How to Make Periodic Money (Final Chapter): A Guide to Bottom Fishing and Topping Out

Author: Jian Shu

I. Overview

This is the last article in our series on cycles. The first three articles analyzed cycles from a macro perspective, while this one will mainly introduce how to use indicators to determine tops and bottoms, as well as how to optimize investment strategies.

II. Five Major Indicators to Help You Determine Tops and Bottoms

1. Ahr999 Accumulation Indicator

Indicator Introduction: This indicator was created by Weibo user Ahr999 to assist Bitcoin dollar-cost averaging users in making investment decisions based on timing strategies. The indicator implies the short-term yield of Bitcoin dollar-cost averaging and the deviation of Bitcoin price from expected valuation.

How to Use:

• When the ahr999 index < 0.45, it indicates a buying opportunity;
• When the ahr999 index is between 0.45 and 1.2, it is suitable for dollar-cost averaging;
• When the ahr999 index > 1.2, the price is relatively high, and it is not suitable for dollar-cost averaging.

Real-time Chart: https://www.coinglass.com/zh/pro/i/ahr999

Recommended reading of the author's article “HODL Bitcoin”

2. Rainbow Chart

Indicator Introduction: The Rainbow Chart is a long-term valuation tool for Bitcoin. It uses a logarithmic growth curve to predict the potential future price direction of Bitcoin.

It overlays rainbow-colored bands on the top of the logarithmic growth curve channel, attempting to highlight the market sentiment of each rainbow color stage as the price passes through it. Thus, it highlights potential buying and selling opportunities.

So far, Bitcoin's price has remained within the rainbow-colored bands of the logarithmic growth channel.

How to Use:

• The closer to blue, the closer the price is to the bottom;
• The closer to red, the closer the price is to the top.

Real-time Chart: https://www.blockchaincenter.net/en/bitcoin-rainbow-chart/

3. RSI

Indicator Introduction: RSI (Relative Strength Index) is an indicator that measures the speed and magnitude of price changes in Bitcoin. The RSI score is calculated based on the performance of the previous 12 months to assess market strength, whether it is in an overbought or oversold range. The stronger the upward momentum, the closer the RSI will be to 100, indicating a positive price movement over the past 12 months; conversely, the stronger the downward momentum, the closer the RSI will be to 0, indicating a relatively negative price movement.

How to Use:

• An RSI value of 30 or below (the closer to red) indicates that Bitcoin is oversold or may soon face overselling, making it suitable for considering a bottom buy.
• An RSI value of 70 or above (the closer to green) indicates that Bitcoin is overbought and may soon face a decline, making it suitable for considering selling.

Real-time Chart: https://charts.bitbo.io/monthly-rsi/

4. 200-Week Moving Average Heatmap

Indicator Introduction: This indicator uses a color-coded heatmap based on the percentage growth of the 200-week moving average.

A color is assigned to the price chart based on the monthly percentage growth of the 200-week moving average.

Historically, Bitcoin's price has bottomed near the 200-week moving average during each major market cycle.

How to Use:

• The closer the dot color on the price chart is to red, the more overheated the market is, making it suitable for selling;
• The closer to purple, the colder the market is, making it suitable for buying.

It is important to note that this indicator failed at the top of the last bull market, indicating that it should not be relied upon entirely. Indicators are merely tools to assist our judgment, and many other factors need to be considered.

Real-time Chart: https://www.lookintobitcoin.com/charts/200-week-moving-average-heatmap/

5. CVDD

Indicator Introduction: CVDD stands for Cumulative Value-days Destroyed.

How to Use: When the Bitcoin price touches the green line, it indicates that the Bitcoin price is severely undervalued, representing a good buying opportunity.

Real-time Chart: https://www.tradingview.com/script/3CEPlBsb-Cumulative-Value-Coin-Days-Destroyed/

Summary

To facilitate readers in using these indicators, we have created a chart.

It is important to note that these indicators provide references for buying and selling Bitcoin and do not imply that other tokens can also be bought.

III. Strategies Suitable for Cycle Trading

When we engage in long-cycle trading, it is easy to encounter situations like the one shown in the image below, often due to subjective judgment errors. If we establish strategies in advance, we can avoid such mistakes.

1. Combining Martingale Theory with Dollar-Cost Averaging

First, let's understand the concepts of "Martingale Strategy" and "Dollar-Cost Averaging."

Martingale Strategy: The Martingale strategy was originally a gambling strategy that involves doubling the bet after each loss until a win occurs. In a fair betting game, where both winning and losing have a 50% probability, the probability of losing once is 50%, twice is 25%, three times is 12.5%, four times is 6.25%, and so on. The more times you play, the lower the probability of losing becomes, theoretically allowing for infinite funds to avoid losses.

Later, the Martingale strategy was applied to trading, manifesting as pyramid-style position increases (the Martingale strategy can be subdivided into reverse Martingale, forward Martingale, and scalp Martingale; the one we are introducing here is reverse Martingale).

