The Forex Chronicles

Why It Is Almost Impossible To Day Trade Bitcoin

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Popularity of Bitcoin

Bitcoin ImageCryptocurrencies such as Ripple, Litecoin, Ethereum and Dash are continually being mentioned on the various different financial news channels and websites , but it is fair to say that Bitcoin is still the most well-known of these cryptocurrencies, and the most talked about.

Many people have chosen to actively buy some Bitcoin coins in the last five years or so and hold on to them as a long-term investment, but others now prefer to trade the price movements of Bitcoin over the course of several days or weeks via CFDs because they can open long positions and short positions.

However while it is true that many brokers now offer CFDs for Bitcoin and many of the other popular cryptocurrencies, it is worth pointing out that these markets are still not really suitable for day trading.

Here are some of the reasons why:

Low Average Daily Trading Range

There was a time at the end of 2017 and the beginning of 2018 when the price of Bitcoin used to fluctuate by around 1500-1900 points a day, but volatility has been steadily declining throughout 2018, and the average daily trading range is now just 208 points.

Therefore this makes it very difficult to make money from if you are just looking to hold on to a position for no more than a few hours, and don’t want to hold any overnight positions.

It is hard enough to predict where the price is heading in the next few weeks or months, but it is even harder trying to correctly predict the direction of the price on any given day.

Large Spreads

Following on from the last point, even if you were able to correctly predict the price direction of Bitcoin on a daily basis, the large spreads would massively eat into your profits.

As stated above, the average daily trading range is currently just over 200 points. So when you bear in mind that many of the leading CFD brokers have spreads of between 50 and 150 points, it is practically impossible to consistently make money from short-term day trades.

Easy Markets have spreads from 45 points on Bitcoin, which is very reasonable, but this still isn’t low enough to make Bitcoin a viable day trading instrument.

Large Margin Requirements

There is one other factor that restricts the ability for traders to day trade Bitcoin, and that’s the large margin requirements.

Many brokers require greater margin for cryptocurrencies than other markets because they are viewed as being a lot more risky, and this is particularly the case for Europe-based traders because the new ESMA rules require a margin of at least 50% when trading cryptos.

Final Thoughts

As you can see, there are many reasons why Bitcoin is not really suitable for day traders at the present time.

The large spreads and the large margin requirements, combined with the low average trading range make this virtually impossible to make money from right now.

Therefore if you are someone who is looking to trade Bitcoin, you should take a longer term view and be prepared to hold on to your positions for days, weeks or months at a time because then these factors will be less of an issue, even if you have to pay a small daily financing charge for holding long positions overnight.

If you open a long position and the price of Bitcoin goes up by $500 or $1000 one week later, then a $50 spread won’t eat into your profits too much, and the daily financing charges will be relatively small.

Over time the spreads may start to come down, and there is a possibility that the ESMA may lower their margin requirements for European traders. However until that happens, it is probably better to look for breakouts or price reversals, for example, and wait for the big price moves to occur, which are obviously more likely to occur over the course of several days rather than a few hours.

Gold Price Breakout – October 2018

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Previous Price Action

The price of gold has been trading in a sideways trading range for the last few months, struggling to break decisively above or below the $1200 level.

This can be seen in the chart below because you can see that the price has been trending within the upper and lower trendlines for many weeks now.

Gold Breakout - October 2018

It seemed that there needed to be a catalyst to move the price strongly upwards or downwards to break out of this range, and last week’s stock market mini-crash provided this catalyst.

Safe Haven

In times of uncertainty, people often sell some of their stocks to preserve their capital and invest it into something a little safer and less risky, and gold is often seen as a perfect safe haven for this cash.

Therefore it was no surprise at all that the price of gold surged higher last week after the big sell-off because this happens fairly regularly.

As a result of this increased buying, the price of gold broke upwards out of this trading range, and is currently trading at $1232 at the time of writing.

Trading Opportunity

If you are someone who likes to trade price breakouts, you probably would have entered a long position at the close of the breakout candle, and would now be in profit slightly because the price has continued edging higher at the start of the London session.

Indeed the breakout candle closed at $1223, so this breakout trade is already $9 in profit at the time of writing.

I myself didn’t really like the look of this breakout because there was a very large breakout candle, and when this happens you will often get quite a large pull-back, and are then sitting on a loss, and sometimes the breakout quickly runs out of momentum.

