Simple And Robust Ethereum Strategy: Trading The Second Crypto Giant
There aren’t many cryptocurrencies that are as famous as Ethereum.
Even more so, there’s an even smaller number of cryptocurrencies which may earn the title of being superior to Bitcoin.
However, the Ethereum Project is one that has topped the market since its inception thanks to its many innovations like smart contracts and token models which gave way to the huge ICO craze of 2017.
The Ether is the blockchain’s main coin and the actual name of the cryptocurrency. There are many reasons that make this coin a highly profitable instrument for traders.
First, you have the most obvious one: its liquidity. Being so famous makes Ether one of the most liquid crypto coins today, and it’s not hard at all to find counterparty even when trading very fast scalping strategies.
Another great advantage of trading and holding Ether is that it gives you easy access to new cryptocurrencies based on the ERC20 template, for they are sold in this coin and they are a possible long-term investment as well.
One of the good things about Ethereum is that it’s a solid platform with a wide range of uses. That feature makes it a stable project that many people say will outlast even Bitcoin itself, so both long-term and short-term traders can benefit from it.
However, for practical uses, we’ll move onto short-term trading with technical analysis.
Let’s go with scalping on the 5m chart
Here, you can see a long position taken at 192.37 and exited at 197.00 with a nice 4.63 in profits. But, how to avoid exiting early after two significant red candles?
Simple: Chart patterns.
But let´s start from the beginning - how to open such profitable trades?
Once we see that an uptrend is forming, we need to wait for it to be confirmed.
One simple and effective way to do that is to set up an EMA and a Parabolic SAR. These are great indicators for short-term trading. Together they work as a trend confirmation tool as well as a moving support/resistance price level.
And this is my secret and one of my favorite techniques.
As you can see above, in the situation marked by the black arrow, we were in a clear downtrend - the EMA was heading downside and Parabolic SAR was above the candle - signaling downtrend.
But as you know, indicators are good as a confirmation tool, but they´re usually a little bit delayed due to how they are calculated. Take a look at the Price Action itself - this is the real edge in the market - the ability to read the context.
The red candle (highlighted by the black arrow) tried to continue in the downtrend and broke the previous low for a while, but then immediately reversed and closed much higher - also forming a Pin Bar pattern (signaling a reversal).
As this is a 5-minute chart only, we can open a trade (LONG) aggressively on the open of the next candle. The Stop-Loss here would have been very small - below 191.50.
This technique is known as trapping traders - traders think that we are in a downtrend or uptrend so they try to open more trades in the direction of the trend, but then suddenly the market sentiment changes and reverses back - usually forming a Pin Bar pattern.
Once in the trade, we can just ride the trend. You may spot that there was hardly any downswings as the trend progresses. Also after the trade entry, you can see how both indicators confirmed my trade as well - ParabolicSAR started to draw below the candles (signaling uptrend) and Ether also broke my EMA indicator.
Now we come to the interesting part - The pennant - How to keep calm and don’t exit the trade too early?
Here, you can see that the price actually dropped quite significantly, which could scare off any trader. To be honest, I was a bit put off by this at first, but I quickly noticed something interesting regarding that EMA you see there.
First, the red candles never touch it, and it keeps pointing up, even during both red candles.
As if that wasn’t enough, the first red candle was only an Inside Bar - signaling a lowered volatility and a little break in the uptrend. Even if the next red candle broke the Inside Bar further down, I stayed calm, because we were still above the EMA indicator.
And as you can see below:
The two red candles show a classical pennant, which is usually a short consolidation period before a continuation of the trend. After the third candle continued the uptrend, it was easier to stay in the trade as it confirms that our analysis and expectations were correct.
But then, at the third green candle after the continuation of the trend, you are probably thinking to yourself, “this is Pin Bar pattern!” Yes, it really is and in this case, it’s a good time to take profits and close the trade.
A good way to react after seeing this kind of a candle while inside of a trade is to simply move your stop loss (S/L) to its low. This protects a large part of your profits and also keeps the door open for more profits in case the uptrend continues.
Nonetheless, in this specific example, the next red candle broke the low and our S/L would have been taken. But, it still netted a nice profit!
Here other traders were trapped and then the key was to be patient enough, keep reading the Price Action (what the market is telling us) and exit the trade at the right time.
Price action is usually a leading indicator of what is to come next while most conventional technical indicators are lagging. Even going against what the indicators show often works well because Price Action is what is actually happening in the market and when Price Action is signaling a clear reversal, it´s a great idea to get into such trade as the indicators will confirm it a little bit later.
This is what I call trading for the right price at the right time. The total risk with this trade was 0.87 points and the total profit was 4.63. This is an extremely positive Risk-Reward Ratio (RRR).