Part 7 Fundamental Analysis – Trading Cryptocurrencies

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7. Combining Fundamental & Technical Analysis
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Lesson 1: Meet the Team

Start your journey to becoming a professional Crypto Trader!

Meet the Crypto Traders Pro team, and learn how the cryptocurrency market compares to traditional markets such as the Stock Market.

Lesson 2: Exchanges & Trading Tools

What are the best cryptocurrency exchanges to trade on? What’s a wallet, and what are the pros and cons of cold storage, desktop, and web wallets?

Learn the answers to these and get introduced to some of our favorite trading tools, and how they can make your trading more profitable.

Lesson 3: Technical Analysis

Learn the basics of technical analysis and how to read a chart.

What do all the different colors and shapes on charts mean? How do you spot patterns in the market, and what are some signs of bullish or bearish markets?

Lesson 4: Market Psychology

Cryptocurrencies are unique in that most investors are looking to get rich quick.

How do you take advantage of their emotions, and use market psychology to improve your profits?

Lesson 5: Fundamental Analysis

What is fundamental analysis?

How can you spot legitimate or fundamentally flawed projects, and decide whether a cryptocurrency is a long-term investment, or short-term trade?

Lesson 6: Advanced Technical Analysis

Learn all about advanced technical analysis, chart patterns, and trading techniques. What is shorting Bitcoin, and how can it help you profit during a bear market?

Lesson 7: Combining Fundamental & Technical Analysis

Review the basics of fundamental and technical analysis, and learn how to combine the two to find the best trading opportunities, and create your entry and exit strategies.

Lesson 8: The V.I.C.I.O.U.S System

Be introduced to the V.I.C.I.O.U.S. system. Learn how to create your own cryptocurrency trading system and checklist.

Lesson 9: Bringing it All Together

Combine all that you’ve learned up to this point!

Learn how to create your own cryptocurrency trading strategy matching your personality, and become consistently profitable.

Lesson 10: Live Trade 1

Over the course of one month, one of our experts conducted a series of LIVE trades resulting in over $100,000 profit.

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Lesson 11: Live Trade 2

Another live trading session, but this time showcasing an opportunity to short IOTA.

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7 Principles for Trading Cryptocurrencies

This is a primer for anyone new to cryptocurrency trading.

It is NOT intended as investment advice, other than ‘caveat emptor’ — buyer beware! I will try to give a valuable set of ideas, observations, principles, and warnings to help beginner-to-intermediate crypto traders.

This article will evolve into a comprehensive series over the coming months, possibly next few years. For updates, follow me on Medium, and on Twitter.

Who am I?

I got interested in cryptocurrency in 1996. Yes it existed back then, at least the concept of it.

J Orlin Grabbe was an early cryptographer, economist and rugged individualist. In 1996 he published this article ‘The End of Money’ in which he recounts:

“Cryptology is the future,” he responded emphatically. “It’s what’s going to protect us from Big Brother.”

It wasn’t until late 2020 that I cottoned on to ‘Bitcoin’ as an attempt at this type of cryptographic ‘end of money’.

While traveling long-term in 2020 and 2020 I traded bitcoin, and unfortunately ignored the Ethereum ICO or Ripple XRP’s gradual development. Ah well…

By 2020 I joined the Bitcoin Debit Card provider Wirex as their first Head of Marketing, building the marketing team to 18 over a year and 3 months. There were many days of excitement as we watched trading volumes, crypto prices, and sheer quantity of crypto coins mushroom beyond expectations.

Then came the big 2020 December highs and a very miserable 2020 crash-in-slow-motion until the market had lost

In November 2020 I published this Beginners Guide to Cryptocurrency. Read that if you’re really new to the whole crypto thing.

As of today, 18 May 2020, my blockchain marketing career has kept me busy, working with the likes of Bitcoin.com (love ‘em or hate ‘em), a decentralized exchange http://metamorph.pro (one to watch), and others.

Now, let’s dive in to trading…

Principles of Cryptocurrency Trading for Newbies/Intermediates

I’m not going to claim useful insight for advanced/expert traders. These principles are for relative newcomers to crypto trading.

Here’s a short list of principles that are certainly worth keeping in mind:

