There comes a time in every market cycle where fear takes over the markets. Usually a market will transition between three phases: consolidation, uptrend, and downtrend. Every time a downtrend is displayed in a market scenario it raises doubt in traders and investors alike. Many people end up panic selling their positions giving into their own uncertainty. Sometimes a market cycle takes longer than “usual” to complete which raises the fear flag in skeptics. Let’s talk about market cycles and why people give up on their positions.
There is no “start” to a market cycle nor a “completion”. Many people try to find the start or end of a cycle but it’s not likely to do so. That’s like the old question, “What came first, the chicken or the egg?” It’s called a market cycle for a reason. It’s a never ending process. There is one phase of a cycle active at a time. Good traders can look at a candlestick chart and see where we are in a market cycle. It can go from consolidation to uptrend or consolidation to downtrend. Then typically the trend will reverse yielding either an opposite trend or another consolidation. If you can spot where you are in a market you will be able to trade your position with the market flow.
Consolidation
When a market is in a consolidation phase, price action tends to be very tight with minimal price swings. Cryptocurrency can be very volatile – sometimes more so than others. There is not much volatility during a consolidation. Usually during a consolidation the candlesticks in a chart will be small and indecisive. You will be able to find horizontal support and horizontal resistance during a consolidation phase. This area of price action between support and resistance is referred to as a zone. It is important to note that zones are areas and not specific price points. It is not exactly ideal to trade within a consolidation range, but it is possible. When price breaks out of a consolidation range it will either break up into an uptrend or break down into a downtrend. Ideally as a trader you would like to wait for the range to break out before taking your position so you could be more confident. It is easier to trade with the trend than against the trend. Remember to trade with the trend because the trend is your friend.
Uptrend
In an uptrend you can observe candlesticks to form higher highs and higher lows. You can never be certain when an uptrend will end and reverse into a down trend. Oftentimes there are opportunities to trade with an uptrend. You should not just buy into an uptrend simply because things appear to be increasing in value. It is important to map out an entry so that you can ensure you have gotten the best possible deal. Typically in an uptrend there are pull back opportunities to buy into the uptrend. During a strong uptrend there is a lot of greed in the markets. Plenty of folks jump into positions with little to no research simply because “It sounds like a good idea.” There is plenty of opportunity to make money in an uptrend but randomly buying into one is not a good idea. You should always pay close attention to chart data when you are looking to enter a market. Counter trend trading is when you are taking a position against the market momentum. In an uptrend you should try to take long positions which means to buy low and sell high. Sounds easy enough right?
Downtrend
A downtrend is classified by lower highs and lower lows. For some reason this is everyone’s least favorite place to be. When a downtrend occurs there is a huge loss of motivation in a lot of traders and investors. Typically in a downtrend is where most of the FUD arises. Nobody complains about consolidation. Nobody complains about an uptrend. Most people complain about a downtrend. It’s important to understand they are all necessary for the market to be “healthy.” Nothing can go straight up forever. There’s nothing to cry about, however. A downtrend is a great opportunity to short the market. You can acquire more of the coins you love in a downtrend. You can short on spot exchanges or futures markets. Betting on a futures market downtrend is easier than shorting a spot market. In order to short a spot market you have to already be holding the coin that’s falling in price. In a futures market however, you can use stable coins to short a downtrend all the way to the bottom. Once your short is complete, you can take the profits and open a long position or you can simply “buy the dip” and use your profits to buy coins and put them into your long term portfolio
Fear is a weird psychological factor that is sure to arise in any market. The key to becoming a professional trader is to trade without emotions – including fear. Don’t just sell the dip because you are scared. Now it’s not advised to hold onto a losing position, but don’t sell your coins unless you have a plan. Otherwise you will spend your whole life chasing the markets. Be proactive, not reactive. To learn more about cryptocurrency trading and what to do in a downtrend check out some of our available courses here.
By viewing any material or using the information within this publication you understand that this is general education material and you can not hold any person or entity responsible for loss or damages resulting from the content or general advice provided here. Trading cryptocurrency has potential rewards, but also potential risks. You must be aware of the risks and be willing to accept them in order to invest in the markets. Only trade with funds you can afford to lose. This publication is neither a solicitation nor an offer to buy/sell cryptocurrency or other financial assets. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in any material on this website. The past performance of any trading system or methodology is not necessarily indicative of future results.
Written by Edward Gonzales © Crypto University 2021