Furthermore, I thought that there may be limited upside from here because the EMA (200) currently stands at $1245, which is likely to act as a strong resistance level.

There are some breakouts that look ripe for a trade, and others that are a little unconvincing, and I would say that this latest gold breakout is still a little unconvincing, which is why I will not be trading this breakout at any point, even after it broke higher today.

The reason why I say that is because we have already seen a slight recovery in the stock market, and there seems to be a little support right now that is holding the price of the major US markets up.

So if the markets do happen to bounce back this week, which could happen, this will likely have the opposite effect on gold, and the price may well fall back within in the previous trading range.

This has turned out to be a good breakout trade for those that had the courage to trade it, particularly if they have already moved their stop loss up to break-even because it is now a risk-free trade, but I never really felt that this was a high probability set-up.

I am prepared to wait for high probability set-ups where the odds of success are much higher. The price of gold could easily touch the EMA (200) and possibly break through it, but it’s no problem at all if this occurs. It’s just something you have to accept as a trader.

US Markets Crash – 200-Day Moving Averages Breached Already

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Is the Bull Run Over?

There is no doubt that the US stock markets have had a fantastic run since they hit their lows back in 2008 and 2009 after the financial banking crisis.

The Dow Jones has gone from 6500 to around 27000 earlier this year, and the S&P 500 has posted similar gains, rising from around 670 to around 2940.

Indeed this has helped global stock markets soar higher in recent years, which has resulted in many active and passive investors growing their portfolios quite substantially.

However yesterday’s big sell off, triggered in part by the threat of rapidly rising interest rates, could signal that the bull run is finally over.

Yesterday’s Sell-Off

The fact is that many US companies had become seriously overvalued due to continued share price rises, and this was even more true for many of the top technology companies.

So my own personal view is that yesterday’s sell-off, which saw 800+ points wiped off the Dow Jones, has been a long time coming, and is actually quite healthy in many respects, even if it has negatively affected my own portfolio of UK stocks.

Now we just need to wait and see if this is a short-term correction or the start of a long-term correction, but using the 200-day moving averages as a guide, the future is looking ominous.

200-Day Moving Averages

The big price rises had seen the price of the major US stock indices continue to trade far higher than the 200-day moving average of these indices, but yesterday’s falls have already seen the price come back to trade close to this key support level in both instances.

Here is the daily chart of the Dow Jones…

Dow Jones Chart After October Sell-Off

….and here is the daily chart of the S&P 500…

S&P 500 Chart After October Sell-Off

As you can see, with the futures once again trading lower today, the price has actually dipped below the 200-day exponential moving average on the S&P 500 at the time of writing.

Future Price Direction

A fall below the 200-day moving average isn’t enough to signal the start of a new bear market, so it is still far too early to call.

However if the price continues to trade below this critical level for the next few weeks, the shorter-term EMA (50) will eventually cross below the EMA (200), triggering a death cross, and this would be a much stronger signal that we are seeing the start of a new bear market.

Therefore there is the potential for the Dow Jones to test the previous low of 2018 – 23112 – and for the S&P 500 to test the previous low of 2553 at the very least.

Whatever happens, these are interesting times whether you are a trader or investor, and it is going to be very interesting to see where the price of these major US indices go from here.

Is Forex Trading Being Overshadowed by Cryptos and Cannabis?

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Popularity of Cryptocurrencies in 2017

Bitcoin, Ethereum, Litecoin, Ripple and many other cryptocurrencies really exploded in popularity in 2017 as the price of these instruments continued to rocket higher and higher, making thousands of people extremely rich in the process.

In some respects it was a new gold rush because many ordinary people started taking an interest in these cryptocurrencies and buying a few Bitcoins to grab a slice of the pie.

However, as expected, the price of Bitcoin and other markets couldn’t keep on going up forever, and eventually there was a huge price drop across the board, which has left many people nursing some heavy losses and praying for a recovery.

Despite these price falls, these cryptocurrencies are still very popular with speculators and traders, and are still be talked about on financial blogs, websites and TV channels on a daily basis.

Cannabis Stocks and ETFs

With the legalisation of cannabis in Canada, and a potential relaxation of laws in other countries around the world, there has also been a huge rush to buy shares in companies that are involved in the cannabis industry.

