Bitcoin Trading Strategy 5 Steps

This is a strategy for trading Bitcoin, currently the most actively traded market of them all. It is more active than stocks, oil, gold, or any other market at this stage. The reason people believe this will continue is the strength of blockchain technology. Today we focus on a Bitcoin trading strategy that, in fact, works for all cryptocurrencies, not just Bitcoin. You may also want to read about Golden Cross Strategy.

Why is trading Bitcoin better than trading fiat currencies?

Cryptocurrencies are like the real money in your wallet: each has a value against the dollar. What sets crypto apart, and makes it a better environment for trading, is that it is not controlled by central banks. It also needs no intermediary and cannot be printed, so it is less affected by the tools that govern fiat currencies, such as inflation, interest rates, and unemployment.

Why is day trading Bitcoin better than long-term trading?

Although long-term Bitcoin trading can produce good returns, day trading Bitcoin tends to be more profitable than long-term trading for several reasons:

• Cryptocurrency is more volatile than stock trading.
• Bitcoin trades around the clock, seven days a week.
• Bitcoin is the most liquid cryptocurrency.
• It offers many trading opportunities throughout the day.

Because Bitcoin is more volatile than other instruments, there will be a large number of potential trading opportunities every day, much like EUR/USD, which offers the most trading opportunities among currency pairs thanks to its deep liquidity. Technical indicators can be a useful tool for gauging the probability of price increases. Volume, relative strength, oscillators, and moving averages can all be applied to Bitcoin day trading, but it is important to remember that technical indicators are only a supporting tool and should not be relied on 100%.

Bitcoin trading strategy in 5 steps

This strategy can be used with all cryptocurrencies, not just Bitcoin. It relies heavily on the Ethereum price chart, as we will explain. If you are not familiar with Ethereum, it is the most widely used cryptocurrency after Bitcoin. See the chart below.

This Bitcoin trading strategy is based 85% on price action and 15% on technical indicators.

Before moving on, we need to define the technical indicator you will need for this strategy.

The only indicator you need is On Balance Volume, abbreviated OBV. This indicator links volume with the change in price movement and shows areas of buying and selling strength on the chart.

You will usually find the OBV indicator already built into most trading platforms, such as TradingView and MT4, so you will not need to download or install it.

How to read the OBV indicator

First, you need to understand how the indicator works. OBV has many uses, but here we focus only on what this strategy needs.

In theory, if the Bitcoin price makes a higher high while OBV makes a lower high, this is a sign that traders are selling at these levels and that the uptrend may not continue for long and could reverse, or a corrective move could occur. The same applies in the opposite direction: if the Bitcoin price makes a lower low while OBV makes a higher low, this is a sign that traders are buying at these levels and that the downtrend may not continue for long and could reverse, with a corrective move possible.

What we really want to see is OBV moving in the same direction as the Bitcoin price, with the indicator and price aligned. The chart above illustrates this.

We recommend keeping a pen and paper handy to write down the rules of this Bitcoin trading strategy.

Bitcoin trading strategy (buy trade rules)

Step 1: Overlay the Bitcoin chart with the Ethereum chart and the OBV indicator.

Your chart setup should contain three windows: one for the Bitcoin chart, a second for the Ethereum chart, and finally, add the OBV indicator.

Your chart should look like the image above. If it does, the first step is complete, so let us move on to the second step.

Step 2: Look for a smart-money divergence between the Bitcoin price and the Ethereum price.

What do we mean by this?

Simply put, we will watch the price difference between Bitcoin and Ethereum. If a divergence occurs in their movement, one of them is almost certainly giving a false signal and will return to the trend.

For example, if the Ethereum price breaks resistance to the upside while the Bitcoin price fails to do the same, we have a smart-money divergence. This means one of the two cryptocurrencies is not following the correct direction.

In the chart above, we can see that the Bitcoin price failed to break above resistance while the Ethereum price broke resistance to the upside and made a new high. This is the first signal in the Bitcoin trading strategy we are discussing.

The core idea of this step is that the concept of smart-money divergence means the crypto market as a whole should move in the same direction.

Anyone trading futures can follow the same approach.

Before buying, we need confirmation from the OBV indicator, which leads us to the next step of the Bitcoin trading strategy.

Step 3: Look for a signal on the OBV indicator.

If Bitcoin is lagging behind the Ethereum price, then the coin heading in the wrong direction should follow the coin heading in the correct direction.

But how do we know which is correct?

Simply put, OBV is a useful technical indicator. It can show us whether the current trend on the Bitcoin chart is valid. Looking at OBV, you will notice it matches the Ethereum chart, which confirms that the correct direction is Ethereum’s and that what is happening on Bitcoin is just a correction. We drew a resistance line to make the picture clearer and to serve as a starting point for opening a trade.

Now, all we have to do is place a pending buy order, which leads us to the next step of the Bitcoin trading strategy.

Step 4: Place a pending buy order at the resistance level.

Once OBV gives us the green signal, all we have to do is place a pending buy order at the resistance level, in anticipation of a possible breakout.

Now we need to set our stop-loss and take-profit orders for this Bitcoin trading strategy.

Step 5: Place your stop-loss below the breakout candle.

The right place for the stop-loss is below the breakout candle, since this level is very strong. You will notice that after the price breaks it, the price moves up strongly toward the target.

When it comes to taking profit, you can use a fixed take-profit at a 1:2 ratio or higher, but it is better to leave the trade open and only exit when the OBV indicator turns down.

Note ** The above was an example of a buy trade. Use the same rules but in the opposite direction to execute a sell trade.

Ways to strengthen the Bitcoin trading strategy

Day trading Bitcoin can carry high risk, but several methods can be used to improve this strategy:

• Diversify your trades. Do not focus on Bitcoin alone; try combining Bitcoin with Ripple, Litecoin, Ethereum, and other cryptocurrencies to reduce the daily risk tied to a single coin.
• Reduce trading costs. Opening multiple positions each day affects your daily return on investment. To lower your trading cost, choose a trustworthy exchange with low fees.
• Use a stop-loss. Place stop-loss orders on every trade, and start with a 2:1 loss-to-profit ratio.

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Conclusion

The best Bitcoin trading strategy is a short-term one based on buying and selling crypto assets within the same day.

While day trading originated in traditional markets, day trading with this Bitcoin strategy requires a deeper knowledge of crypto and blockchain technology to succeed.

Day trading is an investment strategy based on frequent trades of one or more securities throughout the day to capture profits. While traditional investors focus on buying and holding for a company’s long-term performance, day traders seek to benefit from immediate profit opportunities through this Bitcoin trading strategy.

Perhaps one day our paper-money system will collapse and be replaced entirely by digital currencies. We live in a digital world, and there is strong potential for Bitcoin or other major cryptocurrencies to replace the way we pay for goods and services.

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