Pt. 2 - The Perfect Trader
In Pt. 1 of this series, I discussed how the perfect trader looks at macro-markets. That piece is linked down below if you have not read it yet. Part 2 is all about short-term price movements in a bull market (I am also going to make one about a bear market).
Disclaimer: In no way am I saying that I am the perfect trader or that you can become one. This piece is about teaching you how to think and teaching you how some of the best traders develop their strategies.
Takeaways I want you to get:
1. Understanding what perfect trading is
2. Using this knowledge to develop your own trading strategy
Understanding what perfect trading is
I am looking at a small bullish section of
BTCUSD that we saw back in February. You can see that this is a clear bull run because we are seeing higher highs and higher lows. Now, I want you to think to yourself: How would the perfect trader trade this? It is fairly simple. Buying at the highs and selling at the lows. This is going to give you the highest possible return.
(In a bull market, this can be done in both BTC markets and in USD markets. BTC markets will give you the higher return but in this example, we are just referring to BTC in the USD market).
So once you start to understand this perfect buying/selling strategy, you need to use technical analysis to help you achieve this perfection. Your technical analysis can consist of trend lines, support/resistance levels, indicators, moving averages etc. We are going to be talking about indicators in this piece...
Using this knowledge to develop your own trading strategy
Indicators can be super powerful tools but too many people just use the default period lengths and stick with them (Interjection: Many trading bots will use the most common period lengths and this will cause market movement around them. It IS important to still pay attention to them.). I personally have found my best success by manipulating these indicators so that they fit historic events. I am going to be talking about a few specific indicators. That does not mean these are the only indicators this works with! Test, manipulate, and try things! There are 2 key elements to your trading checklist that you can use indicators to determine:
1. Overall Trend Awareness
As I mentioned earlier, we are going to be using different styles of trading in bull and bear markets. So we have to be able to determine between the two. The RSI is going to be my first key indicator. I personally like using the RSI as a momentum indicator for the market (above a certain number is bullish, below a certain number is bearish). You can see that this green line in the middle splits the RSI into bullish/bearish segments. Generally speaking, anything above 50 is bullish and anything below 50 is bearish. In this case, I want to find the bullish support for the RSI. It is around 42-45. So I have it set there so I can visually see when the market is bullish vs. bearish.
I can also use moving averages to help make these longer-term predictions. You can see that I have two EMA's on my chart. The key is having the short-term EMA cross up on the long-term EMA indicating the bull run starting, then having the short-term EMA cross down on the long-term EMA indicating the bear run starting. We want to have as few false signals as possible without too much of the starting buy-in. On the chart above, you can see that I am using 15 and 50. I have found that these period lengths are pretty good. You can see that it is not perfect. It does cross negative one time while the up-trend continues. You are never going to get it perfect. So do your best to find a happy medium for yourself.
Now that we understand how to determine trends, we have to move into buying dips.
2. Actual Buying Opportunity
We can use various different indicators, oscillators, and moving averages to do this. The key is thinking about shorter time frames since these dips are shorter term than the larger market movement. The indicators I am going to use is the stochastic.
The stochastic is good because it is a bit erratic. It flies up and down on the chart fairly quickly (aha! See. Short-term movement). So now it is all about finding patterns. The first thing you probably notice is that the stochastic gets very low when the price falls. This is a good thing to note because we are looking for something to indicate us of low price movement. You will also notice that there are 2 lines in the stochastic (a green and red one). These can be used to cross when the low price starts moving upward. So using the stochastic, we start to realize that the perfect trader would buy when the stochastic is low and crossing positive.
And as you can see above, out of the 8 green arrows I put on the chart, the stochastic would have perfectly gotten you to buy in on 5 of them. You will also notice that the ones that failed (red X), were the ones where the EMA cross I have is still negative. This is why you have to let these various indicators work together when you trade.
So that is how you do it! But I will tell you, it is not all about finding just 1 situation where things line up. It is about scanning charts and testing so that you can see what works best for you and for what you are trading. I have developed some of my best trading algorithms by following the exact process I have outlined for you above. It is all about testing, testing, testing and eventually you will find a winner.
