Most liquid (high trading volume) crypto markets run on a 16-24 bar price cycle (measured from trough to trough, the average usually being 18-20 bars). By plotting a double stochastic oscillator on your charts, you can visually anticipate where the next tradable cycle low may appear. This accurate technical indicator can give you added confidence in entering/exiting your trades. In the trade example below, I’ve identified a valid cycle low at X in BTCUSD’s daily chart. Price accelerates higher in the next four bars, consolidates for several more, and then makes a final surge up to point A. There are several cycle dynamics at work here that you need to internalize:
After a strong 11-14 bar rally (one with no discernible reversals along the way), the probability of further gains is extremely low. So, once price accelerates higher out of the first stall zone, begin to scale-out of at least a third of your open gains once bar 10 is reached, take the next third off by bar 11, and by all means be completely out of the trade and into cash before price runs smack into a major resistance line.
Most cryptos tend to move in three successive, sustained waves. Then comes a trend reversal or major consolidation phase. The late December 2017 thru October 2018 price action in BTCUSD’s daily chart depicts this well:
Note that the three primary waves were lowering since the beginning of 2018. A fourth wave commenced, but it failed to take out wave three’s low, and the price has been consolidating for several months now.
But now glance at the left side of the chart: three powerful bullish waves printed during March – October 2017, but then after only a minor pullback, a fourth wave appeared. This monster wave of buying rose at a near-vertical pace for six weeks. This speculative mania-fueled rally resulted in a predictable blow-off top/reversal in mid-December 2017. Here’s how to profit and also protect open gains, should you ever be caught up in a near-vertical parabolic rally:
The daily candlestick chart for Bitcoin/USD clearly reveals a recurring 19-21 bar cycle count (trough to trough). At times this cycle can extend to 24-26 bars, or even shrink to 14-16 bars, but will generally average around 18-20 bars in duration.
Let’s say you went short on a trendline break in late January 2018, and you already knew that a high-probability cycle low was due to make its appearance on or about February 6th. The price dropped very quickly, offering you a nearly 20 percent gain by February 2nd, so what would a wise trader have done then? See the chart below for some hints:
The cycle bar count was at 16 on February 2nd. At that point, you had open gains of 20 percent, so the wise move would have been to take at least half the open gains by bar close. Then as bars 17-20 developed, there was one final opportunity to harvest final gains before the cycle low formed. Could the price have fallen further, with the cycle low extended to a later date? Yes, but why would you take the chance of risking open gains on such a low-probability outcome?
A similar short trade setup sits on the right side of the chart. The cycle timing and profit-taking dynamics worked in exactly the same way. By the way, the shallow pullback long entry in the middle of the chart also occurred after a confirmed cycle low. Shallow pullbacks into a cycle low occur in a bullish cycle phase and deep ones occur in bearish cycle phases. The more you work with cycles in the same coin, the easier it will be for you to identify low-risk buy and sell short setups.
Knowing how to exit winning trades can be as much art as it is a cold, mechanical process. But a deep knowledge of cycle timing and other technicals will help you wring the maximum gains from your winners. This knowledge will prevent a large winning trade from turning into a mediocre winner, or even a losing trade. That is an event that no skilled trader should ever need to experience.
Harvest gains before your competition does, and you’ll have what it takes to consistently profit in the crypto markets.
Disclaimer: Speculation in the financial markets involves substantial risk and therefore only risk capital should be used when trading or investing. Always consult your licensed financial advisor before deploying risk capital in the financial markets.
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