How a professional trader trades Bitcoins bottom
アップデート済
TL;DR Bitcoin produced a hammer candlestick in a high probability reversal zone. The high of the hammer was taken out which initiated a long swing trade with a target area of 29k BUT the following candle was a bearish engulfing! This is NOT what you want to see after following a long signal and so the appropriate action should be taken. The 'by the book' trader would close his position as the bullish hammer candlestick is void, but he could also only decrease his position sizing by 50% given how significant a support area 20k is.
This is a follow on post from my previous post last week.
First, we need to establish the context within which we are trading - below is a diagram of the wider stage of the market within which we are looking for longs.
Following Bitcoins last bear market, Bitcoin formed a range (oscillating between two price areas). It broke out of that range in 2019/2020 and trended bullish before reaching a high of 69k. This was a huge increase in price and when an asset massively appreciates or devalues, it must digest the move. Behind the scenes this just means that the number of buyers vs sellers shifts to closer to 50/50, oscillating across that split (hence why price bounce up and down between two price areas) rather than either the buyers/sellers being over dominant (which is what forms a trend). Think of it like the tide in the ocean - as the waves come in to reach their highest they don't suddenly turn around and retreat. There is a period of high tide where the forces moving the sea are balanced - the collective buying and selling of market participants is very similar at the end of a trend. While many mistake this recent bearish price action that has dragged price down from 69k to 20k as a bear market, it has a very high probability of actually just being the start of a range in which the massive bullish price action seen from 2020-late 2021 is digested before the final wave of this bull cycle completes itself. This is not opinion, this is a statistical fact. The rule here is: markets almost never go from bullish trending to bearish trending (unless in a bubble - we were not in a bubble, look at 2018 for a comparison of what a bubble looks like). They almost always range before price action flips.
With this knowledge we know that as price continues lower through support areas, there is an increasing probability that those supports will hold. 37-47k / 31k and finally 20k, as these were broken down what you don't see behind the scenes is that less and less people are selling and more and more people are buying. This is what the professional trader looks for - he understands the context that Bitcoin is in: near the lows of a bearish wave of a likely bigger range, and so he looks for evidence that this bearish move is slowing down in order to gauge the risk/reward of potentially trading, ultimately stacking probabilities in his favour (just like a poker player). In this case - just such an instance of this favourable stacking of probability has shown up - a hammer candlestick in a strong support area (previous ATH of the 2017/2018 bubble).
Here we can see the long signal marked as 1. This candle stick demonstrates that (within the timeframe of the candlestick) sellers tried to break down the 20k support BUT the bulls came back strong, closing the candle at the highs. This shows us that not only is the context favourable for a long trade but also that the price action within that interesting support area is also favourable for a long, meaning probability is more in favour of longs making money than shorts. We can use the hammer candlestick to also gauge our entry (marked as 2) and stop loss (marked as 3) and knowing the take profit area (in this case the support turn resistance).
Brilliant we have our trade! But wait.. what is that at point 4? When entering into a long trade of a support area, we typically want to see a quick rejection of the support area as this would show that there are lots of buyers active and this gives more weight to a potential bullish move. Hanging around at support is usually not the best thing and so we'd expect a continuation of the bullish hammer in the form of a big green .... candle. Instead, point 4 shows we had a large number of sellers continue to sell the attempt to bounce off the support created a bearish candle that has engulfed the previous candle. This is called a bearish engulfing. This is not good for our bullish trade and lowers the probability that the trade will complete in our favour. While the support area of 19-20k hasn't been broken down yet, the fact that sellers were so strong and buyers so weak means we the original probabilities suggested by the hammer candlestick might not actually be right. As such, we can do a number of things:
1: Follow the rules - while in my trade idea listed last week I had placed my stop slightly below the hammer candlestick low and so it was not stopped out (I did this because bitcoin has a tendency to go a bit extreme in its moves and so I move the stop further away - hey its an unregulated ultra risky market after all), the bearish engulfing voids the bullish probability that the hammer candlestick provided us. This means that the probabilities are no longer heavily in favour of bullish price action and so holding onto this trade becomes a kin to gambling. This is not opinion, this is fact.
