price, saving costs. Conversely, if market prices fall, although McDonald's must pay the contract price, the actual total cost will also be lower. In fact, companies like McDonald's do use futures contracts in real life to ensure stable supply and controllable costs.
However, when these futures contracts for bulk commodities are derived into virtual currency trading, exchanges, although they borrow the operational methods of futures contracts, do not actually lend you money or coins. Instead, they use similar calculation methods to intuitively inform you of the leverage ratio, expected profit, or loss, lowering the entry barrier for contract trading and facilitating more investors to participate.
What types of contracts are there?
Perpetual contracts: Perpetual contracts do not have an expiration date; users can hold them indefinitely and perform their own liquidation operations.
Delivery contracts: Delivery contracts have specific delivery dates, including weekly, next week, quarterly, and next quarter delivery contracts. When the specific delivery date arrives, regardless of profit or loss, the system will automatically settle.
USDT margin contracts: These require you to use stablecoin USDT as collateral. As long as you have USDT in your account, you can trade multiple cryptocurrencies on margin, with profits and losses settled in USDT.
Coin-based margin contracts: These use the underlying cryptocurrency as collateral. You need to hold the corresponding cryptocurrency before trading, and profits and losses are also settled in that currency.
The most stable way to trade crypto contracts
Choose the right coin and be a good person. As a leveraged trader, fluctuations can be amplified by the leverage ratio. The primary consideration during trading should not be volatility but certainty.
In an upward trend, go long on strong coins; conversely, in a downward trend, short the weakest coins.
For example, at the beginning of a new quarter, the strongest rally is often seen in EOS and ETH, with these two cryptocurrencies being the first choices for long positions during pullbacks. When it comes to shorting, Bitcoin is typically the preferred choice, even if the final result is that mainstream coins experience larger declines than Bitcoin. However, only shorting or chasing Bitcoin can greatly mitigate the risk of violent rebounds.
Most traders in the crypto world are short-term traders. When trading, it is difficult to maintain an ideal exit point, and they are also not very skilled in position control. They cannot rely on fluctuations to adjust the average price. Given this situation, for most traders, a good entry price outweighs everything.
Once you are in profit, take some profits off the table to secure your gains, while setting a stop-loss at the cost price for the remaining portion. This is something I have always emphasized in my community.
The essence of contract trading strategies
(1) Identify the main trend and trade in the direction of the main trend; otherwise, do not enter the market.
(II) If you are trading in the direction of the trend, entry point:
1. New breakout point of the trend;
2. Consolidation tends toward a breakout point in a specific direction.
3. Pullback points in an upward trend or rebound points in a downward trend.
(3) Following the trend with the right position will bring you substantial profits; never exit early.
(IV) If the entry aligns with the larger trend, and the profit on the account proves you are correct, pyramid-style technical scaling is permissible; (reference two)
(V) Maintain your position until the trend reverses for liquidation.
(VI) If the market trend goes against your position, cut losses and run.
In addition to adhering to the above strategies, remember three qualities: discipline, discipline, and more discipline!
The path of trading is to accumulate small gains into large ones, with compound interest being king. If you break even, you must not revert to losses. If you make a profit, take some off the table to prevent it from being all for nothing. In summary: If you earn, take some boldly; for what remains, set your loss at the original price.
Perpetual contract profit-making skills
1. Avoid full position trading
How should funds be allocated? Fund allocation should be understood from two levels:
First, from the risk perspective, understand how to allocate funds. First, clarify how much loss your account can or is prepared to handle. This is the basis for thinking about your fund allocation. Once this total is determined, consider how many times you can afford to lose if you continue to fail in the market, so that you can willingly accept your misfortune and admit defeat.
I personally believe that even the most risky method should be divided into three attempts. In other words, you should give yourself at least three chances. For instance, if the total capital is 200,000, and you are permitted to lose 20%, or 40,000, then I recommend the most aggressive loss plan: first time 10,000, second time 10,000, third time 20,000. I believe this loss plan has a certain rationality because if you get it right once in three tries, you can either profit or continue to survive in the market. Not being kicked out by the market itself is a form of success and gives you a chance to win.
