Cryptocurrency Trading: Price Action Strategy for Crypto Trading

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 past few years. As more and more investors and speculators get involved in this extraordinary asset class, the most popular cryptocurrencies continue to experience post-exponential gains and often 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 deliver good returns across different markets.

Cryptocurrency Considerations

Limited historical data (fundamental and technical)

Cryptocurrencies has not been with us for a long time. While other asset classes such as forex and stocks have plenty of historical data (both fundamental and technical) to extract 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 has limited meaning because results derived from small data samples are often misleading and unreliable.

Difficult and uncertain fundamentals

With fundamentals revolving around concepts that are generally difficult to understand, cryptocurrency price behavior is often difficult to infer or predict from fundamentals. So should traders stay away from this phenomenal market just because its fundamentals can be difficult 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 either does nothing or the exact opposite of what was expected. Fundamental triggers are often ‘priced’ by informed market players long before they are officially announced, rendering them largely ineffective by the time they are published.

Learn how to use price action and technical trading strategies.

While 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 take into account when making trading decisions. When all is said and done, price is the final barometer and most reliable guide to what is really going on with an asset. Even when fundamentals override price action ‘expectations’, the price action itself will quickly adjust to the fundamental shift. The price of an asset is often ‘ahead’ of its fundamentals.

Price action – the great market barometer.

Universal price behavior across different asset classes

Market psychology

Why does price action across many different assets and asset classes often look like similar patterns? Most markets generally function in the same way because of the common characteristics and thought processes of the individuals participating in these markets. Over time, different market participants react to certain market conditions in much the same way. This gives price movements a repetitive nature due to 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 the trend often have trouble getting large buy orders filled at reasonable prices. Consequently, when these major market participants experience pullbacks against the uptrend, it presents them with 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 can move the ‘big boys’ to continue building long positions as a greater supply of that asset enters the market. This, and other market factors, often cause trend price action across most freely tradable financial instruments to move impulsively, followed by corrective Elliott wave sequences (impulsive, corrective, impulsive, corrective, etc.). Of course, the impulsive/corrective pattern is only one of 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 Agreements (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 exhibited the same ‘core’ price action characteristics that are common in other financial markets. It is also expected that the cryptocurrency market will continue to make moves that will resemble the dominant features of traditional financial instruments’ price behavior.

Therefore, we can trade cryptocurrencies with ‘traditional’ technical analysis/price action techniques, especially since the cryptocurrency market’s limited technical and fundamental data provides traders with little material to build cryptocurrency-specific strategies with.

Try ‘buy-and-hold’ cryptocurrency trading

These traditional price action trading techniques will of course need to be adapted to the individual cryptocurrencies, but the great underlying power of proper price action methods combined with caution risk management is virtually guaranteed to bring success.

In closing

Price action is very responsive and reveals an incredible amount of information about any financial instrument. Smart price action techniques and technical analysis are destined to perform well in the cryptocurrency market, as 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.

Start trading cryptocurrency today!