How to make money from market cycles A guide to buying low and selling high

Profit from Market Cycles A Step-by-Step Guide to Buying Low and Selling High

Author: Jiànshū

1. Overview

This is the last article in our cycle series. The first three articles analyzed the cycle from a macro perspective, and this article will mainly introduce how to use indicators to determine the top and bottom, as well as how to optimize investment strategies.

2. Five indicators to guide you in determining the top and bottom

1. Ahr999 Coin Accumulation Indicator

Indicator Introduction: This indicator was created by Weibo user Ahr999 and assists Bitcoin dollar-cost averaging investors in making investment decisions based on timing strategies. The indicator implies the rate of return of Bitcoin dollar-cost averaging and the deviation between Bitcoin price and expected valuation.

• Brace Yourself for the Unthinkable: Saxo Bank’s Outrageous Predictions for 2024
• Welcome to the Memeinator-verse: A Meme Token On Fire! 🔥
• Binance Brings the Hammer Down on AEUR: Stablecoin Rockets 200% Overnight

How to Use:

• When the Ahr999 index is < 0.45, it may be a good time to bottom fish.

• When the Ahr999 index is between 0.45 and 1.2, it is suitable for dollar-cost averaging.

• When the Ahr999 index is > 1.2, the coin price is relatively high and not suitable for dollar-cost averaging.

Real-time chart: https://www.coinglass.com/zh/pro/i/ahr999

2. Rainbow Chart

Indicator Introduction: The Rainbow Chart is a long-term valuation tool for Bitcoin. It uses a logarithmic growth curve to predict the potential future price direction of Bitcoin.

It covers a rainbow of colors at the top of the logarithmic growth curve channel, attempting to highlight the market sentiment of each rainbow stage when the price passes through it. It emphasizes potential buying and selling opportunities.

So far, the Bitcoin price has continued to stay within the rainbow band of the logarithmic growth channel.

How to Use:

• The closer to blue, the closer the price is to the bottom.

• The closer to red, the closer the price is to the top.

Real-time chart: https://www.blockchaincenter.net/en/bitcoin-rainbow-chart/

3. RSI

Indicator Introduction: RSI (Relative Strength Index) is an indicator that measures the speed and magnitude of Bitcoin price changes. It calculates the RSI score based on the performance of the previous 12 months to determine the market trend strength and whether it is in the overbought or oversold range. The stronger the upward momentum, the closer the RSI is to 100, and a high RSI also indicates more positive price changes in the past 12 months; conversely, the stronger the downward momentum, the closer the RSI is to 0, and a low RSI value means relatively negative price changes.

How to use:

• RSI value of 30 or below (closer to red) indicates that Bitcoin is oversold or may soon be oversold, suitable for considering buying the bottom.

• RSI value of 70 or above (closer to green) indicates that Bitcoin is overbought and may soon experience a decline, suitable for considering selling.

Real-time chart:https://charts.bitbo.io/monthly-rsi/

4. 200-week Moving Average Heatmap

Indicator introduction: This indicator uses a color heatmap based on the percentage growth of the 200-week moving average.

Based on the monthly percentage growth of the 200-week moving average, a color is assigned to the price chart.

Historically, Bitcoin’s price has bottomed out near the 200-week moving average in each major market cycle.

How to use:

• The closer the color of the dots on the price chart is to red, the hotter the market, suitable for selling;

• The closer the color is to purple, the colder the market, suitable for buying.

It should be noted that this indicator failed at the top of the last bull market, indicating that it cannot be fully relied upon. Indicators are just tools that assist us in making judgments and need to consider many other factors.

Real-time chart:https://www.lookintobitcoin.com/charts/200-week-moving-average-heatmap/

5. CVDD

Indicator introduction: CVDD stands for Cumulative Value-days Destroyed.

How to use: When the Bitcoin price touches the green line, it indicates that the Bitcoin price is severely undervalued and is a good buying opportunity.

Real-time chart:https://www.tradingview.com/script/3CEPlBsb-Cumulative-Value-Coin-Days-Destroyed/

Summary

To make it easier for readers to use these indicators, we have created charts.

It should be noted that these indicators are only reference points for buying and selling Bitcoin, and do not represent that other tokens can also be bought.

3. Strategies suitable for cyclical trading

When we engage in long-term cyclical trading, we often encounter situations like the one shown in the figure below, many of which are caused by subjective judgment errors. If we formulate a strategy in advance, we can avoid such mistakes.

1. Combine dollar-cost averaging with the Martingale theory

First, let’s understand the concepts of “Martingale strategy” and “dollar-cost averaging”.

Martingale strategy: The Martingale strategy was originally a gambling strategy, which means that in a gambling game, when losing money, the wager is doubled until winning. Assuming a fair dice game where rolling a large or small number both have a 50% probability, the probability of losing once at any given time is 50%, the probability of losing twice in a row is 25%, the probability of losing three times in a row is 12.5%, the probability of losing four times in a row is 6.25%, and so on. The more times you play, the smaller the probability of losing. In theory, if you have unlimited funds, it is impossible to lose.

Later, the Martingale strategy was applied to trading, and the form it took was pyramiding positions (the Martingale strategy can be subdivided into reverse Martingale, positive Martingale, and scalp Martingale; the one we are introducing here belongs to reverse Martingale).