2. Grasp the overall market trend.
Trends are much harder to trade than fluctuations because trends require chasing highs and cutting losses, which requires position stability, while buying high and selling low aligns with human nature.
Trading is about making money when it aligns with human nature; it is precisely because it is difficult that it is profitable.
In an upward trend, any violent pullback should be an opportunity to go long. Remember what I said about probabilities? So, if you're not in the market or have exited, be patient and wait for a drop of 10-20% to be bold and buy more.
3. Set specific profit and loss targets.
Setting profit and loss limits can be said to be key to profitability. In several trades, we must ensure that total profit exceeds total loss. Achieving this is not difficult; just follow these points:
① Each loss should be ≤ 5% of total capital;
② Each time profit > 5% of total capital;
③ Overall trading win rate > 50%
Meeting the above requirements (profit and loss ratio greater than 1 and win rate greater than 50%), profit can be achieved. Of course, one can also have a high profit and loss ratio with a low win rate, or a low profit and loss ratio with a high win rate. Anyway, as long as the total profit is positive, it is fine. Total profit = initial capital × (average profit × win rate - average loss × loss rate).
4. Remember to avoid excessive and frequent trading.
Since BTC perpetual contracts are traded 24 hours a day, many newcomers operate daily, and in a month with 22 trading days, they almost trade every day. As the saying goes: 'Frequent walks by the river will surely get your shoes wet.' The more you operate, the more likely you are to make mistakes, and after mistakes, your mindset may worsen. Once the mindset deteriorates, it may lead to impulsive actions, such as 'revenge trading': possibly going against the trend or over-leveraging. This can easily result in massive losses on the account, which may take years to recover.
5. Timing for entering contracts
Many respondents open positions 24 hours a day, and this behavior is essentially equivalent to giving away money. The purpose of contracts is to develop relatively stable profit strategies under controllable risks and stable indicators, rather than making 100x bets to get rich quickly! Therefore, the timing for entering contracts is particularly important!
⑴: Avoid opening positions during periods of significant positive or negative news because market conditions can become very chaotic, with spot prices fluctuating rapidly between 1-3%. Choosing to gamble on market conditions during this time can easily lead to being caught off guard.
⑵: I generally choose to enter after the second bottom or peak following a significant volatility because the fluctuations in the market will gradually stabilize after the second wave. The risk coefficient in subsequent ranges is the lowest. The goal of contracts is to implement the most suitable strategy in the smallest risk range.
⑶: Entering the market within the indicator range; as long as the indicator parameters do not meet your expectations, never place an order. This can be understood as entering the market within your strategy range and ignoring the market if it has not reached your psychological price. Since contracts amplify leverage, the risk coefficient also amplifies, so discipline is very important.
To summarize simply, when the market stabilizes and the indicators are in place, the risk rate can be reduced by 50%, at which point you can trade.
Disadvantages and risks of perpetual contracts
Liquidation risk
Liquidation refers to when the losses of a position reach a certain level, leading to insufficient margin to support the position, causing the exchange to automatically execute forced liquidation to protect the interests of the exchange and other traders.
We previously discussed that the underlying logic of contract trading is actually leverage borrowing. For example, if Xiaoyu has 100 USDT in investment capital and uses 10x leverage to open a long position worth 1000 USDT in BTC, if the price of Bitcoin is 100 USDT at this time, the essence of this position is borrowing 900 USDT and then purchasing 10 BTC together with the initial capital, hoping to profit when the price of Bitcoin rises.
However, if the price of Bitcoin continues to fall to 90 USDT each, then the 10 BTC in hand would be worth 900 USDT based on the market price, which is exactly the amount Xiaoyu borrowed. If the price continues to fall, the value of these 10 BTC will drop below the borrowed amount. The exchange will not allow itself to incur losses, so when the price of Bitcoin falls by 10%, that is, to 90 USDT each, the exchange will liquidate Xiaoyu's position, which is what we call 'liquidation.'
