Due to a large number of laymen and novice presence, the text of the article tries to formulate and replace concepts such as volatility, alpha or appreciation as simply as possible.
For this reason, I apologize in advance to those who know the subject.
The content uses concepts known to retailers and tries to give a “psychological crutch”.
How do we know when the market is trending and when it is not?
The images in this article were taken from the Tradingview.com platform, which is an amazing graph drawing tool with an extremely wide palette.
Most trader tutorials define the concept of an uptrend in such a way that rising highs and lows follow each other.
In the same way, the decreasing bear trend is the opposite: declining highs and lows follow each other.
The sideways market, though, is where the highs and lows do not follow each other, but as its name implies, the price is moving sideways in a nearly horizontal line.
This will be our starting point for definition. Let’s look at some graphs.
This is a graph of BNBUSDT drawn between February 4 and May 7, 2021 with 4-hour candles.
What is the status of the market in the picture? It’s easy to spot rising peaks and bottoms with the naked eye, but I’m also connected then with trendlines below. This is a clear upward trend.
But would that really be the case?
The part marked with yellow trendlines is a phase of the market where it was not possible to say clearly whether it would move in either direction.
Nor does trend-like movement mean that you are constantly moving in only one direction. Sometimes this movement is interrupted.
This is what we call a range or a sideways movement.
This is an opposite of a trend.
This continuity is almost the rule not only for the BNB.
We can observe this phenomenon on every asset and on every time frame.
The same graph with 1-hour candles from February 8 to 19 looked like this:
BTCUSD 1H, Jun 16–22:
Many theories explain such ranges with any kind of explanation starting from support resistance levels to chart patterns.
But I think the easiest way to understand it is to recognize that this is how it looks visually when the supply and demand for the asset are in equilibrium.
It will never stay that way forever.
It’s always catching to move in either direction, and either under the influence of optimism and euphoria, investors will start buying the asset again and we’ll step back into the pure bull trend, or panic will prevail and everyone wants to get rid of the coin.
Ranging periods in the market are uncertain.
No one can tell how long they will last. The time frame is especially important here.
We can’t know for sure if the range will last for 1 week or for 1 month. Moreover, if we use a higher timeframe chart, such as 1 Day, the ranges on that timeframe will be longer as well since we use a higher timeframe.
This is true for Daily trends and Daily ranges as well. Among the above examples, the sideway candles were for 1 week and the 4-hour candles were for 1 month.
The first range took place between February 19th and March 25th. But that doesn’t mean it’s guaranteed to end after 1 month.
If we go down to a 5-minute graph, there will be a few hours or days. However, the reverse is also true. You’ll also find multi-month, yearly periods on a daily, weekly chart.
Why did we spend so much time looking at some graphs?
Why does it matter if there is a trend or range?
It is very important to understand this concept as we move on. This is because a strategy works differently under different market conditions.
A trend-following strategy by definition performs well in the trend market, and when there is siding, less. This is also true for range strategies, such as mean reversion models.
They typically perform very well in sideways and uncertainty, but poorly when the direction is clear.
I will show an example of these. Intentionally with technical indicators, as these are the tools that everyone has come across in their own trading.
Simple moving averages are probably the most popular indicators for technical traders.
Moving averages are tools that are typically used to create trend-following strategies.
According to a simple strategy, if 50 MA (blue) crosses the moving average of 100 (turquoise) from the bottom up, it is a bullish signal.
The strategy then gives us a buy signal and enters the market. (Of course, the following examples generalize, BCUBE models do not follow this principle.)
Then when the moving average of 50 crosses the top 100, we need to get out of the trade and switch to short.
Pictured, the green, and red circles are market entry signals for our hypothetical strategy. We can see that in the green rings, the signal is perfect.
On the buying side, we entered the market and got both fantastic moves in profit.
But let’s see what happened in the period bordered by the yellow trend lines. Here, the moving average seems to be confused.
The ribbons are close to each other, crossing each other and the price several times.
Here, our strategy immediately gave 3 losing signals that we would all have lost.
