Exclusive Trade Setup for Bitcoin in August [Premium Content]

Judging by the swiftness of the decrease and the creation of a descending triangle, which is a bearish pattern, we believe that BTC is not done decreasing. However, we are still bullish on the long-term prospects of BTC — even though we are expecting a short-medium term downward move to materialize. In this article, we are going to outline a buying scheme that will allow us to scale into a good position for the ensuing future upward move. We aim to do this while also minimizing the possible risk of these buy orders by entering a position in which we can easily cut our losses if the trade does not go our way. For our scheme, we are considering a portfolio of $10,000. [Disclaimer: This article is not trading advice and should not be construed as such. It is for educational purposes only and represents the typical trades the author would make himself. Always consult a trained financial professional before investing in cryptocurrencies, as the market is particularly volatile.] 

Setting Up a Buy Plan for BTC/USD

At the current time, the Bitcoin price is trading inside a descending triangle. A breakdown that travels the entire height of the triangle would eventually take us to $5000. Since we have clearly visible support, we will initiate our first trade at the support line of the triangle. This trade will only be initiated with 10 percent of our portfolio. Even though we believe the price will eventually break down from the triangle, it is possible that it begins an upward move before that, once it reaches the support line of the triangle. The move could yield significant profits, but is still done with a relatively small percentage of the total portfolio. The reasoning behind that is that we are trading against the underlying trend, which is significantly riskier and not recommended for beginner traders. Our entry point is at $9200, our stop loss is at $8989, while our target is set at $11,200. The stop loss represents a loss of 2.5 percent while the Risk:Reward ratio is 8.75. I like this trade since it has a very lucrative R:R ratio and allows for a very appropriately positioned stop loss. If the price moves towards the resistance line, we will update our target based on the sentiment of the market, and likely gradually take profits throughout the upward move towards resistance. If the price breaks down from the triangle, an event which is looking likely, we have outlined several support areas, in which we will take medium-to-long-term positions. They can be found at:

• $7800-$8100
• $6100-$6300
• $5300-$5400

It is possible that the price will not reach all of our targets. However, it is worth noting that the price has been trading inside the descending triangle, which is a bearish pattern, for almost two months. A breakdown after such a long period of trading within the confines of a pattern is usually swift and of a substantial magnitude. Judging by the period of time that BTC has been in an uptrend and making the hypothesis that the downtrend will have a similar length, our targets should be reached around the middle of September. However, it is likely that the price will not decrease in a straight line. Rather, it is much more probable that it will undergo several upward bounces of varying magnitudes once it reaches the individual support areas. This allows for profit taking for scalpers and other short-term traders.

Money Management

We stated that we will enter a long trade with 10 percent of our portfolio at $9200. However, if the price breaks down from the triangle, our stop loss will be triggered, preventing further losses. Additionally, if the price moves upward towards the resistance line, we will take profits. Therefore, we will not count this 10 percent towards the other positions. A rough plan for how we are going to allocate our portfolio is given below:

Price Level	Percentage of Portfolio
8050	35%
6200	20%
5350	45%
Average of 6464.5

As stated on the table, this would give us an average entry price of $6464.5. There are several reasons which we will examine below as to why we like our average entry, First, let’s say that the Bitcoin price reaches all or several of our support areas, before beginning another upward move. Needless to say, this would allow us to profit significantly from the move, since we have a very low entry point. We believe this scenario does not need clarification. Now, let’s say that the price again reaches all our targets, triggering our buy orders. However, the ensuing upward move is weak and based on market sentiment we have decided that BTC will continue to decrease.

A retracement to the support line of the triangle (breakdown point) would give us a 40% rate of profit, measuring from our average entry point. A movement such as this after a breakdown is very common. Therefore, this entry point would not only virtually eliminate all of our possible downside risks, but it would also allow us to profit from the corrective upward move. Now, say that the breakdown is a lot stronger than expected. The Bitcoin price breaks below all our support areas without giving any hint of retracement, and creates a double bottom near $3200, before beginning to retrace.

A retracement to the 0.5 Fibonacci level would take us to around $6200, allowing us to exit the trade experiencing incremental losses of 2-4%, depending on the exact level at which we exit. This would allow us to exit the trade with the vast majority of our funds, and give us the possibility of entering another long trade at a much lower price level. Therefore, the allocation of our portfolio in this exact way allows us to :

1. Initiate a very profitable long for the ensuing upward move.
2. Exit the trade with a quick, significant profit (40%) if the upward move is weaker than expected.
3. Cut our losses to only 2-4% if the trade goes south.

A spreadsheet that will track all of our positions, combined with our rate of profit/loss and several important indicators is given below.

Previous Trades

Short BTC/USD: July 10

We believe that the the price of Bitcoin (BTC) will decrease and reach the support line outlined below. Furthermore, the recent price movement and the creation of a high allows us to place a very tight stop loss and initiate a profitable trade setup. The trade consists of an average entry price of $12,900, a stop loss of $13,251, and a target of $12,078. This represents a 1:3.2 risk: reward ratio. This means that in order to break even, the trade would have to be successful 31% of the time. (1/4.5=0.22). In order to initiate a trade, we will always look for Risk:Reward ratios that are higher than 1:3. While this trade barely passes this threshold, we believe it is a relatively low-risk trade with a very high chance of materializing.

