Cryptocurrency Trading: Price Action
Cryptocurrencies – who would have thought that this strange asset class would attract so much attention and such a massive amount of investment capital in such a short period of time? Billions of dollars have poured into the range of different cryptocurrencies over the last couple of years. As more and more investors and speculators engage in this extraordinary asset class, the most popular cryptocurrencies continue to post-exponential gains and oft volatility. Opportunities in this market abound. But is there a trading approach that has stood the test of time? And will this trading approach yield results with a relatively new asset class like cryptocurrencies?
Solid price action trading strategies produce good yields across different markets.
Limited Historical Data (Fundamental and Technical)
Cryptocurrencies have not been with us for a very long time. While other asset classes like forex and stocks have plenty of historical data (both fundamental and technical) to draw valuable information from, most of the cryptocurrency market is uncharted territory. The first and most prominent cryptocurrency, bitcoin, has only been around since 2009.
With this in mind, statistical modeling and strategy backtesting on cryptocurrencies have limited significance because results derived from small data samples are often misleading and unreliable.
Tricky and Uncertain Fundamentals
With fundamentals revolving around concepts which are generally difficult to understand, cryptocurrencies’ price behavior is often difficult to deduce or predict from fundamental aspects. Should traders, therefore, stand aside from this phenomenal market just because its fundamentals may be tricky to master? Definitely not!
The Power of Price Action Trading
There is a powerful ‘truth’ in global financial markets. Traders often expect certain fundamental catalysts to have specific effects on the price of an asset. These biases are often thwarted when the price does either nothing or exactly the opposite of what was expected. Fundamental triggers are often ‘priced in’ by informed market players long before it is officially made public, rendering it largely ineffective by the time it is published.
Although fundamental data can play an important role in the valuation of assets, the price action of an asset is the final and most important consideration to be taken into account when making trading decisions. When all has been factored in and everything is taken into account, the price is the final barometer and most reliable guide to what’s really going on with an asset. Even when fundamentals override price action ‘expectations’, the price action itself will quickly adapt to the fundamental shift. The price of an asset is often ‘ahead’ of its fundamentals.
Price action – the great market barometer.
Universal Price Behaviour Across Different Asset Classes
Why does price action across many different assets and asset classes often resemble similar patterns? Most markets generally function in the same way because of the common characteristics and thought processes of the individuals who participate in these markets. Over time, different market participants react to certain market conditions in very much the same way. This gives price movements a repetitive nature because of the market psychology involved.
Supply, Demand, and Common Market Mechanics
Another reason for the uniformity between different markets is the way supply and demand shape markets. A simple example is the following: in strong uptrends, there is a shortage of sellers. Large investors and speculators who trade with-trend often have problems with getting large buy orders filled at reasonable prices. Consequently, when these large market participants encounter pullbacks against the uptrend, it offers them opportunities to get their large orders filled at relatively good prices. Also, when the price pulls back, it is a visible indication that more selling liquidity is entering the market, which may move the ‘big boys’ to continue accumulating long positions because a greater supply of that asset is entering the market. This, and other market factors, often cause trending price action across most freely tradable financial instruments to move in impulsive followed by corrective Elliot wave sequences (impulsive, corrective, impulsive, corrective, etc.). Of course, the impulsive/corrective pattern is only one of the many common characteristic patterns caused by regular market functioning.
All freely tradable assets have some core price action functions in common (supply, demand, liquidity, human psychology, etc.).
Current and Future Similarities (Cryptos vs. More Established Markets)
While there is much more to be said about how traders generally think and act when it comes to trading, the important point is that the cryptocurrency market has already displayed the same ‘core’ price action characteristics that are commonly found throughout other financial markets. The cryptocurrency market is also expected to continue making moves that will resemble the predominant characteristics of traditional financial instruments’ price behavior.
Therefore, we can trade cryptocurrencies with ‘traditional’ technical analysis/price action techniques, especially because the cryptocurrency market’s limited technical and fundamental data offer traders little substance to build cryptocurrency-specific strategies with.
These traditional price action trading techniques will have to be customized to the individual cryptocurrencies, of course, but the great underlying strength of proper price action methods combined with prudent risk management is virtually guaranteed to bring success.
Price action is very responsive and reveals an incredible amount of information about any financial instrument. Cunning price action techniques and technical analysis are destined to perform well in the cryptocurrency market, like in any other market. Even in the absence of extensive historical cryptocurrency data, price action trading offers a high probability of success due to the universal characteristics of financial markets.