One of the most popular trading strategies still remains trading using supply and demand levels. With the passage of time, most of its varieties remain the same and, unfortunately, do not turn into the expected profit. What are the reasons for this?
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Analysis using supply and demand zones.
Beginners in the field of trade claim that in order to check the strength of a given zone of demand or supply, it is necessary to check the time of the last contact of the price with this zone. It is assumed that the longer it is, the better. Reality shows the exact opposite.
The more fresh a given zone is, the more likely a reaction is. This is because orders opened through institutions in a certain area have not been closed and therefore must be defended.
On Forex and the cryptocurrency exchange, demand and supply are often mentioned, although traders often approach the subject with misunderstanding. The lines drawn by traders on the candlestick chart are completely subjective. Why should the price react to them in a specific way?
How do institutional traders create supply and demand?
Very simplifying the subject, the law of stock market supply and demand can be outlined in two points.
Creating demand occurs so that there is an opportunity to resell the item at the best price. The creation of supply takes place so that there is an opportunity to buy back the position at the best price.
Beginners often do not pay attention to the reasons for seemingly random price movements. If you want to know where the problem is, then look at the market through the eyes of a retail trader, trading funds small enough that he has trouble finding financial liquidity that can help him open a position.
Large capitals are facing a much more difficult situation. Hence, banks present on the stock exchange must create artificial supply and demand,and in order to execute their orders. Here, cryptocurrencies should immediately come to mind, where problems with low liquidity are completely natural.
The process of designing the market.
What you should do to sell your product at the highest possible price. You should probably invest in effective marketing. It would be best to make buyers feel that the product is worth a lot more than they pay for it. Stock market demand can be created by rising or falling, where the instrument will look undervalued.
Creating demand through growth requires breaking the price above the level on the chart. This level is considered by most retail traders to be so important that after breaking it should keep the price afloat and be the beginning of an upward trend. This is, for example, a breakout above the resistance level.
Illustrating, the crowd will be very happy to buy Bitcoin from you after it has broken an important line, because according to the logic of the crowd, it acquires its share at an extremely attractive price, at the beginning of the future bull market. But look real. If someone offers you to buy a valuable item at a lower price than expected, is it suspicious? Simply, when institutions aggressively raise the value of an instrument, what happens is that they probably want to create demand that will allow them to close their positions profitably.
In the case of stock trading, many methods do not fully reflect reality and catching such "opportunities" can be problematic. So if you can't logically explain the outcome of a particular method, it means you don't know what's going on and your way probably doesn't work.
Technical analysis on the cryptocurrency market.
It is the most widely used tool, mainly by retail traders, to predict future price movements. Such methods are usually simple and effective. Let's consider the issue of technical analysis on the cryptocurrency market, where, as you know, there are frequent and rapid price fluctuations.
Technical analysis has been designed to predict changes in the prices of currency pairs in the Forex markets, but also for stocks, companies and commodities using charts designed for this purpose.
With the help of this method, the information placed on the chart is interpreted, i.e.: opening and closing prices, the highest and lowest prices of a given session and others. Practice often shows that technical analysts often base their predictions on knowledge in a field called crowd psychology.
Regardless of what the instrument is called or how much it costs, the market behaves the same. It is guided by fear or greed. Technical analysis proposes a template useful when creating your own strategy. It allows you to turn speculation into your own business based on cryptocurrencies.
Forecasting cryptocurrency prices using technical analysis.
It is unlikely to be assumed that technical analysis will disappoint you when used in the cryptocurrency market. It is better to ask yourself under what circumstances it is best to apply it. In the case of unstable markets, such as the Bitcoin market, you can get a lot of wrong signals. It is worth testing technical analysis in different time frames and with different tool settings, so as to get a filter that protects against too early trading.
Cryptocurrencies and susceptibility to manipulation.
Cryptocurrency markets are relatively low capitalized in the market, which makes them highly susceptible to sudden increases and price slipping. They attract investors using"pump-n-dump"knitting, which consists in the simultaneous purchase of a specific cryptocurrency by organized traders. Then its price rises sharply, which gives a chance to sell profitably and leave the market.
If you rely entirely on fundamental analysis, at least briefly perform technical analysis to be able to identify the main levels and determine trends. When relying on technical analysis, be careful, but do not hesitate to invest in cryptocurrencies.