Dollar-cost averaging: Dollar-cost averaging is a long-term investment strategy that involves buying assets on a regular basis to average the purchase price. This strategy emphasizes consistent investment and long-term holding, rather than attempting to profit from short-term market fluctuations.

When using the above indicators, these indicators cannot tell us the precise bottom-fishing and top-escaping points, they can only judge the relative bottom and top within a cycle. And we cannot monitor the indicators all the time, which is why we need to engage in dollar-cost averaging.

Formulating the strategy: We can apply the principles of the Martingale strategy to dollar-cost averaging in order to minimize our average holding price. The specific strategy can be formulated as follows: Assume the current price of Bitcoin is $37,000 and start dollar-cost averaging from this price. Based on the above indicators, we can determine that the current Bitcoin price is neither high nor low, so we can engage in dollar-cost averaging. We set the benchmark amount for dollar-cost averaging at $1,000 and the frequency at once a week. In each weekly investment, if the price rises by $1,000, we decrease our investment amount by 5%. If the price falls by $1,000, we increase our investment amount by 5%. Of course, the premise is that according to the indicators, the Bitcoin price is still within the dollar-cost averaging range. When the Bitcoin price rises beyond this range, we pause the dollar-cost averaging plan and resume it when the price returns to the dollar-cost averaging range, or we consider reducing positions based on the indicators. These strategy parameters are just examples, and different parameters will naturally yield different returns. Readers can formulate their own strategies based on this process.

Disadvantages: The Martingale strategy claims to never lose money, but this is based on the assumption that the trading asset will not go to zero and the trader has unlimited funds. Therefore, the Martingale strategy is not suitable for trading long-tail assets, and the larger the trader’s funds, the more the advantages of the Martingale strategy can be reflected.

2. How to Increase Profits with Grid Strategy

When we engage in long-term investments, holding Bitcoin spot positions in hand, the APY on decentralized lending platforms is not high; if we deposit in exchange financial products, the APY is considerable but has a limit. To increase capital utilization and earn additional income, using the spot grid strategy is a good choice.

Spot Grid Strategy: The spot grid strategy is an automated strategy that involves buying low and selling high within a specific price range. Users only need to set the highest and lowest prices for the range and determine the number of grids to be divided. The strategy can then be executed. If needed, trigger conditions can also be preset, and the strategy will automatically start running when the market conditions meet the trigger conditions. The strategy calculates the buy and sell prices for each small grid and automatically places orders, continuously profiting from market fluctuations.

How to Develop a Strategy: Generally, the grid strategy is suitable for oscillating or oscillating upward market conditions, and is not suitable for one-sided market conditions. The disadvantages of the grid strategy are obvious – when the price rises or falls outside the set range, it will either sell too soon or buy at high prices, which is why some people call it a garbage strategy. We have optimized the grid strategy by selecting an unconventional stablecoin/grid strategy. Specifically, we use the ETH/BTC trading pair combined with an infinite grid strategy.

An infinite grid strategy is an advanced version of the regular grid strategy. In an upward market condition, the infinite grid ensures that users hold equivalent valuation currency assets. With the infinite grid strategy, no matter how many times it is sold, the user still retains assets equivalent to the previous position. For example, if the initial price is 20,000 USDT/BTC, and the user owns 1 BTC, the user has 20,000 USDT worth of assets invested. When the price rises to 40,000 USDT/BTC, selling half a unit means the user still has half a unit, and still retains 20,000 USDT worth of assets invested. When the price rises to 80,000 USDT/BTC, selling another quarter unit means the user still has a quarter unit, and still retains 20,000 USDT worth of assets invested. The infinite grid does not have a specific upper range, so using the infinite grid strategy can effectively avoid situations where the price continuously rises and the strategy sells too soon.

So why choose the ETH/BTC trading pair? Our optimization of the grid strategy focuses on how to avoid losses caused by prices exceeding the grid range. However, due to the nature of the grid strategy itself, it cannot solve the losses caused by continuous price declines, so we can only reduce the losses caused by downward trends. ETH/BTC reflects the relative strength and weakness of ETH and BTC trends. From a cyclical perspective, the ETH/BTC exchange rate exhibits an oscillating upward trend during bullish markets and an oscillating downward trend during bearish markets. The ETH/BTC trading pair is a good match for the infinite grid, which is a strategy suitable for long-term slow bull markets. Moreover, we not only gain profits based on BTC, but also from the rises in ETH and BTC during bullish markets.

IV. Conclusion

Although the indicators and profit methods discussed in this article are based on Bitcoin as an investment target, readers can also apply the “buy low, sell high” strategy to invest in other cryptocurrencies. Moreover, the price changes of Bitcoin also have guiding significance for the trends of other currencies, especially mainstream ones with large market capitalization.

No matter what indicators are used, they have their inherent invariability. Although the market often experiences black swan events, the crypto market will not go to zero. As long as people participate and it does not go to zero, prices will continue to fluctuate, following cycles. This not only estimates value but also tests time. For ordinary investors, as long as they make good use of the cycles, they can reap the benefits of industry development. This applies not only to the crypto industry but also to other industries. Multiples are not important; what matters is sustainability. The crypto industry does not lack opportunities, but rather continuous participation.

We will continue to update Blocking; if you have any questions or suggestions, please contact us!