I don’t trade crypto. But a lot of my non-finance friends have been asking me how to trade it. So if you really can’t stand the temptation, here’s the best way to trade cryptocurrencies like Bitcoin, Ethereum, Litecoin, etc.
*Go to the homepage for the latest crypto outlook.
Breakout systems and classic trend following strategies work best during bubbles
Make no mistake. Crypto is in a massive bubble, and this bubble will end eventually. But in the meantime, here’s how you can profit off the bubble if you can’t resist the temptation.
- For starters, you should only trade a bubble from the long side.
- Do not try to short the bubble’s top. You will get killed because nobody knows where the bubble will end. Picking the internet bubble’s top is what ended the career of legendary investors like Julian Robertson.
A breakout strategy (trend following) is the best trading strategy during bubbles. Breakout strategies work best when the market’s trend is very strong. Trends are insanely strong during bubbles. This is how Dan Zanger turned $10k into $18 million during the last 2 years of the internet bubble. He literally bought every single internet stock that broke out and held it until the stock broke below a moving stop loss.
I recommend “Trend Following” by Michael Covel if you’re interested in learning more about trend following. I’m not affiliated with the author or his book.
Trend following got started during the commodity bubbles of the 1970s. Many traders made millions in the 1970s by trading commodities (gold, silver, oil, sugar, copper etc) using classic trend following and breakout strategies.
In a bubble, very overbought momentum isn’t bearish. It’s actually the bullish sign of a market that’s breaking out and about to soar. Here’s an example of Ripple overlapped with daily RSI 14.
Notice that Ripple’s RSI reaching 90 was just the start of its massive rally. Previously, Ripple’s daily RSI was capped at 70.
In a bubble, the best trading strategy is also the simplest
- Use a standard breakout strategy. Buy the crypto when it breaks out from a trading range.
- Use a close moving average (e.g. 15 daily ema) as a stop loss.
- Sell the long position if the market falls below that moving average.
- Do not short. Wait and look for breakouts in other cryptocurrencies.
Position sizes MUST be small (i.e. less than 5% per cryptocurrency). Crypto is an insanely volatile space, and a 30-40% decline in one day is completely “normal” for this asset class.
Yes, some breakouts will be fake breakouts. That’s why the stop loss is important. But the MASSIVE profits on true breakouts (like Ripple) will more than make up for the losses on fake breakouts.
Portfolio churnover using this strategy will be very high, and that’s exactly what you want. You want to be long the hottest crypto’s, the same way traders wanted to be long the hottest internet stocks in the late 1990s. Very high momentum = a bullish sign. You want to hold onto strong momentum cryptocurrencies and discard them when they start to lose momentum.
Being long ICO’s is also not a bad idea as long as this bubble doesn’t end. During the 1990s, some of the hottest hedge fund managers made massive returns simply by buying into IPO’s. They would buy into the IPO and one of 2 things would happen.
- The stock would start to soar. Then they’d use the classic trend following strategy to get out of the stock (i.e. moving stop loss).
- The stock would fall for 1 day, and they’d get the hell out of that stock. A high momentum stock should rally on its very first day of public trading.
*This strategy only works well during bubbles (i.e. when the market is going parabolic on a log scale). It doesn’t work well during normal, healthy bull markets.
Contrarian strategies do not work well during bubbles (ie crypto). Trying to “buy the dip” can be dangerous. If e.g. Ripple falls 20%, it might fall another 30% before bottoming. Don’t try to catch the falling knife.
Daily crypto outlook
I’ll post daily crypto charts on BullMarkets.co homepage. These charts will point out specific cryptocurencies that are breaking out. It will demonstrate how well this strategy works in a bubble.
Follow this strategy and copy its trades at your own risk. I do not trade cryptocurrencies for the sole reason that I do not touch insane bubbles. I only trade the U.S. stock market.