After liquidation, users not only fail to earn money but also lose the initial margin (capital) used to open the position. The higher the leverage used, the easier it is to get liquidated. In the above example, with 10x leverage, a 10% price fluctuation in the opposite direction will lead to liquidation; if 100x leverage is used, a 1% price fluctuation in the opposite direction will lead to liquidation.
The example above is calculated based on a 100% loss for liquidation; however, in actual trading, the liquidation loss percentage calculated by each exchange varies. Some exchanges may calculate it at 90%. Therefore, in specific trading, it is more accurate to directly reference the liquidation prices provided by the exchange.
Spike risk
A spike refers to a sudden and sharp fluctuation in the market that quickly returns to normal levels. This situation may trigger stop-loss orders or lead to liquidation, resulting in losses for investors. Spikes may be due to insufficient liquidity in the exchange or may result from malicious market manipulation.
Funding rate erosion
As mentioned earlier, exchanges now require users holding perpetual contract positions to pay a funding rate every 8 hours. Although each time it is only 0.000x%, if you hold a large position for an extended period, the accumulated funding rate can also become a significant cost.
Contract trading carries high risks; trade cautiously!
Combined with the MACD indicator, the win rate can reach as high as 70%, avoiding liquidation!
Trading in the crypto market is essentially a battle between retail investors and institutional players. If you lack insider information and firsthand data, you can only get cut! For those who want to collaborate and harvest with institutional players, you can follow (WeChat public account: Trend Prediction) and welcome like-minded people in the crypto world to discuss!
MACD practical tips for contracts:
1. When the MACD is above the zero axis, each golden cross indicates that the coin price is about to reach a new high.
2. When the MACD is below the zero axis, each occurrence of a death cross indicates that the coin price is about to reach a new low.
3. When the MACD has a golden cross below the zero axis, it belongs to a downward trend rebound market, and participation should only occur once it returns above the zero axis.
4. When MACD has a golden cross above the zero axis, it signifies an upward trend bullish market, allowing for high selling and low buying until a top divergence occurs. When MACD shows a small sell signal, if the coin price rises and the subsequent red histogram is not higher than the previous one, it will likely decline.
6. MACD buys low; when the coin price drops or flattens, and the next green histogram is not lower than the previous one, it will rise.
7. MACD high position contraction: After a large surge in coin price, if the MACD is far from the zero axis and the red histogram shortens, exit quickly.
8. MACD low position golden cross: After a sharp drop in coin price, when MACD is far from the zero axis, it is bound to rise, and a second golden cross indicates a stronger upward trend.
9. MACD golden pit: After a wave of price increase, if it pulls back, and the MACD shows a death cross while the green histogram is short within 7 days, it indicates a rise.
The MACD indicator plays a very special role in technical analysis and can be considered an essential part of learning technical analysis. Its importance includes at least the following points.
1. The MACD indicator is one of the most effective technical indicators verified by historical trends and is also one of the most widely used indicators.
2. The MACD indicator is derived from the EMA moving average indicator and has good application effects for grasping trending markets. Trend investors generally refer to this indicator in practice.
3. The top and bottom divergence of the MACD indicator is recognized as the best method for 'buying the bottom and escaping the top.' This method is an important tool for the concretization of trend theory and wave theory.
4. Many veterans have had this experience: when they first entered the field, they started learning the MACD indicator, then gradually discarded it. After a long period of study and comparison, especially after practical testing, they ultimately returned to the MACD indicator. This shows the indicator's uniqueness.
5. The application of the MACD indicator in quantitative trading is also very extensive.
It is precisely because of these advantages that the MACD indicator has become the most commonly used technical indicator among professional traders.
The concept and algorithm of the MACD indicator
The MACD indicator, or the Exponential Moving Average Convergence Divergence indicator, was created by Gerald Appel and is used to track price trends and analyze candlestick buy and sell timing. This indicator is a common indicator in market software and is known as the 'king of indicators'. As shown in [Figure 1].