2: While probability has shifted away from a high probability reversal off the 20k support based on the hammer candlestick, I am still convinced that this trade will execute bullish given the weight of the support area we sit in. In trading, the professional trader will never risk more than 2%(max 4% but not in this kind of a context - remember they are trading with a million dollar portfolio so 2% = losing 20k! Nothing when you could gain 40/60k) of his portfolio on a trade like this. As I am convinced of how important this area is as a support, the alternative to closing the original trade could be to reduce the risk and close a portion (50%) of the position. With only 1% of the portfolio now at risk (rather than 2%), even if price breaks down this support area the professional trader knows that he will have capital remaining to do exactly the same trade at the next support area. The professional trader would most likely have done exactly this at every support level since the all-time high (47k/36k/30k and now 20k). Despite being wrong 3 times already, he would have only lost 3% of his portfolio (max 6% if he was being naughty).
Because the professional trader is constantly weighing probabilities in his favour but also understanding the risk/reward of his trades, he is able to ignore the emotional pain that trading brings to those who are inexperienced. Lets try and simplify the breakdown in a conclusion for why this is. In this specific trade (entry at 21k stop at 18k) the professional trader can lose 15% of his position to potentially gain 35-40% profit (with profit taking at 29k). Having repeated this trade at each support (47k/36k/30k - with exactly the same % lost as this trade), his original position size is now down a total of 45%. Breaking that into easy numbers - if his trade size has always been $1000, and each trade he risked 15%, he has now lost $450. However because the reward for these trades has (for simplicity) been 35-40%, it means that he need be right just once to make back almost all that money he has lost so far. As each one of his long trades had a higher probability of being right more than being wrong, if he continues to do exactly these types of trades over the course of his life he will make money.
That is how a professional trades.
P.
This is a follow on post from my previous post last week.
First, we need to establish the context within which we are trading - below is a diagram of the wider stage of the market within which we are looking for longs.
Following Bitcoins last bear market, Bitcoin formed a range (oscillating between two price areas). It broke out of that range in 2019/2020 and trended bullish before reaching a high of 69k. This was a huge increase in price and when an asset massively appreciates or devalues, it must digest the move. Behind the scenes this just means that the number of buyers vs sellers shifts to closer to 50/50, oscillating across that split (hence why price bounce up and down between two price areas) rather than either the buyers/sellers being over dominant (which is what forms a trend). Think of it like the tide in the ocean - as the waves come in to reach their highest they don't suddenly turn around and retreat. There is a period of high tide where the forces moving the sea are balanced - the collective buying and selling of market participants is very similar at the end of a trend. While many mistake this recent bearish price action that has dragged price down from 69k to 20k as a bear market, it has a very high probability of actually just being the start of a range in which the massive bullish price action seen from 2020-late 2021 is digested before the final wave of this bull cycle completes itself. This is not opinion, this is a statistical fact. The rule here is: markets almost never go from bullish trending to bearish trending (unless in a bubble - we were not in a bubble, look at 2018 for a comparison of what a bubble looks like). They almost always range before price action flips.
With this knowledge we know that as price continues lower through support areas, there is an increasing probability that those supports will hold. 37-47k / 31k and finally 20k, as these were broken down what you don't see behind the scenes is that less and less people are selling and more and more people are buying. This is what the professional trader looks for - he understands the context that Bitcoin is in: near the lows of a bearish wave of a likely bigger range, and so he looks for evidence that this bearish move is slowing down in order to gauge the risk/reward of potentially trading, ultimately stacking probabilities in his favour (just like a poker player). In this case - just such an instance of this favourable stacking of probability has shown up - a hammer candlestick in a strong support area (previous ATH of the 2017/2018 bubble).
