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Trading Principles

Some basics concepts and definitions anyone interested in trading should know.

| General / Basic TA Knowledge |

  • Support / Resistance Level (S/R): Horizontal levels of relevance where price reaction is expected. Usually levels where rejections or bounces occur. Generally they are also used to mark the ends of a range.
  • S/R Flip: When a relevant horizontal level changes from support to resistance or vice versa. This may indicate the start of a trend.
  • Divergences: Divergence is when the price of an asset is moving in the opposite direction of a technical indicator or is moving contrary to other data. Divergence warns that the current price trend may be weakening, and in some cases may lead to the price changing direction. Generally used between oscillators (like RSI) and Price Action (PA).
  • Risk/Reward (R/R): The risk/reward ratio marks the prospective reward a trader can earn for every dollar they risk on an trade. The ratio helps assess the expected return and risk of a given trade.
  • Fibs: Fibonacci retracements are used to find areas of interest/reaction on a pullback. A Fibonacci retracement is created by taking two extreme points (swing high and swing low) on a chart and dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8%, and 100%. The most watched levels are the 0.382, 0.5 and 0.618. - LTF: Low time frame. For me that is from 5min to 2h timeframe.
  • MTF: Medium timeframe. From 4h to 12h timeframe.
  • HTF: High time frame. 1D, 2D, 5D and weekly. Monthly, quarterly and beyond more oriented to macro analysis not really actionable trading plan (my opinion).
  • O.H.L.C: Refers to Open, High, Low and Close of a candlestick.
  • Relative Strength Index (RSI): Momentum oscillator indicator. The RSI provides traders with signals about bullish and bearish price momentum. An asset is usually considered overbought when the RSI is above 70 and oversold when it is below 30. The 50 acts as neutral zone. I consider that the RSI needs other confluences to be useful. Is really good for divergences identification.
  • Range Highs/Range Lows: Range is the difference between the high and low prices in a given trading period. Range-bound trading is characterized by prices staying in a definable range over time.
  • CME Gap: CME refers to the Chicago Mercantile Exchange, the world’s largest derivatives trading exchange. The “CME gap” is the difference between the trading price of Bitcoin futures contracts when the market opens on Sunday, and when it closes on Friday. BTC trading on crypto exchanges doesn't stop during weekends so that's why there is usually a price variation between both and the concept of “filling the gap”.
  • Trend: A trend is the general direction of the price of an asset. An uptrend is a series of higher swing highs and higher swing lows. A downtrend is a series of lower swing highs and lower swing lows.
  • Trend trading: Trend trading strategies assume that an asset will continue to move in the same direction as it is currently trending. So trend traders just follow the trend and watch price action and previous key swings. Long into uptrends and short into downtrends.
  • Breakout: A breakout is when the price moves above a resistance level. This move in many cases is usually abrupt and with heavy volume.
  • Beakdown: A breadown is when the price moves below a support level. This move in many cases is usually abrupt and with heavy volume.
  • Price Action (PA): Price action generally refers to the changes of an asset price over time. Technical analysis formations and chart patterns are derived from price action. Also some indicators like moving averages are also calculated from historical price action.
  • Higher High = (HH) | Lower High = (LH): | Higher Low = (HL): | Lower Low = (LL)
  • Liquidity Grab: Big trades and institutional investors who need to fill big orders must find liquidity areas in the market to complete their trade. Triggering massive amount of stop losses are a way to generate fast and big liquidity in a short period of time to fill this orders. So generally this liquidity grabs occur at obvious stop-loss placement levels. This are usually swing lows/highs.
  • DXY: The U.S. Dollar Index is used to measure the value of the dollar against a basket of six foreign currencies. These are: the Euro, Swiss franc, Japanese yen, Canadian dollar, British pound, and Swedish krona. Generally if DXY go up risk-on assets price tends to go down but this is not strictly correct as they are not directly related.
  • VIX: Is a real-time market index representing the market’s expectations for volatility on S&P 500 over the coming 30 days. The VIX generally rises when stocks fall, and declines when stocks rise. Good way of measuring the level of risk on the market and expected returns due to volatility increasing or decreasing.
  • ETH/BTC: Ether against Bitcoin. How many BTC takes to buy 1 ETH. I personally use it to see the strength of the alts market vs bitcoin, as many alts follow ETH to the upside. If ETH/BTC go down means BTC is on and stronger position relative to alts and also with a higher dominance.

| Trading Execution Oriented Terms |

  • SL (Stop Loss Order) : A stop-loss order is a type of order used by traders to limit their loss. Stop-loss orders are orders with instructions to close out a position by buying (if short) or selling (if long) a position at the market when it reaches a certain price known as the stop price.
  • TP (Take Profit Order) : A take-profit order is a type of limit order that specifies the exact price at which to close out an open position for a profit. Partial TP refers to setting an order only for a % of the total position.
  • Risk Management: Prior to opening any new trade there are at least three variables that must be clear. Entry trigger, Exit trigger and Risk Management, this makes up a trading plan. The latter generally refers to the invalidation point where the stop loss is usually placed.
  • Open Interest (OI): Number of outstanding contracts that are yet to settle / total number of open positions held by market participants at any given time / notional value of all open futures positions.
  • Funding rate: Funding rates are periodic payments either to traders that are long or short based on the difference between perpetual contract markets and spot prices. Therefore, depending on open positions, traders will either pay or receive funding.
  • Margin: Margin is the money borrowed from a broker to purchase an investment and is the difference between the total value of an investment and the loan amount. Margin trading refers to the practice of using borrowed funds from a broker to trade a financial asset, which forms the collateral for the loan from the broker. More margin = more collateral = lower leverage = further from liquidation. Less margin = less collateral = higher leverage = closer to liquidation
  • Isolated Margin: Isolated margin is margin assigned to a single position that is restricted from being shared. In the event of a liquidation, you may lose the initial margin and extra margin added to this position.
  • Cross Margin: Cross margin involves margin that is shared between open positions. Under cross margin, all available balance of the corresponding margin account will be deployed to meet maintenance margin requirements and prevent liquidation. All corresponding available balance can be lost in the event of liquidation.
  • Maker Orders: Limit orders. Less trading fees on this type of orders (for opening and close a position).
  • Taker Orders: Market orders, buys or sells at market price. Higher trading fees on this type. You are a taker whenever you fill someone else's order.
  • Trailing Stops: A trailing stop is an order type designed to lock in profits or limit losses as a trade moves favorably. A trailing stop will allow a stop order to follow the last traded price based on a pre-set distance and direction, and will automatically move to lock in the profit or stop loss. Trailing stops only move if the price moves favorably. Once it moves to lock in a profit or reduce a loss, it does not move back in the other direction.
  • Order book: Is an electronic list of buy and sell orders for an asset by price level. Can be useful for identifying large buy/sell orders or order blocks.
  • Liquidation: Liquidation occurs when margin available for a position falls below maintenance margin. At this point, more or less, the exchange assumes the position on your behalf and tries to get rid of it. Longs getting liquidated: sell orders hitting the market as the liquidated long is closed. Shorts getting liquidated: buy orders hitting the market as the liquidated short is closed.
  • Liquidation Cascade: When liquidations beget more liquidations i.e. short liq → forced to close → becomes a buy order → pushes price up → triggers another short liq → forced to close → becomes a buy order → pushes price up → repeat