Dollar-Cost Averaging: Dollar-cost averaging is a long-term investment strategy that involves regularly purchasing assets according to a plan to average the purchase price. This strategy emphasizes continuous investment and long-term holding rather than attempting to profit from short-term market fluctuations.

When using the above indicators, they cannot tell us the precise bottom and top points; they can only help us determine relative bottoms and tops within a cycle. Moreover, we cannot constantly monitor the indicators, which is why we need to engage in dollar-cost averaging.

How to Formulate a Strategy: We can apply the principles of the Martingale strategy to dollar-cost averaging to minimize our average holding price. A specific strategy can be formulated as follows: Assume the current Bitcoin price is $37,000, and we start dollar-cost averaging from this price. Based on the above indicators, we can determine that the current Bitcoin price is at a neutral position, making it suitable for dollar-cost averaging. We set the base amount for dollar-cost averaging at 1,000 yuan, with a frequency of once a week. In each weekly dollar-cost averaging, if the price rises by $1,000, we reduce the amount by 5%; if the price falls by $1,000, we increase the amount by 5%, provided that the indicators still indicate that the Bitcoin price is within the dollar-cost averaging range. When Bitcoin rises beyond this range, we pause the dollar-cost averaging plan and resume it when it returns to the dollar-cost averaging range or monitor the indicators for potential reductions. These strategy parameters are just examples; different parameters will yield different returns, and readers can formulate their own dollar-cost averaging strategies based on this process.

Disadvantages: The Martingale strategy claims to "never lose money," but this is based on the premise that the trading asset will not go to zero and that the trader has unlimited funds. Therefore, the Martingale strategy is not suitable for trading long-tail assets; the larger the trader's capital, the more the advantages of the Martingale strategy can be realized.

2. How to Use Grid Strategies to Increase Returns

When we engage in long-cycle investments, holding Bitcoin spot, depositing it in decentralized lending platforms yields low APY; if deposited in exchange wealth management, the APY is considerable but limited. To improve capital utilization and earn additional returns, using a spot grid strategy is a good choice.

Spot Grid Strategy: The spot grid strategy is an automated strategy that executes low buys and high sells within a specific price range. Users only need to set the highest and lowest prices of the range and determine the number of grids to start the strategy; if needed, they can also pre-set trigger conditions, and the strategy will automatically start when the market reaches those conditions. The strategy will calculate the low buy and high sell prices for each small grid, automatically placing orders to earn profits from market fluctuations.

How to Formulate a Strategy: Generally, grid strategies are suitable for oscillating or upward-trending markets, while they are not suitable for one-sided markets. The drawbacks of grid strategies are evident; when prices rise or fall outside the set range, it can lead to missed selling opportunities or unwanted purchases, which is why some call it a garbage strategy. We have optimized the grid strategy by not choosing the conventional non-stablecoin/stablecoin traditional grid strategy; instead, we use the ETH/BTC trading pair with an infinite grid strategy.

The infinite grid strategy is an advanced version of the ordinary grid strategy. The infinite grid ensures that users hold an equivalent amount of the quoted currency asset during upward trends. Using the infinite grid strategy, regardless of how many times users sell, they still hold an equivalent amount of assets to their previous position. For example, if the initial price is 20,000 USDT/BTC, and the user holds 1 BTC, they have 20,000 USDT in assets invested. When the price rises to 40,000 USDT/BTC and they sell half a unit, they still hold half a unit, maintaining 20,000 USDT in assets invested. When the price rises to 80,000 USDT/BTC and they sell a quarter unit, they still hold a quarter unit, retaining 20,000 USDT in assets invested. The infinite grid does not have a defined top range, so using the infinite grid strategy can effectively avoid missed selling opportunities due to continuous price increases.

So why choose the ETH/BTC trading pair? Our optimization approach for the grid strategy focuses on mitigating losses caused by prices exceeding the grid range. However, due to the inherent characteristics of grid strategies, they cannot solve losses caused by continuous price declines; we can only reduce losses from declines. The ETH/BTC pair reflects the relative strength of ETH and BTC, and from a cyclical perspective, the ETH/BTC exchange rate trends upward during bull markets and downward during bear markets, making the ETH/BTC trading pair a good match for the infinite grid strategy suitable for long-term slow bull markets. Moreover, we can not only gain returns in BTC but also benefit from the price increases of both ETH and BTC during bull markets.

IV. Conclusion

Although the indicators and profit methods introduced in this article focus on Bitcoin as the investment target, readers can also apply the bottom-buying and top-selling ideas from this article to invest in other cryptocurrencies. Additionally, the price changes of Bitcoin provide guidance for the trends of other cryptocurrencies, especially mainstream coins with higher market capitalization.

Every indicator has its inherent invariance; although black swan events often occur in the market, the crypto market will not go to zero. As long as there are participants, prices will continue to fluctuate, creating cycles that are not only estimates of value but also tests over time. For ordinary investors, as long as they utilize cycles well, they can benefit from the industry's development dividends. This principle applies not only in the crypto space but also in other industries; the multiplier effect is not important; what matters most is the ability to sustain participation. What the crypto space lacks is not opportunities but the ability to continue participating.