The MACD indicator in the cryptocurrency market consists of the DIF fast line, DEA slow line, MACD histogram, and zero axis, collectively referred to as 'three lines and one axis'. Investors use the intersections, divergences, breakthroughs, supports, and resistances of these 'three lines and one axis' to analyze prices. The MACD indicator has become a preferred indicator on many market software, highlighting its extensive application, which also indicates that this indicator is one of the most effective and practical indicators verified by history.
MACD's golden crosses and death crosses
The 'golden cross' and 'death cross' patterns are extremely important forms in technical indicator analysis. The golden cross pattern, which can also be referred to as the golden crossing, occurs when a relatively short-term indicator line crosses upwards and crosses the longer-term indicator line (of the same type), indicating a potential short-term buying opportunity. If the golden cross pattern appears after ① a short-term rapid decline during a downtrend; ② a rebound during an uptrend; ③ a consolidation during an upward trend, then when the golden cross pattern appears at a stage low, it is a more reliable buy signal.
The death cross pattern can also be referred to as a death crossing, which occurs when the shorter-term indicator line crosses downwards and crosses the longer-term indicator line (of the same type), indicating a potential short-term sell signal. If the death cross pattern appears after: ① a consolidation during a downtrend; ② a rebound during an uptrend; ③ a short-term sharp rise during an uptrend, then it is a more reliable sell signal when appearing at a stage high.
After understanding the golden cross and death cross patterns, we can look specifically at the golden cross and death cross patterns of the MACD indicator line. The appearance of golden and death crosses at different positions reflects different market meanings.
Situation one: Buy points at low position golden crosses.
If the position of the golden cross between the DIFF line and DEA line occurs below the zero axis and is far from the zero axis, this golden cross is referred to as a low position golden cross. Investors can view this golden cross merely as a short-term price rebound. As for whether the candlestick can form a true reversal, it still needs to be observed and confirmed in conjunction with other indicators.
As shown in the figure above:
On August 27, 2019, in the BTC 10-minute candlestick chart, as the price pulled back, a low position golden cross appeared, followed by a rebound of 200 US dollars. Short-term investors could seize the opportunity to enter.
Situation two: Buy points at golden crosses near the zero axis.
If an upward trend has formed, and the golden cross between the DIFF line and DEA line occurs near the zero axis, it often represents an excellent buying opportunity for investors.
This is because after an upward trend is formed, a golden cross near the zero axis indicates that the adjustment has completely ended and a new upward trend has started. If this is accompanied by a golden cross in the volume line, it indicates that the price rise is supported by transaction volume, making the buy signal even more reliable.
Once this buying point appears, investors should absolutely not miss it; otherwise, they will miss out on a big rally.
As shown in the figure above:
On August 19, 2019, at 09:30, in the BTC 5-minute candlestick chart, Bitcoin broke above the 30-day moving average, indicating that an upward trend has initially formed. For a period afterward, the price almost consistently operated above the 30-day moving average.
On August 19, 2019, at 14:00, the MACD indicator formed a golden cross near the zero axis, indicating that the market is about to experience a significant upward trend. Investors can decisively buy in.
Situation three: Buy points at high position golden crosses.
If the golden cross between the DIFF line and DEA line occurs above the zero axis and is in a region far from the zero axis, then this golden cross is referred to as a high position golden cross. High position golden crosses generally appear in the consolidation phase during an upward price movement, indicating that the consolidation has ended and the candlestick is about to continue the previous upward trend. Therefore, once a high position golden cross appears, it is a good signal for increasing positions.
In practice, when an upward trend is formed, and the candlestick slowly rises over a long period, once the MACD indicator forms a high position golden cross, it often signals that the candlestick is about to accelerate its rise.
It is precisely for this reason that high position golden crosses can also be used for wave operations. Investors can use the MACD indicator to continuously target upward waves during an upward trend.
