Three Basic Steps to Establish Trading Strategies Using On-Chain Tools

Although some may say that on-chain data is only for retail investors, as long as the data or indicators from the corresponding tools can provide us with new assistance or guidance, it is still worthwhile to use and study them as necessary. Everything is dialectical, and we can maintain an inclusive attitude towards any matter.

On-chain data mainly targets two groups of people: those who conduct research and analysis using on-chain data (such as institutions or media) and those who explore profit opportunities using on-chain data (such as traders or investors).

From a trading perspective, if you hope to find profit opportunities using some on-chain data, then:

First, determine the direction for searching for data. For example, focus on finding high liquidity assets (to avoid slippage), identifying trending assets (using momentum), discovering smart money, etc.

Second, use different tools to conduct the necessary exploration. Currently, there are many types of tools available, and different tool platforms may have different focuses. Some commonly used tools can be further explored through the "toolbox" previously organized by Huali Huawai.

Next, let's provide a brief step-by-step guide on how to use on-chain tools to establish 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 using Ticks data, as shown in the image below. Supplementary 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, meaning every price change is recorded. For example, if a cryptocurrency changes price 30 times within a minute, we will only see 4 prices in the one-minute K-line market data: the opening price, closing price, highest price, and lowest price, as these four data points are enough to draw a K-line candlestick chart. The other 26 price changes are ignored. Tick data provides a complete record of all changes within a specific time, meaning all 30 price changes mentioned earlier will be recorded. In simple terms, you can see that the price of the corresponding cryptocurrency changed 30 times in one minute, so tick data is also referred to as high-frequency data.

Alternatively, you can sort and filter data using different dimensions such as Volume (trading volume), Volatility, Vdelta (difference), OI Change (open interest change), Funding Rate, Open Interest, etc. The specific data to look at depends on your own strategy. Interested parties can learn more about the relevant concepts through Google.

Step 2: Create Your Observation List

Add the tokens you found in Step 1 that you are interested in to your Watchlist using on-chain data tools, and plot them on a chart (customizing the indicators you need on the chart) to monitor their data changes. As shown in the image below.

The image above demonstrates the use of the TradingView tool, which has a very user-friendly panel. After adding to the Watchlist, you can conveniently view the corresponding data through different buttons, such as directly entering the technical indicators page or adding your own notes.

Step 3: Customize Strategies for Trading

Based on your monitoring situation, trade according to your customized strategy when you believe the market opportunity is suitable. There are many specific strategies, and different people may need to set different strategies, which varies from person to person. The e-book released by Huali Huawai has already outlined many of these.

Next, let's continue with a simple example using Momentum (to identify trending coins) and Mean Reversion (to identify volatile coins) strategies.

1) Momentum

Momentum is a common trading strategy that focuses on buying or selling based on the recent price trend of cryptocurrencies, emphasizing riding the trend and closing positions before a trend reversal.

This strategy mainly calculates the difference between the current price of a token and a 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. An upward momentum line indicates that the price trend is strengthening, while a downward momentum line indicates that the price trend is weakening.

However, this is also a lagging indicator because it relies on past prices to calculate the current value. Therefore, it is not recommended to use this indicator as the sole decision-making metric; it should be combined with other indicators for comprehensive analysis, such as using support and resistance levels and moving averages to confirm the trading signals generated by the momentum indicator.

Nevertheless, using the momentum strategy in trending markets can effectively identify trading opportunities for altcoins. If you want to use this indicator to buy an altcoin for profit, you should focus on the following aspects:

• Bullish market structure

• MA is expanding in a fan shape

• High volume breakout

For example, when SOL is in a continuous upward trend, theoretically, as long as you go long when it breaks through the resistance level, the probability of success is relatively high. As shown in the image below.

2) Mean Reversion

Mean Reversion is a quantitative trading strategy based on statistical arbitrage, which uses the relationship between short-term price deviations and long-term mean reversion to trade. The core idea of this strategy is that when the price deviates from its long-term mean, there is a tendency for the price to revert to its mean level. Therefore, this strategy can also be used to identify volatile coins and profit from their volatility.

However, the use of this strategy requires precise timing and careful risk management, as false signals, trending markets, and trading costs can significantly impact profitability.

Nonetheless, in volatile markets, using the mean reversion strategy can also effectively identify trading opportunities for altcoins. If you want to use this indicator to buy an altcoin for profit, you should focus on the following aspects:

• Whether the breakout of the resistance level is rejected

• Swing Failure Patterns (SFP, when the price line and RSI line diverge, it is called a failed swing)

For example, when LINK's price fluctuates within a specific range, it theoretically provides some excellent trading opportunities. As shown in the image below.

However, it is important to remind you that whether it is Momentum, Mean Reversion, or any other strategy, there is no one-size-fits-all strategy. What we need to do is find the strategies that best suit our own risk preferences and apply them flexibly.

That's all for this issue. For more content, you can check the homepage of Huali Huawai.