How to Trade Bitcoin Like a Pro

bitcoin price

2017 saw Bitcoin and the other cryptocurrencies blow up from nowhere to become the world’s most popular financial story. Digital millionaires were being made overnight and everyone wants to trade bitcoin and grab a piece of this incredible new market.

Now in 2018 we find bitcoin futures listed on the CME and hedge funds springing up to serve wealthy investors. As the Wall Street professionals descend on bitcoin, individual investors and speculators need to get savvier or risk being squeezed out.

In this article I look at the difference between amateur and professional traders, I talk about what is special about cryptocurrencies and demonstrate a bitcoin trading strategy that anyone can use.

I have also recorded a video below where you can see me demonstrating the trading strategy and showing how I tested it.

Things that Professional Traders Do

Have a plan

Professionals know under what conditions they will enter and exit a trade. They will have also have a plan for how to manage the trade.

Do their Analysis

“Risk comes from not knowing what you are doing” – Warren Buffett

Warren Buffett and George Soros have wildly different approaches to trading the financial markets. But one thing they have in common is they both do meticulous analysis before they enter a trade.

If you want to trade a wild cryptocurrency like Bitcoin you must know the mathematical expectancy of your strategy based on how the currency has behaved in the past.

Control their Emotions

“The worse a situation becomes the less it takes to turn it around, the bigger the upside” – George Soros

Emotional control is essential for the professional trader. Human nature makes it very difficult for most of us to do the right thing when we are trading. Objectively we know we should let our profits run and quickly close losing trades. However, in the heat of the moment, most of want to do the complete opposite. Emotional control is not easy but it is essential if you want to trade over the long term.

Things that Professionals Don’t Do

While we are looking at the difference between professionals and amateurs it is worth thinking about what pros don’t do.

  • They don’t buy on Hope.
  • They don’t over-leverage.
  • They don’t buy or sell based on the latest financial news headlines.

What so Special about Cryptocurrencies?

Bitcoin and the other cryptocurrencies are like the Wild West. They are unregulated, decentralised and constantly evolving. The stunning increase in price in 2017 has made bitcoin a household name. But before you jump in you have to remember that you are not dealing with a normal investment like buying shares of a company or a government bond. For these investments we expect to receive a return, either in form of dividends, interest payments or share buybacks. Bitcoin does not provide a return. The only way we can profit from holding bitcoin is to sell it for a higher price.

Bitcoin is a medium of exchange and a store of value. There are many good reasons why bitcoin could continue to increase in price. some of these reasons are:

  • It has been designed so that only 21 million bitcoins can ever be mined. This scarcity should act to increase the value of bitcoin over time.
  • Bitcoin is the oldest and still the most dominant digital currency.
  • Bitcoin already has a number of real-world payment uses.
  • Bitcoin has a very strong base of supporters around the world who are determined to see it become more widely used.

All investments carry an element of risk. But bitcoin has more risk than most. Some areas of risk are:

  • It is very new and does not yet have a wide acceptance as a medium of exchange.
  • Other cryptocurrencies are advancing fast and could easily surpass bitcoin.
  • Bitcoin mining requires a huge amount of electricity and there is already resistance to large mining operations.
  • The technology behind bitcoin will come under increasing strain as their value increases.
  • Governments may decide to intervene directly in bitcoin to prevent rampant speculation or tackle criminal activity like tax evasion and money laundering.

How to Trade Bitcoin

There are many different approaches that can be used to trade bitcoin. For the reasons set out in the previous section, I think that bitcoin will continue to fluctuate in value. In order to take advantage of the fluctuating price, I prefer to use a trend-following strategy. This means that I will always be trading in the direction of the dominant trend.

How to Trade Bitcoin

Bitcoin has historically tended to trend. As the price has moved upwards the biggest profits have been made by buying bitcoins. However, given the reasons set out above, bitcoin could just as easily triple in value as it could collapse to near zero. Therefore my preference is to trade both the long and the short side. However, you could just as easily use this strategy to trade long only or short only.

The Trading Strategy

In this strategy I am using the Aroon Indicator. This is a nice indicator that I have written about before: How to Trade the S&P 500 using the Aroon Indicator. The Aroon is also featured in my 21 More Technical Indicators spreadsheet.

The Aroon is a breakout indicator that is presented to look like an oscillator. The rules of this strategy are simple:

Long Trades only when the closing price is above the 200 EMA
Short Trades only when the closing price is below the 200 EMA

  • Go Long when the green line crosses above 30
  • Exit Long when the green line crosses below 70
  • Go Short when the red line crosses above 30
  • Exit Short when the red line crosses below 70

Tradinformed Backtest Model

I carried out my analysis using a Tradinformed Backtest Model. These are models created using Excel that can be used to test all sorts of trading strategies. Check out the Tradinformed Shop to see the latest models.

If you watch Video below, you can see me demonstrating the strategy.

Results

Metric Result
Gross Winning Trades $153,500
Gross Losing Trades $-9,433
Net Profit $144,067
Profit Factor 16.27
Winning Trades 13
Losing Trades 4
Percentage Winning Trades 76%
Average Winning Trade 11,808
Average Losing Trade -2,358
Largest Winning Trade $67,767
Largest Losing Trade $-4,613
CAGR 29.0%
Max Drawdown 17.8%3

bitcoin trading strategy capital graph

Video

Please use the Comment Box below to tell me your thoughts about Bitcoin. And let me know how you are trading cryptocurrencies.

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