As shown in the figure above:
On June 25, 2019, in the BTC 3-hour candlestick chart, the price of Bitcoin was rising, and after a consolidation, it rose again, while the MACD indicator showed a high position golden cross. This indicates that the pullback is over, and the price will continue the previous upward trend. Investors should pay attention to seizing this opportunity to increase their positions.
Situation four: Sell points at low position death crosses.
A low position death cross refers to a death cross that occurs far below the zero axis. This type of low position death cross often appears at the end of a rebound during a downward trend, serving as a sell signal that the rebound has ended. At this time, investors who are not in the market should be cautious and wait while those who are deeply trapped can sell first and repurchase after the price drops to lower their cost.
As shown in the figure above:
On July 14, 2019, in the LTC 3-hour candlestick chart, the MACD indicator showed a low position golden cross, and the price experienced a slight rebound, followed by a rapid decline.
Immediately afterward, the MACD indicator shows a death cross below the zero axis, after which the candlestick begins a new wave of downward movement. Spot investors can sell their positions at the death cross point and then buy back to reduce their holding costs.
Situation five: Sell points at death crosses near the zero axis.
If the previous market direction has been a downward trend, then the cross formed by the DIFF line breaking below the DEA line near the zero axis is called a death cross near the zero axis, indicating that the market has accumulated considerable downward momentum near the zero axis. The appearance of the death cross signals that the downward momentum in the market is beginning to release, and the candlestick is likely to continue the previous downward trend, serving as a sell signal.
As shown in the figure above:
On August 12, 2019, in the BTC 1-hour candlestick chart, the DIFF line of Bitcoin broke below the DEA line near the zero axis, forming a death cross. This indicates that downward momentum in the market is beginning to release, serving as a sell signal. Investors should sell their positions decisively; otherwise, they will be deeply trapped.
Situation six: Sell points at high position death crosses.
When the DIFF line breaks below the DEA line at a distance above the zero axis, it forms a high position death cross. This type of death cross pattern is sometimes accompanied by a top divergence in the MACD. The manifestation is: during a sustained upward trend, the price continuously makes new highs, but the MACD's DIF line and DEA line no longer continue to rise or push higher but instead diverge from the price movement, gradually moving downward.
Above the zero axis, when the DIF line crosses downwards through the DEA line, it forms a downward crossover pattern, which is a relatively reliable sell signal.
As shown in the figure above:
On August 23, 2019, in the TRX 1-hour candlestick chart, after a wave of price rise in TRX, the price continued to reach new highs while the DIF line and DEA line no longer continued to rise, eventually forming a death cross and a sell signal.
Divergence between MACD and candlestick
Divergence is a term describing momentum in physics. In technical analysis, it is a widely used method with a high success rate. In a downward trend, if the price makes a new low while the indicator line does not, it is called bottom divergence, indicating that upward momentum is accumulating, signaling a buy. In an upward trend, if the price makes a new high while the indicator line does not, it is called top divergence, indicating that downward momentum is accumulating, signaling a sell.
I. Bottom Divergence
(1) MACD histogram and DIFF line bottom divergence
Bottom divergence of the DIFF line and price refers to a situation in a downward trend where the price makes a new low while the DIFF line does not. This indicates that during the price decline, the falling extent of the DIFF line is less than that of the price, and upward momentum in the market is continuously accumulating, indicating a high probability of price stopping its decline and rising in the near future.
The MACD histogram is the MACD histogram line hidden behind the DIFF line, divided into red and green. Its divergence with the price is an important use of the MACD indicator and is widely applied in practice. The bottom divergence between the MACD histogram and price indicates that when the price continuously makes new lows, the MACD histogram does not follow suit, indicating that upward momentum is accumulating, and the price is about to stop declining, with a high probability of rising in the near future.
When bottom divergence occurs, investors can grasp specific buying points in two ways.
(2) Specific buying timing
The bottom divergence of the DIFF line, MACD histogram, and price is not a specific moment but a pattern that occurs over time. However, the specific buying opportunity for investors is at a specific moment, indicating that the price is about to stop falling. Therefore, to grasp the specific buying timing, when the DIFF line, MACD histogram, and candlestick show bottom divergence, investors must combine bottom divergence with other technical analysis tools to specify the buying point.
