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General Trading Principles For Bitcoin

“Trading technicians focus on three general trends:

First, and most importantly, is the macro or long-term trend. This is also referred to as a secular trend.
Second, is the medium or primary term trend. Third, is the micro, secondary, or short-term trend.

These terms refer to different time periods for different markets, but roughly speaking they break down as follows:

Macro/Secular is for greater than 5 years and usually less than 25 years. Gold and silver were in a secular or macro bull market from 1970’s into 1980.

Primary/Medium term trends run for a year or more, but not generally longer than 4 years. The U.S. general stock market as shown by the S&P500 has been in a secondary bull market for several years.

Micro/Secondary trends run less than a year and often refer to moves lasting a few weeks or months. The recent dip in the U.S. stock market is probably a micro bear or down trending market. When it reverses and goes higher, it will confirm that this was a secondary down trend and not a switch to a secular bear market.

All of this seems simple until we have briefly, but first we should look to understand the millionaire maker, a.k.a. the macro or secular trend.

The short answer is: Up. Bitcoin is designed to rise in value on average, every year.

Bitcoin has several forces going for it and increasing the exchange value over the long term:

1. Almost all national currencies are vastly out “printing” Bitcoins. There are about 12 million BTC’s as of this writing, while the Federal Reserve creates over $85 billion in USD’s for buying government securities every month.

Simply taking an approximate value for the total U.S. currency in near circulation divided by BTC gives a staggering number of the potential value for $/BTC.

M2 is a mid range predictor of the currency available for transactions in the U.S. M3 is the broadest but discontinued form, while M1 is more descriptive of cash on hand. M2 sits at about $10.5 Trillion per Federal Reserve reports.

If only 10% of M2 funds went into BTC, that would be about $1 Trillion.

This looks like:
$1,000,000,000,000/ 12,000,000 = $83,333/BTC

Yes, it is extremely unlikely that 10% of M2 will find it’s way into BTC.

2. Bitcoin is worldwide. Almost 70% of searches for the word Bitcoin come from outside the U.S. Asia drives a lot of the Bitcoin trade; Asia is growing much faster than the U.S. Anything tied to Asian growth, will outperform national centric growth patterns.

3. Increasing taxation and confiscation across the world will drive citizens toward anonymous currencies that have no centralized controlling institution. Many investors in Europe, the U.S, and Asia watched in horror as Cyprus banks and the government stole up to 60% of some bank accounts.

Bitcoin wallets avoid this confiscation threat altogether. There is no bank that can close our Bitcoin accounts or wallets. We can choose to keep our Bitcoins on our computers or USB drives or even memorize them. Bitcoins were designed for just this situation: the need for a private, decentralized, potentially anonymous (hence nontaxable) unit of account, safe from confiscation.

4. More and more stores are accepting Bitcoins. Numbers are hard to come by on the acceptance rate (over 1000 stores), but already there is a core of stores that translate the virtual value of BTC’s into hard goods. With that translation, BTC’s gain credibility and utility. When BTC’s stabilize more over the $100 point, it will be easier for stores to transition into accepting them.

Wild swings in BTC exchange rates made pricing goods difficult for merchants. Also, with a limited stock of BTC’s circulating, there is not enough demand as the user base is limited. When bitcents are traded and even microbits and lower denominations are more common, then the distribution of BTC’s can spread. Wider distribution will mean more customers with BTC’s to spend, leading to stores meeting the demand.

Already nightclubs such as EVR in Newing funding and moving in to take over. They will have trouble succeeding because their benefits are marginal, and they will have to build a new user base. We will discuss the future of Bitcoin and possible competitors in a later section.

All the above factors will send the general trend for Bitcoins relative to national currencies steeply upwards. This trend will continue for many years, possibly as far as 20 years, until there are conflicts within the currency system.

We can then buy the long-term trend and sit tight while our wealth increases, when comparing BTC to our national currencies.

For primary and secondary trends, the simplest trading methodology is also one of the most effective.

What we are looking for are extreme moves where the short-term trend moves significantly beyond the longer-term trend. This tells us that a bubble or reversal may be at hand.  A perfect example occurred during the April 1-11 time frame. The chart shows with the Bollinger bands, and the two exponential moving averages shown by the brown and purple lines (the 10 day is almost always above the 25 day EMA line for those with black and white readers), where the danger zone happened. All experienced traders knew there was a steep collapse dead ahead.

At the Financial Survival Center (http://www.financialsurvivalcenter.com) and @financialsurvvl twitter feeds, there were warnings saying to sell out of BTC immediately. When the price leaps outside of the upper bounds of Bollinger bands, and the short term EMA moves much higher than the long term EMA – jump off the BTC ride into a national currency.

Conversely, when the BTC value dives deep into the Bollinger bands, and the short term EMA crosses below the long term EMA line, there is a good opportunity to buy shortly. Then we can ride the short term EMA back up as it re-crosses above. This is all manual trading. More automated trading uses key techniques such as:
– Stop Loss orders (for selling based on a triggered loss level)
– Stop Age (time based selling)
– Target Price (buying or selling based on reaching a price)
– Buy Order Protection (forces over priced orders to below current market rate)

The stop loss and target price tools are the most critical. With a high beta market, the stop loss should be set as high as 20% or even 25%. Lower beta markets can use a 10% stop loss, or what is known as a tight stop loss. This translates to buying in at $100 and setting a stop loss at about $80.

While there could be much more written for covering other trading techniques, this basic knowledge will suffice. We can spot the too highs and too lows for selling and for buying. That is all we need to do for making a handy profit with Bitcoins.

For those interested in learning more about trading any currency or market, the challenge is there are too many books or courses available. Financial Survival Center has a free newsletter for trading, general investing, alternate income, and alternate currency investing.

Source : Daniel Forrester. “Bitcoin Exposed: Today’s Complete Guide to Tomorrow’s Currency.” iBooks.