Although some people may say that the data on the chain is for the leeks to see. But even so, as long as the data or indicators of the corresponding tools can provide us with some new help or guidance, we can also use and study them as necessary. Everything is dialectical, and we can be tolerant of everything.
On-chain data is mainly targeted at two groups of people: those who use on-chain data for research and analysis (institutions or media, etc.) and those who use on-chain data to explore money-making opportunities (traders or investors).
From a trading perspective, if you want to use some on-chain data to find opportunities to make money, then:
The first thing is to determine the direction of data search. For example, focus on finding highly liquid assets (avoid slippage), identifying trending assets (using momentum), mining smart money, and so on.
The second is to use different tools to carry out the necessary excavation work. At present, there are actually many kinds of tools, and different tool platforms may have different focuses. You can also consider learning more about some commonly used tools through the "toolbox" compiled by Huali Huawai.
Next, let’s give you a brief step-by-step guide on how to use on-chain tools to build a trading strategy:
Step 1: Find projects based on data dimensions
Use on-chain data tools to filter out the data you need. For example, you can filter by Ticks data, as shown in the figure below.
Additional knowledge: What is Ticks data?
The K-line market data we see daily is based on time units, while tick data records a more detailed dimension, that is, every price change is recorded. For example: suppose a cryptocurrency changes its price 30 times in one minute, then in the one-minute K-line market data, we will only see 4 prices, namely the opening price, closing price, highest price and lowest price, because these 4 data are enough to draw a K-line candle chart. The other 26 price changes are ignored. Tick data will provide all change records within a specific time, that is, the 30 price changes mentioned above will be recorded. In plain words, you can see that the price of the corresponding cryptocurrency has changed 30 times in one minute, so tick data is also called high-frequency data.
Alternatively, you can also sort and filter the data by different dimensions such as Volume, Volatility, Vdelta, OI Change, Funding Rate, Openinterest, etc. The specific data you want to view depends on your own strategy. Interested friends can also learn more about the above corresponding concepts through Google.
Step 2: Create your own watch list
Add the tokens you are interested in found in the first step above to your watchlist with the help of on-chain data tools, and draw them into charts (customize and add some indicators you need in the charts) to monitor their data changes, as shown in the figure below.
The above demonstration uses the TradingView tool. The panel in this tool is very easy to use. After adding it to the Watchlist, you can easily view the corresponding data through different buttons, such as directly entering the technical indicator page or adding your own notes.
Step 3: Customize your strategy for trading
According to your own monitoring situation, you can trade according to your customized strategy when you think the market opportunity is more appropriate. There are many specific strategies, and different people may need to set up corresponding different strategies. This varies from person to person. Huali Huawai has sorted out a lot of them in its e-books.
Next, we will continue to use the Momentum (momentum, used to identify trending currencies) and Mean Reversion (mean reversion, used to identify volatile currencies) strategies to give a simple example.
1）Momentum
Momentum is a relatively common trading strategy, the core of which is to buy or sell based on the recent price trend of cryptocurrencies, focusing on following the trend and closing the position before the trend reverses.
The strategy is to calculate the difference between the current price of the token and the specified past price. Specifically, if the current price is higher than the past price, the momentum indicator will show a positive value. If the current price is lower than the past price, the indicator will show a negative value. A rising momentum line indicates that the price trend is strengthening, while a falling momentum line indicates that the price trend is weakening.
However, this is also a lagging indicator because it relies on past prices to calculate current value. Therefore, it is not recommended to use this indicator as the only decision-making indicator. It is necessary to combine other indicators for comprehensive analysis, such as using support and resistance levels and moving averages to confirm the trading signals generated by momentum indicators.
However, in a trending market, using momentum strategies can help you find some trading opportunities for altcoins. If you want to use this indicator to buy a certain altcoin for profit, you need to focus on the following aspects:
- Bullish market structure
- MA fanning out
- High volume breakout
For example, when SOL has been on an upward trend, in theory, as long as you go long when the resistance level is broken, the probability of success is relatively high. As shown in the figure below.
2）Mean Reversion
Mean Reversion is a quantitative trading strategy based on statistical arbitrage, which uses the short-term deviation of prices and the regression relationship of long-term mean to trade. The core point of this strategy is that when the price deviates from its long-term mean, there is a trend that the price will return to its mean level. Therefore, this strategy can also be used to identify those volatile currencies and use their volatility to trade profitably.
However, the use of this strategy requires accurate timing and careful risk management, as false signals, trending markets and transaction costs can have a significant impact on profitability.
However, in a volatile market, using the mean reversion strategy can also help find some trading opportunities for altcoins. If you want to use this indicator to buy a certain altcoin for profit, you need to focus on the following aspects:
- Whether the breakout of the resistance level was rejected
- Swing Failure Patterns (SFP, Swing Failure Patterns, when the price line and RSI line separate from each other it is called a failure swing)
For example, when the price of LINK fluctuates in a certain range, it theoretically provides some good trading opportunities, as shown in the figure below.
But one more reminder is needed here. No matter whether it is Momentum, Mean Reversion, or any other strategy, no one strategy is omnipotent. What we need to do is to find the strategies that best suit us according to our own risk preferences and apply them flexibly.
We will share the content of this issue here. You can view more content through the homepage of Huali Huawai.
Disclaimer: The above content is only a personal point of view and analysis, and is only used for learning records and communication, and does not constitute any investment advice. The encryption field is an extremely high-risk market, and many projects have the risk of returning to zero at any time. Please treat it rationally, do not touch it if you do not understand it, and be responsible for yourself.