First: Histogram color change or MACD golden cross.
Color change of the histogram indicates that the upward momentum in the market has begun to dominate. It generally appears after 'the histogram shortens', although it may be delayed, it is more reliable. When the bottom divergence occurs, if the histogram successfully changes color or forms a golden cross, investors can buy in.
As shown in the figure above:
On August 26, 2019, in the Ethereum (ETH) 15-minute candlestick chart, the price of Ethereum made a new low while the MACD histogram did not make a new low, forming a bottom divergence between the histogram and price. This indicates that upward momentum in the market is beginning to accumulate, and there is a high probability that the price will experience an upward trend.
Immediately after the histogram changes color, these two sequential buying signals combined increase the reliability of the upward significance, allowing investors to intervene when the histogram changes color.
Second: Combine with other technical analysis tools and candlestick reversal patterns.
Bottom divergence combined with candlestick reversal patterns, such as 'single needle probing the bottom' or 'three soldiers at the bottom', is a specific application of the 'multi-indicator combination' principle.
As shown in the figure above:
On August 26, 2016, in the BTC 30-minute candlestick chart, the price of Bitcoin reached a new low, but the MACD histogram did not reach a new low, forming a bottom divergence between the histogram and price, signaling the continuous strengthening of the market's upward momentum.
Accompanied by the price's downward halt, it forms a buy signal of 'MACD histogram and price bottom divergence + candlestick single needle probing the bottom.' Afterward, the price shows an upward trend.
II. Top Divergence
(1) MACD histogram and DIFF line top divergence
The top divergence between the MACD histogram and candlestick refers to a situation in an upward trend where the price reaches a new high, but the MACD histogram does not reach a new high. It indicates that the downward momentum in the market is accumulating, and the price may drop at any time.
The top divergence between the DIFF line and candlestick refers to a situation in an upward trend where, when the price makes a new high, the DIFF line does not make a new high. This indicates that downward momentum is continuously accumulating in the market, and the price may soon decline.
(2) Specific sell timing
Similar to bottom divergence, in practice, investors can combine several methods based on the principle of multi-indicator combination to make sell signals more specific.
First: Histogram color change or MACD death cross.
After the top divergence between the MACD histogram and candlestick forms, if the histogram suddenly shortens significantly, it indicates that the downward momentum in the market is beginning to release. Investors should pay attention to timely selling. The color change of the MACD histogram indicates that the downward momentum in the market has begun to dominate; this generally occurs after the histogram continues to shorten. If a top divergence occurs and the histogram changes color or the MACD shows a death cross, investors need to pay attention to exiting in a timely manner.
As shown in the figure above:
On August 9, 2019, in the HT 1-hour candlestick chart, the price of Huobi reached a new high, but the MACD histogram did not reach a new high, forming a divergence between the histogram and price peak. This indicates that the downward momentum in the market is beginning to accumulate, and the price may experience a downward trend at any time.
Subsequently, the MACD histogram changes from red to green, issuing a sell signal of 'histogram and price top divergence + histogram color change.' Investors should pay attention to exit in a timely manner.
Second: Combine with other technical analysis tools and candlestick reversal patterns.
After the MACD histogram diverges from the price peak, if other technical analysis tools also show sell signals, the reliability of the market's sell significance will greatly increase. At this time, investors need to be decisive in exiting. Common sell signals of this kind include 'divergence between histogram and price peak + candlestick reversal patterns', etc.
As shown in the figure above:
On July 20, 2019, in the ETH 3-hour candlestick chart, the price of Ethereum reached a new high, but the MACD histogram did not reach a new high, forming a divergence between the histogram and price peak. This indicates that downward momentum in the market is continuously increasing, and the price may experience a downward trend.
Subsequently, the MACD histogram gradually shortens, while the candlestick forms a bearish evening star pattern. Investors should pay attention to exiting timely, as the candlestick subsequently shows a significant downward trend.
