Nothing like waking up to not just one, but several assets getting crushed in the market. But our system was clear that this was a possibility as we previously posted. Yes we had ample warning. We even stated that a pullback could go further than anticipated and clearly marked it on our charts. Since that post NEO went up, so we adjusted our charts and retracement levels and looked to our other indicators to view what was happening. After our 1st retracement (adj) point triggered we assumed right on target. It appeared that NEO was on board with our thinking, and we could prepare for another leg up. But we had warned that there was yet another "ideal" retracement level that seemed improbable at the time, but we do not trade on the improbable, we trade our time tested system. NEO is proof that we must remove our emotions from trading and rely on our system of signals and indicators. So what was the signal? Which indicator foresaw this happening? Well several did but one in particular. The often misused RSI.
I see it posted all the time, RSI has entered overbought territory, they throw a trend line on there and tell you to get out. Sometimes their lucky but it's a coin toss at best. There is a correct way to use the RSI but how? Above I labeled the adjusted chart from our previously post with the 1st and ideal retracement levels. The RSI signaled the ideal retracement was in play and highly probable.
I have labeled a channel on the RSI charts cyan, and modified the RSI for 14 bars. This take time to tweak so do NOT use this until you get the hang of it. Those two lines signal where we can expect a trend change. I have labeled them BULL/beartop, and BEAR/bullbot. These are the signaling lines! To the far left we labeled BULL BRK. This means the RSI has signaled we may be changing from a bearish to bullish trend. To the right we have a double bottom right at the BEAR line. This confirmed our signal. NEO is starting to trend bullishly at this point even though the graph shows a minor dip. Great signal, so now I draw my breakout box you all have seen before and wait. As long as the RSI does not pass through the BEAR line I will buy a breakout. Now when the RSI signal broke the BULL level it's overbought sell right? NO. This is where it gets a little more complex, and to keep it simple it means the bull trend is still intact. As long as the indicator stays above the BEAR level, we are still in a bullish overall trend, regardless of the ups and downs. Even when we retraced from 5 to A we only touched the Bear level (circled), confirming the overall trend was intact. But then it broke through, the BEAR line. Buy right it's oversold? NO! The RSI is signaling "trend change" not over sold! We must now anticipate the ideal retracement line is play and boy it played out fast this morning. We got a double top to confirm this right before the retracement to E. WE HAD WARNING!
Please note, this is more involved then can be explained in a paragraph, and books have been written on interpreting the RSI indicator. I bring this up to show two things, #1 Most people use it in the wrong way. #2 we had a clear signal prior to the meltdown and ample opportunity to adjust our trade. Before implementing this I recommend research and reading first. Constance Brown has a great book on trend trading for those more interested in expanding their knowledge. To others be careful who you follow and what they throw up on a chart!
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I want to be clear I use this mainly to verify a trend is intact, or whether a trend is changing. This is how I use the RSI in my system and you should research it before adding it to yours. This is the most misused indicator I know and often leads to being in or out of the market at the wrong time.
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The defaults for the RSI are only a guide, each equity, commodity, coin etc must be backtested to find the proper upper and lower band levels along with the appropriate time frame. You can see I adjusted them for this article. It could take you a couple days to fine tune a good RSI strategy for one coin. So if you haven't done this, then it should only be used as an accessory not a primary.
You indicated in your other post that you believed the news was irrelevant because NEO was up 11% in spite of a lack of news that China's regulations were being rolled back. First, China didn't instill any regulations to roll back. They simply expressed an intent. Second, there was a HUGE rumor that drove the price back up and continues to drive it up and that is NEO's addition to Bitfenix, a huge Asian exchange. Those who value fundamentals saw this huge pump coming a mile away as well.
goldbug1
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@b1ackhat, I think if you follow the posts you'll change your mind. but thank you for reading and you opinion. We want to get alternate opinions to make us all better traders.
pjims
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What a nice piece of analysis!! Always happy to learn, test out and apply, keep up the good work! :)
@goldbug1 Your trading strategy seems to be trend following, right? I find it sometimes difficult to set targets. Many trend followers apparently use trailing stops instead and have no explicit targets. That also means you won't catch the last swing up in an up trend. What advice would you give for getting better at anticipating where it's time to take profit? Do you have a specific target in mind when you enter a trade (in FOREX and cryptos) or not?
goldbug1
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@pjims, Yes I am a trend trader. I do not like trailing stops or stop loss orders, I find they do not work for me. It depends how I'm trading the equity and what equity it is. When I enter in a price 90% of the time I enter in a sell order or two, sometimes 3 at maybe 5%-10%-30%. depends on the equity etc. You can move trailing stops up which is one method, I found that with cryptos it's better to enter in sell orders where I am happy taking profit. It only took twice for me to realize I missed out overnight price pops and was like that's it, I want 5% here's my sell price. I found out when it pops 5-10% it usually comes back. These words should be above your desk by JP Morgan "I made a fortune getting out to early" ;)
pjims
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@goldbug1, Yeah, getting out too early is usually way better than getting out too late (when everyone is storming out). Btw, do you use sell stops in the system or mental stops for trading cryptos? With so much volatility it's sometimes easy to get stopped out.
goldbug1
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@pjims, If I'm in a trade I draw a line on the graph where my stop is, this way I can look before selling, the shadows of the bars are so ridiculous it looks like gyros so I do not enter stop losses, but do enter market limit buys. If I can get a buy on a deep shadow on a core holding like ETH did that one day I'm happpppyyyyy
pjims
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@goldbug1, Thanks, you have been very helpful! Have a good trading day!
goldbug1
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I @pjims, I rely on a HMA system we use in lieu of trailing stops.
UnknownUnicorn995743
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Nice explanation, but didn't it occur to you that the reason why we are having a major pull back is the news coming out from China?? It would be nice if you covered some fundamental analysis with your charts.
goldbug1
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@pisces38, The news out of china happened Thursday I believe, how is that affecting the market today? That's old news. Korea is old news. So does the market lag the news? I have posted many times, news does not drive markets, sentiment does. News can be a catalyst but the direction was already shown in the charts.
This is the news release 6 days ago where China was considering it coindesk.com/reports-chinas-regulators-consider-suspending-icos/ Then two days later they implemented it by telling NEO they were not allowing ICO's at this time. So it took 4 days for the market to react?