Why is that?
Because our hypothetical moving average strategy is a trend-following strategy, it is not suitable for trading in a sideways market.
It would be logical to think about why you are trading at this time and why not wait for the trend to start again. This is a logical proposition, but unfortunately, in practice, it is very difficult to tell in advance that we are just in a correction and the trend will continue soon (if we get out here and we need everything there) or it is over and we have gone sideways.
We still seem to be in the bull trend, but we didn’t know it went on like this a few days later:
Unfortunately, a natural feature of a trend-following strategy is the poorer performance during ranging. Even though it hurts us, we have to say this event is natural and stems from the nature of price movements.
Now let’s look at the opposite. Strategy for sideways markets.
Many traders use support/resistance levels and supply/demand levels in their trading strategies.
This method of analysis determines exactly the levels from which the market is expected to reverse. It works well if the market bounces as far as possible between a well-defined zone.
The zones then become excellent, easy-to-manage entry and exit signals where you can easily place pending orders.
The rectangles bordered in blue are the levels where a range trader would place them. No matter how thick such a zone is, the rule is not set in stone.
Here the previous tops and bottoms (green circle) helped define them. Some people only draw a horizontal line. But while I was a technical trader I used a slightly more complex place in my own strategy.
I put them on the stop loss levels of traders who had jumped in earlier. (Read on and I’ll show you an example at the end.) However, the majority would draw them somewhere similar to the one in this picture.
The market is sidelined between these levels. When the support comes close to level, it is advisable to buy it and to sell it when it comes close to resistance.
These positions are also good because they allow the luxury of making our stop-loss order very tight, which we can then easily move into a profit. You can see this in the picture as well.
One position closed with a risk-reward of almost 8/1, while the other didn’t hit the target, it didn’t lose, because I would have moved the stop loss a long time ago.
Just as moving averages do not work in a sideways market, a strategy based on support levels does not work well in a trending market because the order is almost always loses or not activated. Meanwhile, trend traders are realizing huge profits.
What has this got to do with BCUBE strategies?
BCUBE models are currently exclusively trend-following strategies.
Let’s see what happened to the BNB coin in November and December. Then let’s see how the BNB Positional Trader Futures Bot performed during this time.
Although a slight downward trend can be seen, in line with what has been explained above, it is safe to say that the BNBUSDT chart has been steadily sideways since November 8, apart from last week’s break.
So, if the strategy that BNB Positional Bot uses is itself trend-following, it is logical to assume that there has been a weakening in performance after 8 November.
Almost to the day on November 7, the performance of the model also had difficulties consistently with previous theoretical explanations.
The temporary weaker performance of a strategy does not mean that it will no longer work. We are simply going through a period that will end soon (as it has always done so far).
We hope you enjoyed the first part of our educational article series and that makes the relationship between the performance of BCUBE models and market trends more understandable.
In the coming weeks, we’ll be writing more tutorials like this that we hope you’ll get a lot of benefits.
The BCUBE Team
As promised earlier, I will show my own strategy, which I developed as a technical trader a few years ago, as a bonus.
The essence of the strategy is to take advantage of the clumsy placement of stop-loss orders by less-experienced traders.
It is a well-known trading strategy to trade the trendline breakouts.
The breakout trader will board where the trendline is broken by a strong engulfing candle. (green circle)
And a stop-loss order will typically be placed below the previous technical level. Roughly around the red lines.
We still haven’t joined with them, but let the next bull move happen.
Meanwhile, the breakout trader makes a profit and in order not to lose the profit he has already made, he moves the stop-loss order into a so-called breakeven.
Breakeven is the point where you can get out of position at 0. That is, where we got in.
Since we know where the breakout trader got in, we also know where the breakpoint will be. So the location of the Stop-loss order. The place of the order provides liquidity to the market.
The market is always looking for liquidity.
The buyer of the strategy is a Buy Stop order at the break-even point of breakout traders.
When the market returns to the breakeven point, our order is activated and we start taking it. The result is a position of at least 15/1.
Thank you for your attention!
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