Hey guys,
I'm not an economist nor an expert trader, actually I'm a pharmacist during the day, but I did earn a nice profit while trading cryptocurrencies. I wrote this guide to explain the basics of trading to some of my friends and I community I was in, but I decided to make it public because I think these essentials can help a lot of other beginners.
So if you have just started trading cryptocurrencies or if you are planning to do so. Here are some of the basic rules you can follow to stop the blind guessing and start making your first real profits:
1. People like round numbers
You may have noticed: the exchange rate changes direction on round numbers. This is called a ‘bounce’. This phenomenon probably exists only because people like round numbers. When they try to make a profit, they think of what would be a nice price to sell at, most of the time that will be a nice round number. Selling at 0,00030000 is nicer than selling at 0,00029732. The same is true for people that are buying coins. People start buying when they think the price won’t get any lower. But when they think of a nice price to buy some coins, they will again come up with a nice rounded number.
It gets a little bit weirder. The nicer (more rounded) the number, the stronger this effect is. That’s why the chance it will bounce on 0,00030000 and 0,00010000 is a lot higher (see the picture above) than the chance it will bounce on 0,00026000 for example. But these bounces do still happen. Take a look at the picture below:
To be able to use this to your advantage, you have to know something about support and resistance levels.
2. Support and resistance levels
These round prices, where the exchange rate bounces, are called support and resistance levels.
A support level is a low round price, for example: 0,00010000 or every other round number (0,00026000, 0,00022000..), where the price will find support while going down. The chances are high that the price will bounce of this level. But when the support breaches, the chances are high that the price will drop further to the next support level! So from 0,00026000 to 0,00025000. Or maybe even from 0,00025000 to 0,00020000.
A resistance level is the opposite of a support level. It is where the price will find resistance when going up. So when the current price is 0,00028623, 0,00030000 will probably be a big resistance level and 0,0002900 a small one. There is a chance the price will bounce on 29, but if it doesn’t , there is good chance of it bouncing on 30. But of course a resistance level can also be breached. When a resistance level is breached, the price will probably go up to the next level of resistance, so to the next round number: 30 -> 31 or 35? or 40!?
So now you know about these levels. But you also need to know how strong the support or the resistance is. Will it bounce or will it breach?
3. Buy walls, sell walls and whale hunting!
That is where buy walls, sell walls and whale hunting come in to play.
We’ll take a look at the order book. The order book shows all the people that want to buy and sell. As I explained, most people will buy and sell at round numbers. Some people have too much money and are trading it in insane numbers, we call them whales. Whales know what they are doing. So they are buying and selling on nice round numbers. You can find whales in every order book, just look for big to very big buys or sells, they are probably on round numbers! Smart people with less money, do the same.
Whales create buy and sell walls. A buy wall makes a support level, a sell wall makes a resistance level. The more coins are in the wall (check the BTC’s), the stronger the wall. So the buy wall on 0,00025012 in one of the pictures above is a really strong one.
How does such a wall work?
Imagine the price dropping from 27 -> 26 in the example above. All the buy orders will be completed until it hits the mini-wall on 26 of 2.54 BTC (+1,34 BTC on 25,999). The price won’t go lower than 26 before all the 2,54+1,34 BTC are sold. Because at that moment, that is the highest price people are buying coins for. It takes a little bit of time before the 3,88 BTC worth of QRK are bought. With every buy, the wall will get a little bit lower 3,88 -> 3,22 -> 2,5 -> 1,0 -> 0,88 -> 0,4 etc. When somebody in this time, while the wall is still up, decides he wants to buy QRK at a higher price, his order will be above the wall in the order book. So his order will be handled first (he is the highest bidder). So the wall remains and will not get eaten before all the orders on top of it will be completed. When more people decide to buy for a higher price than the wall a bounce happens!
But that was just a wall of 3,88 BTC. There is a good chance the 3,88 BTC will be eaten in no time, before someone decides to buy at a higher price. So than the price will drop below 26, and probably to the massive whale wall of 103 BTC on 25. It takes a lot of time for 103 BTC worth of QRK to be sold. Since eating this wall takes a long time, chances are higher people will start buying at higher prices, so the price will probably bounce up of this wall.
It is the same for sell walls. The price won’t go higher than a sell wall, because that’s the lowest price possible to buy the coins when the price reaches the wall. When people start to sell their coins for a lower price than the sell wall, the price drops and the sell wall remains intact. So a sell wall also needs to be ‘eaten’ first, before the price can rise. The
bigger the sell wall, the higher the chance the price will bounce back down.
4. How do you use these whales and walls to make money?
When the price is rising, look for big sell walls at round numbers. Is there a sell wall of 300 BTC on 0,0003000? Than the price will probably bounce. So sell your coins at 0,00029999, just below the whales. But keep an eye on the order book! If the wall gets eaten really fast, make a buy order for 0,00030001 (or just above the whales). Because when the wall drops, the price will probably rise to a new resistance level!
Vice versa: when the price is falling, look for big buy walls at round numbers. When you find a buy wall, make a buy order just above the whales. So when the whales are on 0,00025000, you buy on 0,00025001. So when the price bounces, you bought at a low! But also don’t forget to keep an eye on the wall. If it gets eaten too quickly, make a sell order a little bit below the whales, so on 0,00024999. So you will be save when the price drops to a lower support level. If that happens, you just use the rule above and buy back at 0,00024001. So when the price bounces on 0,00024 and rises to 0,00025 again, you’ll have more coins thus more money than you had before the drop!
Rule of thumb: sell at x.xxx9’s, buy at x.xxx1’s.
When you have the time and the nerves you can play this game on every round number: 0,00026, 0,00027, 0,00028, 0,00029 etc. But it’s more easy and more secure to only do it on the nicer numbers: 0,0002, 0,00025, 0,00030, 0,00035 etc. since the chances of bouncing are higher on these numbers.
We finish with another, a bit less useful trick.
5. Reading the depth chart
As in every market, when there are more people selling than buying, the price will go down. And vice versa, when there are more people buying then selling the price will go up. You can see these different volumes in the depth charts. I took a picture from the depth chart of LTC/EUR at Kraken.com. Notice the massive volume of people selling, against the small volume of people buying. So the price of LTC will probably keep dropping.
Another rule of thumb: Imagine an arrow between the two volumes drawn fromthe right to left. When it resembles the green arrow up in the picture, prices will rise. When it resembles the red arrow down, prices will drop.
6. Thank you!
That was it, thank you for reading! I hope you guys learned something and are going to make some money with it.
If you have other insights on trading cryptocurrencies, please share them in the comments!