ETFs have been set up that invest in a selection of companies in this growing sector so that individuals can get a broad exposure to this industry without having to select individual companies, and the price of these ETFs has really rocketed higher in the last few months.

Two of the most popular ones are the Horizons Medical Marijuana Life Sciences ETF (HMMJ) and the ETFMG Alternative Harvest ETF (MJ), and you can see from their respective charts below that they have both risen by more than 50% since August:

Horizons Medical Marijuana Life Sciences ETF

ETFMG Alternative Harvest ETF

As a result of these price moves and the increased media coverage, more and more traders and investors are taking in interest in these cannabis stocks and ETFs because of the enormous potential to make future profits from the opening up of this industry.

Indeed as interest in cryptocurrencies has started to wane in 2018 with less volatility and fewer wild price swings, it is the cannabis / marijuana stocks that have become the ‘next big thing’ this year.

Implications for the Forex Trading Industry

I think it is fair to say that forex trading has definitely been overshadowed by both cryptocurrencies and cannabis stocks in the last couple of years.

While it is true that there will always be a large forex industry with many participants from all over the world, there is no doubt that traders are increasingly looking to these alternative markets in the belief that they can potentially generate more profits in the long run.

Subsequently, forex brokers are desperately looking to capitalise on these trends and compensate for any reduction in forex trading activity by their traders.

Therefore you will see that many brokers now offer trading on Bitcoin and a few other cryptocurrencies in the form of CFDs, and have created a range of banners and promotional material that is designed to attract these cryptocurrency traders.

Similarly, I am also seeing a range of banners for cannabis ETFs from brokers who provide the option to buy or trade these markets.

So, if anything, the clever brokers are actually benefiting from the growing popularity of cannabis stocks and cryptos, even if their forex trading profits have flat-lined or are growing at a slower rate.

It is also good news if you are an individual trader because you now have more markets to potentially make money from with the ability to trade these cannabis stocks and ETFs, and more opportunities to benefit from the price volatility of cryptocurrencies because you can take long and short positions, and don’t actually have to buy the cryptos directly.

USD/JPY Soars To 114 After Breakout

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Trading Price Breakouts

If you are new to forex trading, one of the easiest ways to get started is to simply concentrate on trading price breakouts.

The key here is to find currency pairs that are trading sideways in a narrow trading range on the daily chart, draw trendlines connecting the highs and the lows, and wait for the price to close outside of this range with strong momentum.

In an ideal scenario, you also want to see a series of short, mid and long-term exponential moving averages (I use the 20, 50, 100 and 200-period EMAs) all trading close together because this indicates a period of consolidation and indecisiveness, and is a common pattern that you will often see before a strong breakout.

USD/JPY Breakout

If you visit this site regularly, you will know that I will often highlight some of the most promising set-ups, and a few weeks ago I highlighted the potential for the USD/JPY to break out of its current trading range.

This was because it continued to trade within an ever decreasing sideways trading range with little volatility or momentum, and all the EMAs were tightly squeezed together in readiness for a potential breakout.

So as a result of these favorable trading criteria, I said that there was a real chance that we would see a decent breakout if the price breaks through the upper or lower trendline (at around 112 or 110 respectively), and as it turned out, it was the upper trendline that was breached.

USD/JPY Breakout Before and After Results

Here is the pre-breakout chart of the USD/JPY pair….

USDJPY Price Chart - 10 September 2018

….and this is what subsequently happened….

USDJPY Breakout - September 2018

As you can see, the price of the USD/JPY has hit 114 after breaking out of its previous sideways trading range, giving a total profit of around 200 points so far.

Final Thoughts

Of course everyone will trade these breakouts differently. Some traders may look for even more profits, possibly equivalent to two or three times the width of the trading range, for example, while others will scale out of their positions in two stages or will have much smaller profit targets than 200 points.

The point I want to get across is that these price breakouts can be very profitable, and although you do occasionally get a few false breakouts (including a few that I have highlighted in previous articles), the profitable ones will often compensate for the losing ones in the long run if you use strict stop losses and maximize your earning potential with realistic profit targets.

If you want to see a live example of a price breakout, you might want to check out the daily gold chart because this is threatening to break lower and breach its support level, as first pointed out here.