Price Action on Bitcoin

Lately we have seen a huge increase in interest and volatility in price on Bitcoin and other cryptocurrencies.  In this video we look at the recent price action and identify key levels to watch for to find great entry opportunities.

See how to identify the key price levels in Bitcoin to find trading entries. See how to find the prime zones for entry setups for a new trend move.  Identifying the continuation and contraction phases of the trend is key to making sure you trade with the momentum and pick the best continuation trades.

Bitcoin Trading

It’s hard to leave cryptocurrencies unnoticed nowadays as more new crypto instruments get popular, while the leading crypto asset Bitcoin makes new highs.

Let’s focus specifically on Bitcoin and see how we can utilize the price action opportunities that the crypto asset offers daily.

Trading approach – from contraction to expansion

On the one hand, we trade following the trend, trying to catch the momentum as the market expands. We also try to identify the change in the market phase as the trend stalls, and the contraction phase starts.

We attempt to find the key contraction phase that leads back into the market expansion, and we trade out of that contraction phase identifying the price action and using our indicators to support our analysis.

If we look at the 30 min chart of Bitcoin, we can find many key momentum or continuation setups (see the circled price action in the chart below).

The indicators also work quite well, confirming the price action. The Exponential Moving Averages (EMAs) confirm the direction of the trend, MACD and Stochastic show the local change in momentum.

How do we use technical indicators?

Sometimes it’s hard to read the price action with bare eyes, and that’s where technical indicators come into play. Below are the key indicators that we use in our trading approach.

  • 20 & 50 Exponential Moving Average (EMA) help to keep us on the right side of the market. When EMA (20) above EMA (50), the bias is bullish, so we should be buying. Likewise, we get bearish bias if EMA (20) is below EMA (50).
  • MACD shows when the momentum is starting to fade so that we can see some divergence. We look for a buying opportunity by fading the trend down and vice versa for short-sell trades.
  • Stochastic is the indication of buying and selling pressure. The indicator becomes “oversold” as the sellers try to push the price down and understand the price action context.

For more detail on how we use technical indicators, see our Favourite Indicator series:

We must analyze the indicators in conjunction with the price action. We always trade from the key levels, utilizing the indicators to support our analysis and get a better idea of what will happen. Are we going to see sellers stepping into the market at the key resistance? Will we see buyers stepping in when the market is at the key support?

The key setups of the expansion phase

Let’s run through several key setups and the zones and see the reasons behind trading those.

1. Let’s look at the first setup example in the chart above. The overall trend is heading upwards on 4-hour and daily timeframes. EMAs confirm the direction of the trend on a 30-minutes chart.

We can see the breakout of the key level (horizontal line) and a little pullback afterwards that formed a small consolidation.  In the consolidation we see the candles’ lows getting higher, signalling that more buyers are stepping in.

We use the consolidation as our entry area. You may buy either at the breakout of the consolidation or during the white candles off the consolidation’s low. As you see, the market continued surging after the breakout of the consolidation.

2. As the market continued rallying, the new support level (36628) is formed by being tested four times.

We see the buyers stepping in and pushing the prices higher from the support level towards the new highs as the momentum is taking off.

We trade off the support level by entering at the breakout of the short consolidation that’s formed after the last rebound.  We set a stop-loss (see the red horizontal line) below the consolidation’s low. The market continued to advance after the breakout.

The MACD shows us that the momentum is going from overbought to neutral and is starting to rise again. We want to go with the momentum as the MACD grows. The stochastic is going up from oversold as we see the buyers are pushing the price higher.

Trading during the contraction phase

Previously we looked at a couple of examples where we take the trend continuation setups and ride the upward momentum.

Let’s extend the key support level (the grey horizontal line) and see what other kinds of setups we can extract from it. Once this key support is broken (see the red oval in the chart below), we know that the momentum up is probably starting to fade.

Another conclusion we can get from this level’s breakdown is that the higher timeframe trend, such as four-hour or daily, is starting to stall as more and more buyers lock-in their gains from long positions. That’s how we get the overall change of the trend’s momentum.

At the stage of the momentum shift, EMA (20) pushes below EMA (50), which gives us more downside bias (see the EMAs’ crossover in the grey circle in the chart above).

How do we read the price action after the phase-shift?

3. After the market broke the key support level, we can have a short-sell price action setup. As the market was attempting to retrace back to the support-turned-resistance, it formed another local resistance by testing it at least twice, eventually piercing the price and tumbling shortly afterwards.

One way to enter can be a couple of candles away from the price level at the close of a candle. (see Entry #1 in the chart above).

Another way to short-sell is after a “shoulder” (marked with the blue zigzag-arrow) on the lower timeframe. The shoulder is represented by one white candle and the following black candle. We sell at the black candle’s close, which finishes the shoulder pattern (see Entry #2 in the chart above).

For more information on indentifying a shoulder, see our video How to anticipate a market change

Notice that it’s not a momentum play anymore, as, on the higher timeframe, the expansion phase has already finished, and we’re trading within the contraction phase.

The hints from indicators while trading off the key level

Another short-sell setup we get off the key level is when the market forms a vivid shoulder (see the blue arrow in the chart below).

The price action is accompanied by a failing stochastic from the overbought zone and rolling momentum on the MACD as sellers put more pressure on prices (see the circled areas in the indicator windows if the chart above).

Fading the downswing

Although the proceeding move didn’t turn out to go far, the swing formed a new key level 32471 that gave us the basis for the new long setup.

 

We see the new setup in the context of fading the last big-scale downswing (see the grey arrow) off the major key level.

Rather than buying close to the major low, buyers are stepping in and buying at higher prices to make a new support level. The market tested the new key level twice and formed a minor higher low, which can already be considered an entry once it’s clearly seen (see the blue arrow).

Prime entry area

The prime long entry area forms not long after the last higher low. Look at the boxed area in the chart below.

What gives a higher significance to this area is the context in which the market is. Notice the down trendline (see the inclined trendline in the chart above) that was broken before the consolidation, adding to the evidence that the general contraction phase might be over.

Looking at the general picture, we had good down momentum, the strong retracement to the upside, and finally, the losing steam selling pressure, which was eventually overcome by more buyers stepping in as the down trendline(see the black inclined line) was broken.

The proceeding consolidation breakout is the prime entry long that potentially can signify the beginning of the new major uptrend. We enter at the close of the breakout candle and initially keep our stop-loss below the consolidation, managing risk as to the uptrend proceeds.

As the upside move develops, we will be looking for the kinds of momentum buy setups that we talked about earlier.

Summing up

In this article, we looked at two styles of setups. The first kind is a momentum play. We trade trend continuation setups during the expansion phase of the market, using primarily EMAs and MACD to confirm the direction of the overall trend and the momentum. The second kind of setups is price action trades within the contraction phase of the market.

In general, the expansion phase generates more trading opportunities. Most of the entry-triggers come up when we get a breakout from a local consolidation. We keep the initial protective stop below the consolidation for long setups and vice versa for the short setups. Make sure you manage your risk while riding the proceeding move.