Throw a like on this post if you want to see more posts similar to it! Also, feel free to comment below if you have any questions. Goodluck with your trading everyone!
Disclaimer: In no way am I saying that I am the perfect trader or that you can become one. This piece is about teaching you how to think and teaching you how some of the best traders develop their strategies.
Takeaways I want you to get:
1. Understanding what perfect trading is
2. Using this knowledge to develop your own trading strategy
Understanding what perfect trading is
I am looking at a small bullish section of
BTCUSD that we saw back in February. You can see that this is a clear bull run because we are seeing higher highs and higher lows. Now, I want you to think to yourself: How would the perfect trader trade this? It is fairly simple. Buying at the highs and selling at the lows. This is going to give you the highest possible return. (In a bull market, this can be done in both BTC markets and in USD markets. BTC markets will give you the higher return but in this example, we are just referring to BTC in the USD market).
So once you start to understand this perfect buying/selling strategy, you need to use technical analysis to help you achieve this perfection. Your technical analysis can consist of trend lines, support/resistance levels, indicators, moving averages etc. We are going to be talking about indicators in this piece...
Using this knowledge to develop your own trading strategy
Indicators can be super powerful tools but too many people just use the default period lengths and stick with them (Interjection: Many trading bots will use the most common period lengths and this will cause market movement around them. It IS important to still pay attention to them.). I personally have found my best success by manipulating these indicators so that they fit historic events. I am going to be talking about a few specific indicators. That does not mean these are the only indicators this works with! Test, manipulate, and try things! There are 2 key elements to your trading checklist that you can use indicators to determine:
1. Overall Trend Awareness
As I mentioned earlier, we are going to be using different styles of trading in bull and bear markets. So we have to be able to determine between the two. The RSI is going to be my first key indicator. I personally like using the RSI as a momentum indicator for the market (above a certain number is bullish, below a certain number is bearish). You can see that this green line in the middle splits the RSI into bullish/bearish segments. Generally speaking, anything above 50 is bullish and anything below 50 is bearish. In this case, I want to find the bullish support for the RSI. It is around 42-45. So I have it set there so I can visually see when the market is bullish vs. bearish.
I can also use moving averages to help make these longer-term predictions. You can see that I have two EMA's on my chart. The key is having the short-term EMA cross up on the long-term EMA indicating the bull run starting, then having the short-term EMA cross down on the long-term EMA indicating the bear run starting. We want to have as few false signals as possible without too much of the starting buy-in. On the chart above, you can see that I am using 15 and 50. I have found that these period lengths are pretty good. You can see that it is not perfect. It does cross negative one time while the up-trend continues. You are never going to get it perfect. So do your best to find a happy medium for yourself.
Now that we understand how to determine trends, we have to move into buying dips.
2. Actual Buying Opportunity
We can use various different indicators, oscillators, and moving averages to do this. The key is thinking about shorter time frames since these dips are shorter term than the larger market movement. The indicators I am going to use is the stochastic.
The stochastic is good because it is a bit erratic. It flies up and down on the chart fairly quickly (aha! See. Short-term movement). So now it is all about finding patterns. The first thing you probably notice is that the stochastic gets very low when the price falls. This is a good thing to note because we are looking for something to indicate us of low price movement. You will also notice that there are 2 lines in the stochastic (a green and red one). These can be used to cross when the low price starts moving upward. So using the stochastic, we start to realize that the perfect trader would buy when the stochastic is low and crossing positive.
And as you can see above, out of the 8 green arrows I put on the chart, the stochastic would have perfectly gotten you to buy in on 5 of them. You will also notice that the ones that failed (red X), were the ones where the EMA cross I have is still negative. This is why you have to let these various indicators work together when you trade.
So that is how you do it! But I will tell you, it is not all about finding just 1 situation where things line up. It is about scanning charts and testing so that you can see what works best for you and for what you are trading. I have developed some of my best trading algorithms by following the exact process I have outlined for you above. It is all about testing, testing, testing and eventually you will find a winner.
Throw a like on this post if you want to see more posts similar to it! Also, feel free to comment below if you have any questions. Goodluck with your trading everyone!
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