  1. Know the difference between Technical Analysis and Fundamental Analysis. Technical is all about the price charts. Indicators of momentum. Where as fundamental analysis is all about the project/company itself (whose on the team, what’s the product, etc). Traders may consider fundamentals, including short-term news, but the focus is on the technicals (price charts).
  2. Learn technical analysis. If you’re going to attempt trading then you have to learn the technical details. No short cuts. No ‘play your luck’. No “rely on so-and-so from twitter as he publishes a lot of charts so he must know what he’s doing”. Where to learn trading? A great place to start is this long article by SatoshiMoku. I don’t like his attitude about various crypto projects (he mostly comes across as a Bitcoin Maximalist and dismisses the viability of other coins), but his technical analysis is excellent.
  3. Trade less often! Use higher time-frames to spot long-term swing trade opportunities, rather than getting caught in the choppy seas of short-term fluctuations. If you are really, really new to trading, then don’t ‘trade’ at all… instead, buy to hold (HODL — hold on for dear life) IF you believe in the long-term development of cryptocurrency. Which means, research some coins you like, diversify into a handful of them, keep tabs, learn more, and don’t fret. In the mean time, learn trading as a bonus side-project if it interests you to do so. And only trade a small portion of your portfolio, as you continue to accumulate more coins over time. If you’re constantly checking the price chart caught up in the emotion of minute to minute ups and downs, you’re doing it all wrong.
  4. Learn risk management. Despite how long it might take to learn technical analysis, it still won’t make you a good trader until you learn how to manage your portfolio diversification, position size, exit strategy. That is, when to actually buy, how much to buy of different coins, and when to actually sell to close the trade. Ultimately, this is why ‘trading less often’ is quite sage advice, because it helps reduce the amount of mistakes :)
  5. Don’t trade on emotion. Speaking of mistakes, the biggest mistake, the most basic underlying mistake of all trading, is a lack of objective discipline. That is, trading on emotion. When bitcoin starts to spike we have FOMO (fear of missing out). Then it starts to crash and we have buyers remorse, so we sell for a loss because ‘we don’t want to lose everything’ fearing that it might ‘crash to zero’… and then low-and-behold the price recovers, goes back up, and we are simply left with less dollars and no crypto, because we traded too often, and made decisions based on emotion.
  6. Develop your own system. What works for some will not work for you. Partly because you don’t watch the charts as often as they do. Or because your personality is different. Or whatever. Learn from others. Be curious. Adapt. But create your own approach, based on the historical accumulated knowledge about trading (read, learn, absorb, master).

So with those 6 points, what I’m really saying is, take trading seriously (study, learn, take Udemy courses), don’t believe hype about it being easy, and take a long-term view.

You may have heard that ‘most people lose money on the stock market’. I’m guessing that applies to the cryptocurrency markets too.

Far better is to save yourself both time and stress, by simply buying and holding for the long-term gains.

You are essentially speculating, or you may consider it investment. Like buying shares of IBM, Apple or Google in the early Internet days.

If you do want to trade, then understand there are smoke-and-mirrors on social media. And it’s a complex skill that takes the proverbial blood, sweat and tears to get good at. I may produce a series of videos lessons for trading techniques that I rely on.

You might get lucky. The market may enter a strong bull run and you make 500% in a few months. Does that make you a good trader? No. Or you might catch the start of a bear run and your account drops by 50% in a week. Does that make you a bad trader? Maybe. Welcome to cryptocurrency trading.

I’ll add a 7th point to the list:

7. Take profits. This is one that was difficult for me to follow. I had a long-term HODL mentality even as I got more comfortable with trading. Once you do get good at reading the charts and want to actively trade, there is nothing wrong with taking profits on winning positions. So you may lose out on a bit of the upside potential, but steady accumulation of locked-in profits over time is what separates the winners from the losers.

Ultimately, it all boils down to one thing:

Buy low. Sell high. Not the other way around :)

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Reading time: 9 minutes

Fundamental analysis is a method of analysing financial markets with the purpose of price forecasting. Forex fundamental analysis focuses on the overall state of the economy, and researches various factors including interest rates, employment, GDP, international trade and manufacturing, as well as their relative impact on the value of the national currency they relate to.

The core premise of fundamental analysis in Forex, as well as other financial markets, is that the price of an asset may differ from its value. For this reason, various markets may sometimes misprice an asset, overprice, or underprice it in the short run. Fundamentalists claim that despite being mispriced in the short-term, the assets will always return to the correct price eventually. The end goal of performing fundamental analysis is to discover the true value of an asset, to compare it to the current price, and to locate a trading opportunity.

This also nicely demonstrates the key difference between fundamental and technical analysis. While technical analysis barely pays attention to anything but the current price, fundamental analysis researches everything but the current price. Whilst it is true that fundamental analysis may not be the best tool for a short-term trader in day-to-day markets, it is the fundamental Forex factors and how they are analysed that answer what happens in the long-term.

Methodology

FX fundamental analysis isn’t just about comparing the current data of single economic indicators to previous data. There are a great number of economic theories which surround fundamental Forex analysis, attempting to put various pieces of economic data in context, to make it comparable.

The most popular economic theories of currency fundamental analysis babysit the notion of parity – a condition of price at which currencies should be exchanged when adjusted, according to their local economic factors, such as inflation and interest rates.

Understanding Fundamental Analysis

The following video explains how fundamental analysis is used to monitor major news releases, and what traders can expect to happen in the financial markets when certain data has been released:

Good News – Bad News

You may have noticed that from the very practical standpoint of an average Forex trader, it is news reports that produce movements on the markets. How and why does this happen? There are several economic indicators that financial experts observe because they can provide hints on the health of the economy.