Appendix:
Evening Star: During an upward trend, a longer candlestick appears first, followed by a shorter candlestick (either bullish or bearish) the next day, which is likened to a star, forming the main part of the candlestick pattern. The third candlestick is a longer bearish candlestick that goes deep into the body of the first candlestick. The evening star is a signal of price peaking and retreating, with some predicting an accuracy rate of over 80%.
(Regarding some candlestick patterns indicating peaks and troughs, we will have several specialized courses to explain in depth later. Everyone is welcome to continue following.)
Modification of MACD parameters
The lag in response to price changes makes the buy and sell prices sometimes not very ideal; this is a flaw of the MACD indicator. One way to change this situation is to adjust the indicator parameters, making the MACD indicator more sensitive to trends, thereby allowing for more ideal buy and sell price points.
In commonly used market software, the default parameters for the MACD indicator are 12/26/9. Under this parameter setting, the MACD indicator often has a notable lag in response to price changes.
The lagging nature of the MACD indicator can be addressed through parameter adjustments. Commonly used parameter combinations include 5/34/5, 5/10/30, etc. Investors can also try and explore more in practice.
Execution is a hard injury in trading; holding positions is a common ailment in investing. Due to poor execution, no matter how good the strategy is, it cannot be realized. However, excessive holding of positions amplifies even the smallest mistakes, like a disease that multiplies. When you can no longer hold on and leave this market, I estimate no one will bid you farewell. Even if you were here, a year later, no one will remember you. Any entry should not be based on luck; any speculation should not be done with full positions. One mistake means you have to leave; a hundred successes count as success.
Through trial and error, I summarized 10 rules and insights for trading cryptocurrencies. The content is not much but highly valuable. If you think it makes no sense after reading, feel free to say whatever you want!
1. Never chase high prices to buy coins; maintain a mindset that whatever the price rises to, it is just as if this coin does not exist.
2. There are only two types of coins: coins at good entry points are all good coins; otherwise, they are garbage coins. Large-scale buying points are the best performance coins. Be patient and wait for large-scale entry coins to become truly performance stocks; this is the real mentality.
3. In fact, the most important thing in trading cryptocurrencies is mindset. Many people clearly know it is not a buying point but cannot resist the urge; this is a mindset issue. If this is not resolved, any theory will be useless.
4. Maintain a stable mindset; do not have feelings for any coin or price point; only look at the signals from the market. You should have feelings for buy and sell points. Good technology, if you also have large funds, for example, if you can operate on a 30-minute basis, then there is no problem of timing.
5. The reasons for mistakes are always unrelated to the market; to find reasons, one must only look for their own reasons. Every mistake must be summarized immediately.
6. The psychology of being eager to make money is a big taboo for us cryptocurrency traders. If you can't even control your own heart, cannot control your greed and desires, you cannot succeed in the market for long.
7. Trading cryptocurrencies tests long-term profitability rather than short-term explosive capabilities. The key is a long-term effective trading strategy. When buying, consider various situations, hold firmly, and be even more decisive when selling; this is how to gradually improve. You trade cryptocurrencies, not the other way around; start with yourself.
8. The virtual currency market only rewards those with patience; any good coin needs to be nurtured. Continuously changing coins will only lead to small funds and minor profits. Focus on a few; running around every day will never lead to significant money.
9. Dance to the rhythm of the market; as long as you follow the rhythm of the market, you can glide on the edge of a knife. Rhythm is always the market's rhythm. A market participant without a sense of rhythm will always await torment. Set aside your greed and fear, and listen to the market's rhythm. As long as you can follow the rhythm, no one can stop you. The market has a rhythm; grasp the current rhythm, and no one can defeat you.
10. For capital players, remember that the power of compound interest is the greatest. As long as you have a good mindset and skills, compound interest is inevitable, allowing you to overcome everything.
By closely following the market trends, with precise strategy analysis and large-scale AI data selection, can you position yourself to remain undefeated? The market has never lacked opportunities; the question is whether you can seize them. By following experienced individuals, we can earn more!
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