If you want to look for a token with good prospects, prepare a cryptocurrency trading plan and an appropriate strategy. Any way of trading can be categorized as long,medium and short-term trading (day trading).
If you want to store currencies in your wallet for a long time, you need to know that your approach will be different than in the case of day trading. Day trading is mainly technical analysis or less used analysis of the order flow. However, short-term trading is considered very risky, although it can bring considerable profits. Of course, provided that proper preparation is made.
Novice traders often claim that blockchain technology excludes the use of classical market analysis. Reality shows that the prices of virtual currencies are set by similar laws as currencies from the Forex markets.
It is worth remembering that investing in a cryptocurrency exchange is associated with serious risks, the greater the less knowledge you have managed to accumulate.
The use of auction theory in the cryptocurrency markets.
By the assumption of auction theory, the markets for cryptocurrencies, currency pairs and shares of listed companies do not have significant differences from, for example, the market of food products. It follows that the price is nothing more than a mechanism that advertises a given instrument to other market participants at different levels.
Greater interest in a given level makes the turnover on them increase and it becomes more likely to find interest at the same level in the future. It also works in the opposite direction. Lower interest in a given price increases the chance of rejection by the market mechanism and returning to the most popular areas. In auction theory, it is called Fair Value,which can be understood as an adequate value.
On the stock market, you can find market and pending orders, often called the main market force. They are combined with such financial institutions that have too much funds to put them into circulation with market orders. Limit orders,i.e. pending orders, are full of a market wall of cash, stopping the price from further rising or falling while the absorption process is in progress. In it, aggressive market orders are absorbed through pending orders of much higher value.
Placing a limitorder contributesto the creation of market liquidity. Also, if your positions are opened with the help of so-called aggressive orders, you place limit orders with the setting of stop loss levels or such profit.
The reason for the low liquidity of the cryptocurrency exchange is the lack of the required number of pending orders. A large number of pending orders in the market along with a small number of traders executing them makes an environment of high liquidity and low price volatility.
Such circumstances create unfriendly conditions for short-term investors using scalping techniques. Hence, for example, cryptocurrency exchanges due to high price volatility are a natural environment for scalpers and people looking for quick earnings despite high risk.
Richard Wyckoff's theory.
This is one of the methods that uses price movement as the basic argument for opening a position. This way of trading was created over 100 years ago, but it still remains relevant. It is governed by universal laws of supply and demand, which also apply when trading cryptocurrencies.
Being an opposition to classical Elliott wave theory, the way Wyckhoff's market structures are analyzed assumes that every price behavior we see in the market is one hundred percent unique. The harshest form of this approach is based on simple schemes that explain how players who have more resources are able to manipulate the price to trigger waves of sellers or buyers. Thanks to them, they can execute orders in the opposite direction.
The presence of many participants in the market can cause confusion, so in order to simplify the matter, Wyckoff decided to collect the most important of them (financial institutions) and create a single enemy – The Composite Man. This useful psychological concept and principle is a big help in understanding the basics of structural market analysis according to Wyckoff. The most popular cryptocurrencies are also subject to it.
So if one operator is responsible for all price movements, and his goal is to confuse most participants to close positions at a profit, then it is easier to understand the logic behind price behavior.
Wyckoff's Three Laws
According to Wyckoff's first law, when the demand for an asset is greater than the supply, prices rise, and conversely, supply over demand leads to price declines. It seems to be extremely simple, but it seems that most beginners behave as if they ignore such a dependence.
Wyckoff's second law speaks of cause and effect. The difference between supply and demand is not a coincidence, but is due to certain market circumstances. The actual law of cause and effect makes it possible to predict what role the accumulator or distribution will play in the coming trend, and where each of the accumulations and distributions is part of a broader context. Hence, the law of cause and effect determines what the current phase of the market is for.
As Wyckoff stated in his third law (the law of effort and result), changes in the price of an instrument are the result of effort, the representation of which is volume. In the event that the price movement is adequate to the turnover adopted during this movement, this is a normal situation where there are good chances to continue the trend. The discrepancy between price movement and turnover strengthens the chances of a possible reversal of the trend.