These indicators are found in news reports and news outlets. Some are released weekly, most are released monthly, and a few quarterly. You can track such announcements and developments through our Forex calendar. Now let’s compare technical and fundamental analysis by the frequency of data updates.

In the case of currency trading fundamental analysis, new data arrives every second in the form of a price quote, while fundamental indicators are only published once a week at the most. Capital flows gradually from countries where it accumulates at a potentially slower rate, compared to the countries where it could accumulate at a potentially faster rate.

That has everything to do with the strength of an economy. If an economy is forecast to hold strong, it will appear as an attractive place for foreign investment, because it is more likely to produce higher returns in the financial markets.

Following that thought, in order to invest, investors will first have to convert their capital into the currency of the country in question. Buying more of that currency will push the demand, and force the currency to appreciate. Unfortunately, economics is not that simple, which is why examples of healthy economies showing weakening currencies are not exactly unknown to history. Currencies are not like company stock, that directly reflects the health of the economy.

Currencies are also tools that can be manipulated by the policy makers – such as central banks and even private traders like George Soros.

When economic reports are released, traders and investors will look for signs of strengths or weaknesses in different economies. If prior to the news releases, the market sentiment leans in one direction, changing the price before the release is known as a ‘priced in market’. It often causes a little commotion upon the actual data release.

Conversely, when the market is unsure – or the data results vary from what was anticipated – severe market volatility may occur. That is why Forex rookie traders are generally advised to stay away from trading around the news when practising fundamental analysis.

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Major Economic Indicators

Economic data may hint towards shifts in the economic situation of a respective country.

Interest rates

Interest rates are a major fundamental Forex analysis indicator. There are many kinds of interest rates, but here we will focus on the nominal or base interest rates set by central banks. Central banks create money, that money is then borrowed by private banks. The percentage or the principle that private banks pay central banks for borrowing currencies is called a base or a nominal interest rate. Whenever you hear the phrase ‘interest rates’, people are usually referring to that concept.

  • Manipulating interest rates – a big part of the national monetary or fiscal policy – is one of the primary functions of central banks. This is because interest rates are a great leveller of the economy. Interest rates are perhaps stronger than any other factor, and they influence currency values. They can have an impact on inflation, investment, trade, production and unemployment.

Here is how it works:

The central banks generally wish to boost the economy and reach a government-set inflation level, so they decrease interest rates accordingly. This stimulates borrowing by both private banks and individuals, as well as stimulating consumption, production and the economy in general. Low interest rates can be a good tactic, but a poor strategy.

In the long-term, low interest rates can over-inflate the economy with cash, and can create economic bubbles, which as we know, sooner or later will set a toppling chain reaction across the economy, if not entire economies.

To avoid this, central banks can also increase interest rates, thus cutting borrowing rates and leaving less money for banks, businesses and individuals to play around with. From a Forex fundamental analysis standpoint, the best place to start looking for trading opportunities is in the changing interest rates.

Inflation

News releases on inflation report on the fluctuations in the cost of goods over a period of time. Note that every economy has a level of what it considers ‘healthy inflation’. Over a long period of time, as the economy grows, so should the amount of money in circulation, which is the definition of inflation. The trick is for governments and central banks to balance themselves at that self-set level.

Too much inflation tips the balance of supply and demand in favour of supply, and the currency depreciates because there is simply more of it than demanded. The converse side of the inflation coin is deflation. During deflation, the value of money increases, whilst goods and services become cheaper.

In the short run it may be a positive thing, but for the economy in the long run, it can be a negative thing. Money is fuel for the economy. Less fuel equals less movement. At some point deflation may have a drastic impact on a country, to the extent that there will hardly be enough money to keep the economy going, let alone to drive the economy forward.

GDP

Gross domestic product (GDP) is the measurement of all goods and services a country generates within a given period. GDP is believed to be the best overall economic indicator of the health of an economy. This can seem odd, especially considering GDP is basically a measurement of the supply of goods and services, yet it has nothing to do with the demand for these goods and services.

The general idea is that it takes a great deal of knowledge of both supply and demand to make reasonable, accurate estimations. It would be unwise to believe that GDP reflects both sides of the market. Therefore, an increase in GDP without a corresponding increase in gross domestic product demand or affordability, is the very opposite of a healthy economy, from a fundamental Forex analysis perspective.

Interest rates, inflation, and GDP are the three main economic indicators employed by Forex fundamental analysis. They are unmatched by the amount of the economic impact that they can generate, compared to other factors such as retail sales, capital flow, traded balance, as well as bond prices and numerous additional macroeconomic and geopolitical factors. Moreover, economic indicators are not only measured against each other through time, but some of them also correlate cross-discipline and cross-borders.

You can learn more about this with our article on ‘ The Best Forex Fundamental Indicators Explained, Part 1’

It is important to understand that there is a lot of economic data released that has a significant impact on the Forex market. Whether you want to or not, you need to learn how to make Forex fundamental analysis a part of your trading strategy to predict market movements.

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About Admiral Markets
Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world’s most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

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