Here we can see the long signal marked as 1. This candle stick demonstrates that (within the timeframe of the candlestick) sellers tried to break down the 20k support BUT the bulls came back strong, closing the candle at the highs. This shows us that not only is the context favourable for a long trade but also that the price action within that interesting support area is also favourable for a long, meaning probability is more in favour of longs making money than shorts. We can use the hammer candlestick to also gauge our entry (marked as 2) and stop loss (marked as 3) and knowing the take profit area (in this case the support turn resistance).
Brilliant we have our trade! But wait.. what is that at point 4? When entering into a long trade of a support area, we typically want to see a quick rejection of the support area as this would show that there are lots of buyers active and this gives more weight to a potential bullish move. Hanging around at support is usually not the best thing and so we'd expect a continuation of the bullish hammer in the form of a big green .... candle. Instead, point 4 shows we had a large number of sellers continue to sell the attempt to bounce off the support created a bearish candle that has engulfed the previous candle. This is called a bearish engulfing. This is not good for our bullish trade and lowers the probability that the trade will complete in our favour. While the support area of 19-20k hasn't been broken down yet, the fact that sellers were so strong and buyers so weak means we the original probabilities suggested by the hammer candlestick might not actually be right. As such, we can do a number of things:
1: Follow the rules - while in my trade idea listed last week I had placed my stop slightly below the hammer candlestick low and so it was not stopped out (I did this because bitcoin has a tendency to go a bit extreme in its moves and so I move the stop further away - hey its an unregulated ultra risky market after all), the bearish engulfing voids the bullish probability that the hammer candlestick provided us. This means that the probabilities are no longer heavily in favour of bullish price action and so holding onto this trade becomes a kin to gambling. This is not opinion, this is fact.
2: While probability has shifted away from a high probability reversal off the 20k support based on the hammer candlestick, I am still convinced that this trade will execute bullish given the weight of the support area we sit in. In trading, the professional trader will never risk more than 2%(max 4% but not in this kind of a context - remember they are trading with a million dollar portfolio so 2% = losing 20k! Nothing when you could gain 40/60k) of his portfolio on a trade like this. As I am convinced of how important this area is as a support, the alternative to closing the original trade could be to reduce the risk and close a portion (50%) of the position. With only 1% of the portfolio now at risk (rather than 2%), even if price breaks down this support area the professional trader knows that he will have capital remaining to do exactly the same trade at the next support area. The professional trader would most likely have done exactly this at every support level since the all-time high (47k/36k/30k and now 20k). Despite being wrong 3 times already, he would have only lost 3% of his portfolio (max 6% if he was being naughty).
Because the professional trader is constantly weighing probabilities in his favour but also understanding the risk/reward of his trades, he is able to ignore the emotional pain that trading brings to those who are inexperienced. Lets try and simplify the breakdown in a conclusion for why this is. In this specific trade (entry at 21k stop at 18k) the professional trader can lose 15% of his position to potentially gain 35-40% profit (with profit taking at 29k). Having repeated this trade at each support (47k/36k/30k - with exactly the same % lost as this trade), his original position size is now down a total of 45%. Breaking that into easy numbers - if his trade size has always been $1000, and each trade he risked 15%, he has now lost $450. However because the reward for these trades has (for simplicity) been 35-40%, it means that he need be right just once to make back almost all that money he has lost so far. As each one of his long trades had a higher probability of being right more than being wrong, if he continues to do exactly these types of trades over the course of his life he will make money.
That is how a professional trades.
P.
ノート
The stop of 18200 has just been tapped but nothing has really changed in the grand picture of things. Ideally with Bitcoin and especially when trading such large magnitude trades the stop would be even further away than the text book hammer candlestick trade (below the local bottom of 17.5k). We can wait for this weeks weekly candle to close and see if that forms another hammer. If so this would be a much more appealing trade as it would be near the mini-range (that has formed in the lower time frames on this support) low and the stop can be put below the local low.
This would mean that rather than being stopped out partly by "noise" (in this case when an asset bounces around erratically because of low volume), the stop would be triggered only on a decisive break of the support area.
To be clear I am still of the heavy bias that we have found a bottom but until a new trade signal develops on the larger time frames (weekly) we can't do much!
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