Pairing Fundamental Analysis, Technical Analysis, the News, some Basic Strategy, and a Knowledge of the Market to Up Your Trading Game
In cryptocurrency trading, Technical Analysis (TA) tends to be dominant. However Fundamental Analysis (FA), the news of the day, a basic strategy, a knowledge of the market, and other factors are also extremely important to consider.
Below we’ll go over how we can pair all these factors together to up your crypto trading / investing game and to avoid the pitfalls of looking at everything through a narrow lens (such as “just TA”).
My point is perhaps best explained by considering the price action of Bitcoin and altcoins in early 2018 and then discussing how each of the aforementioned factors (TA, FA, etc) could have helped to outperform “just holding” or TA, FA, etc alone. Let’s start by discussing TA only, then we’ll add the other factors to show why they are important.
Crypto Trading Based on TA
If you traded Bitcoin and alts based solely on a few basic technicals in 2018, for example just moving averages on 1-day candles, you outperformed buying and holding. This is because 2018 was a “bear market,” where the average price was down, and therefore it did not lend itself to holding in that period.
Consider the chart below, on this chart if you (a Bitcoin and altcoin holder) sold Bitcoin when the short term average started trending down, and then bought again when it started trending up, you exited Bitcoin for a good portion of its correction (the same would have worked on the alt market as a whole).
Even a version of this where you waited for confirmation from a bearish cross down or bullish cross up worked. If you bought and sold the crosses, you still outperformed the market (if you got out at $14k, the death cross on 1-day candles, and back in at $10k, the first inkling of a golden cross, you saved 40% of your Bitcoin). Now imagine if you traded based on those big red or green volume spikes as well, taking those as a sign the trend was about to reverse! You likely did even better.
The thing is, the average trader isn’t in the game just to avoid losing 40% of their investment, they are in it to win it. To outperform a simple TA strategy you can do a more nuanced strategy. Or you can add in other factors like some FA and “basic strategy” (which in terms of this article I’m using to describe tactics like risk management and dollar-cost averaging).
Basic Crypto Strategy
In terms of basic strategy, you can set stops, use trailing stop losses (with the aid of a trading bot), and average in and out of positions (to help avoid misting the market).
These tools help you to manage risk and avoid mistiming trades.
However, even TA and a basic strategy alone isn’t enough and that is where FA and the news of the day come in.
FA in Crypto Trading
First off, FA is short for fundamental analysis. It includes things like looking at how many people use a crypto, how much on-chain volume it has, etc. FA can help you pick the right coins in the first place, and picking the right coins will greatly improve your overall profits.
If you do your research, and you understand transaction speeds and fees, the quality of the code, the activity and vibe of the developers and community, etc… then the coins you apply your TA to are going to be likely winners from the get-go. Then TA just becomes about protecting against losses and making sure you are on the rocket before it takes off.
After all, if your portfolio included only the top-tier coins, the 2018 correction was a lot less harsh for you. Meanwhile, if it included some moonshot alts, you had a real chance of losing big on those (TIP: Risk management is also about not going too heavy into moonshots).
However, neither FA and TA, alone or in tandem, are enough. The problem is, neither of those is going to address the FUD and FOMO of the day in response to rumors and events (what I summed up as “the news of the day”).
News of the Day in Crypto Trading
In crypto, we can look at a chart and see a bullish pattern forming, and we can see this on even the best coins like Bitcoin or Ether, but then some well-timed FUD (China FUD, Korea FUD, SEC FUD, etc) can pull the rug out from under us. This will show in our TA after a while on longer time frames, and will show quicker on shorter time frames, but from a TA-only perspective… we only see the effects, we don’t see the character of the event. We can see the red candle that was MtGox, but we don’t see a label that says “this was MtGox.”
If it was a major event like MtGox, you may want to be more bearish than TA suggests, if it was a minor event (like a rumor) you may want to be more bullish!
Likewise, a bearish chart can turn extremely bullish based on rumors and FOMO. Zclassic’s chart had looked very bearish for months on end, but then in December 2017 it made a bull run based on a fork. TA eventually told you what was up, but if you knew about the rumor beforehand you had a chance to get in early (before it was telegraphed on the chart).
Again, depending on the event you know is coming up, you can adjust how aggressive you are with entering and exiting your position.
Understanding the Cycles of Crypto
Lastly, all the above should be filtered through some basic knowledge of the market. The market tends to be pattern-based and move in cycles. If alts aren’t in season, you will likely want to set tighter stops and not be as aggressive on buying them. If Bitcoin is out of fashion and privacy coins are in, then you’ll want to make sure you have your eye on coins like Verge and Monero. Etc.
This is a whole other layer that can be gleaned from TA, but is never specifically stated on a candle (candles are just price data, they don’t speak to you in English to tell you “why”).
To summarize the above points, the ones I detailed and the ones I quickly noted, a solid crypto investing strategy overview looks like this:
- Use FA to pick your coins.
- Pay attention to the news of the day, FUD, FOMO, internet rumors, etc to understand when to exit and enter positions early.
- Use TA to trade (especially in bear markets where you need to protect your capital and at the end of bull markets when you need to take profits).
- Throw in a few rules like averaging in and out of positions, stops, and trailing stops.
- And don’t forget to factor in the patterns and cycles of the market as a whole.
Let’s illustrate this with one last example, the drop of Zclassic after its amazing run:
Consider, if you just traded based on TA, then you didn’t see the Zclassic drop coming (unless you were watching 15 minute / 30 minute candles). If you paid attention to the news, you knew that getting out before the fork was a safe bet, but that staying in for the fork meant having to keep an eye on those 15-minute candles after the event. If you had stops set they triggered and sold Zclassic for you (no TA needed). If you understood that we were no longer in the alt boom, and that alts were in a bear cycle while BTC was making a slow crawl back, then you knew not to be overly aggressive on your alt plays. Etc.
The point being, TA can tell us what has happened and help us predict the future, but it can’t tell us about events and it can’t tell us why things happen. FA is the only thing that can tell us about the quality of the coin we are investing in, but FA alone has a hard time telling us if a coin has just been pumped to the moon and destined to correct by 80% (although transaction fees and speeds and supply can help hint at this). Our strategy of stops and averaging (and such) protects us in any market… and general knowledge of the market as a whole makes us better understand how to play specific coins at specific times.
TA is perhaps the most important factor when it comes to protecting your capital, but in isolation, it is nowhere as near as powerful as it is when combined with other tools in the toolkit. Start leaving too many of these factors out of your toolkit, and you’ll start having a hard time understanding what is going on in the current market and are likely to be taking some unnecessary risks.