Money Management

In our trades, we will follow a rule stating that we cannot risk more than 2% of our total portfolio in a trade. Therefore, since the stop loss presented above is slightly higher than 2%, it is possible to initiate this trade with 90% of your portfolio without breaking the rule. However, that is not recommended. While the Risk:Reward ratio is satisfactory, it is not outstanding. R:R ratios close to 1:10 are not entirely uncommon in the cryptocurrency markets. Therefore, we would initiate this trade with 5% of the total portfolio. In an account of $10,000, this trade would be initiated with $500. By doing that, we would be risking a total of 0.139% of our total portfolio. In an account of $10,000, this is a loss of $13.90. If the price reaches our target, the profit would be $31.4. Further details of the trade along with the formulas used in our calculations are presented in the sheet below.

Long BTC/USD: June 24

In order to see how we got here, please click here. We believe that the price will make another upward move and reach values of at least $11,700. Furthermore, the price movements outlined below allow for the initiation of a long with a satisfactory risk to reward ratio. There are two reasons for this:

1. The price is trading close to the ascending support line.
2. The line has been touched a sufficient number of times.

Therefore, it is possible to initiate a long with a relatively short stop-loss. The green arrow is the height of the triangle projected from the breakout point. It gives us the final target. The trade consists of an average entry price of $10,700, an average stop loss of $10,480, and an average target of $11,700. This represents a 1:4.5 risk: reward ratio. This means that in order to break even, the trade would have to be successful 22% of the time. (1/4.5=0.22). n order to initiate a trade, we would look for Risk:Reward ratios that are higher than 1:3. Secondly, due to the absence of volatility in the previous lower wicks, the stop loss can be placed close to the support line.

	Simple	Advanced
Entry Point	$10,700	1/3 = $10,650 1/3 = $10,700 1/3 = $10,750
Target	$11,700	1/3 = $11,650 1/3 = $11,700 1/3 = $11,750
Stop-Loss	$10,480	1/3 = $10,495 1/3 = $10,475 1/3 = $10,465
Risk: Reward	1:4.5	1:4.5

In order to remove the risk of the price barely missing the entry point or triggering the stop loss, it is recommended to split your order into three smaller orders, with the average price remaining the same. The value of $10,495 was chosen for the stop loss instead of $10,500, since the latter served as support on June 23. Furthermore, it is likely to provide psychological resistance.

Example

Below we are going to initiate our proposed trade on the Bittrex exchange. The trigger price refers to the price that BTC would have to reach for our stop to be triggered. Since we stated that $10,500 has previously provided support and is likely to provide psychological support, we will use $10,499 as our stop. The “Ask” price refers to the actual price that BTC will be sold. Note that even though we wanted to sell at an average price of $10,480, we used a value of $10,470. This is done in order to remove the risk of the price dropping rapidly from $10,499 to below $10,480. The way the stop-loss order works is that once it is triggered, it will sell at the highest price up until your “Ask price”. Therefore, once the stop at $10,499 is triggered, your BTC will sell at the highest asking price between $10,499 and $10,470. You can think of the “Ask” price as the lowest possible price for your sell order. It is usually better to sell at a slightly lower price than to be left with an open unfilled order. If you want to completely remove the risk of a rapid decrease leaving you with an unfilled order, you can place your sell order significantly lower than this, even at $10,400. This, however, allows for the risk of selling at a significantly lower price than the planned trade, skewing the Risk:Reward ratio in the process. Finding a balance between these two risks depends on several factors, most important among them the price volatility in the exchange.

Money Management

In our trades, we will follow a rule stating that we cannot risk more than 2% of our total portfolio in a trade. Therefore, since the stop loss presented above is slightly higher than 2%, it is possible to initiate this trade with 90% of your portfolio without breaking the rule. However, that is not recommended. While the Risk: Reward ratio is satisfactory, it is not outstanding. R:R ratios close to 1:10 are not entirely uncommon in the cryptocurrency market. Furthermore, the price is possibly near the short-term top. Therefore, there is a considerable downside risk. Therefore, we would initiate this trade with 5% of the total portfolio. In an account of $10,000, this trade will be initiated with $500. By doing that, we would be risking a total of 0.127% of our total portfolio. In an account of $10,000, this is a loss of $12.73. If the price reaches our target, the profit would be $43.12. This gives a Risk:Reward ratio of 1:3.5 instead of 1:4.5. The reason for this is the commission of the exchange, which has to be subtracted both during the entry and exit. The commission varies from exchange to exchange. In the Bittrex exchange, the commission for a trade of $500 is $1.24, a rate of 0.2%. Further details of the trade along with the formulas used in our calculations are presented in the sheet below. Good Luck and Happy Trading! 

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Disclaimer: This article is not trading advice and should not be construed as such. It is for educational purposes only and represents the typical trades the author would make himself. Always consult a trained financial professional before investing in cryptocurrencies, as the market is particularly volatile. Images are courtesy of Shutterstock, TradingView.