How to trade this selloff.
So BTFD had its stop triggered and you’re wondering what your next move should be.
The crypto selloff seems to be widespread with very little hope in sight. This bear wave comes crashing onto the hopeful shores of news about global adoption, new exchanges opening across the globe and more positive regulation. It is a bit shocking for many bulls, though probably not long term bulls who are shooting for the moon if they haven’t made a 1000% already.
So what to do next?
It is definitely unfortunate that we have put in new lows for the year, and seemed to have broken major support areas. The area of support most people wanted to hold was somewhere around $5500 – $6000. The recent low was somewhere in the ballpark of $5700. I say ballpark since different exchanges have slightly different prices. We have broken these levels and seem to be hanging out around $5500 – $5700.
At this point, if you’re a trader looking to create a new position there are a few ways you might approach this.
Slowly build your position.
Stalk and wait
Look for a bullish signal
Regardless of what strategy you wish to take, you must know the next support and resistance levels. Once you have these figured out, they can help guide your entries and exits. Remember, these are guides and should always be used in conjunction with volume, RSI and one or two other indicators to help guide you. In addition, you should keep an open ear for relevant news that hits the market.
As of this writing, Bitcoin (BTC) is hanging out around $5500. At this level, the next immediate support is roughly $5000. It is possible for the currency to gain momentum and break this support briefly and bounce back if momentum and volume pick up due to panicking or a large sale. This is a round number support, which means investors like to enter and exit around round numbers so we may see some buying at this area if there isn’t a lot of volume and selling pressure.
The nest level of support beyond $5000 is $4500. This is a level that was tested back in 2017. A lot of trading occurred at this level for around 2 months. Below this level, we see trading occur around $2800 – $3000. This occurred for 3 months before a push further north.
Furthermore, the pattern that’s been building over the past year or more has been a descending triangle. This pattern is usually a continuation pattern. What this means is the price action after a break of the pattern should continue the previous price movement which was bearish. Could the price have shot up with this pattern? Absolutely, but statistically, this occurs less often than the continuation break. The same goes for an ascending triangle. Could this pattern fail? Absolutely, but we can’t hope. Instead we must use the technical support and resistance levels along with other indicators to guide us.
So how do we trade the strategies?
For building a position slowly, we could open a position at some of these different levels – basically scaling in. For instance, if you feel $5500 may hold, but with panicking and some momentum we may see $5000, then you could add a little more around the $5000 level if the price does tag it. You can do a one third position at $5500, another 1/3 position at $5000 and then another 1/3 at $4500 if it does dip that far. If it doesn’t dip that far, then your entries could be $5500, $6500 and around $7500. From there you can ride it if it continues to break resistance levels like, $8500.
With stalking and waiting, one can simply look for a test of a specific resistance with a short term bullish signal. Let’s say we close around $5000 today and volume looks light. This may indicate sellers are tired and have protected against losses. Later we may see some bullish action, maybe a good push past $5500 or higher. If sellers don’t come back and take control, a trader could enter here with stops setup to protect against a route, like $5500 then $5000. Mind you, a lot of this trading may be done for a shorter term chart like, hourly or minute charts.
Looking for a bullish signal requires more patience. For this to work, one may have to sit and wait for a significant break to the upside. A strong resistance level break with volume is mainly the indicator a trader following this strategy would look for. At this point, that would be around $6300. That would be a run back to the previous levels before this big drop in price. What this would mean is the selling was temporary and partly panic driven and investors and traders are piling back in to push for a bull run. Again, with this strategy, you should have stops setup along the way. Those could be stops for partial position under $6300, $6000, $5500 or wherever you feel comfortable. This also works if the price dips lower, say to $4500, but your resistance break then might be $5500 instead of $6300.
The sentiment right now is there may be more selling to come. Being in the bullish camp, I tend to disagree. The pattern and price action do not bode well for the bulls, but I feel this rapid decline is indicative of end of year selling by institutions and retail investors as they look to prepare for next year and the holidays respectively. In addition, the action has gotten quite boring and traders may be looking elsewhere or are simply ready for a break. The Bitcoin Cash (BCH) hard fork doesn’t help although that shouldn’t really affect Bitcoin itself nor the whole of the market. However, seeing a selloff in any currency inspires FUD.
So for long term investors and hodlers, this is a major set back and a further test of patience. For traders, this may be the volatility they need to enjoy some quick trades before the holidays.