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The Basics of DEX Trading in a Bull Market

The Basics of DEX Trading in a Bull Market

By FHD - 05-Feb-2024

Understanding that tokens on a centralized exchange with perpetual futures or margin spot trading will trade very differently from a token only listed on a DEX is important. 

Anyone reading this article probably has a basic understanding of the differences between a centralized exchange and a decentralized trading platform. But learning the behavior of tokens on one or the other type of platform is important. Also, creating trading strategies to take advantage of opportunities in DEX markets is key. This article explains some important traits of market behavior on DEX-only tokens and explains some trades I look for in these markets. 

Market Behavior on CEXs vs. DEXs

For centralized exchanges, the main things to note are the frequent liquidity grabs, mini squeezes, or whatever other names traders give these price movements. Traders who set stop-loss orders can help trigger cascading liquidation events in either direction when these orders pile up. Essentially, this creates forced buying or selling pressure, which makes it a bit more complicated of a trading environment.

Personally, these and other similar reasons are why I prefer trading tokens only listed on DEXs. 

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First, these coins often follow basic technical analysis to the extreme. Most DEXs offer limit orders, but stop-loss orders are either unavailable or unused, and this is quite an advantage. When a token drops to a certain support level, there will usually be limit orders being filled at that price point. And there will not be any stop losses at that level purely because they cannot be created easily. 

So, traders who look at many charts of liquid, high volume, and trending tokens will see that these can be easily traded by buying at support levels and selling at resistance levels. It’s often just that easy. Plus, there aren’t as many volatile candles which stop you out, which means you can trade with very high risk:reward. 

When traders are active in markets for the right coins – liquid, high volume, and trending tokens  – trading these markets can be very simple.

Additionally, short selling tokens on DEXs is extremely difficult if it’s possible at all. Trading assets with price action based only on spot markets is a big advantage. “Artificial sellers” cannot appear out of thin air. On CEX’s, however, short sellers borrow tokens from traders with long positions to create sell pressure. Spot-only, DEX-only markets avoid this hassle. 

Strategies for Trading Tokens on DEXs

There are two main trades I take when watching DEX-only markets. 

  • First, a break of a previous all-time high price level. 
  • Second, a break through a resistance level that was tested multiple times.

Generally speaking, tokens that are breaking highs will have another leg up or at least a bounce at the previous high or old resistance. This idea is the same for trading breaks of continuous resistance. The price action suggests that sellers have been exhausted, so there should likely be a good entry at the retest of the resistance. 

By comparison, if I was trading a token listed on a CEX, I would have to worry about a liquidity grab below the resistance after late long positions got stopped out or liquidated. But for DEX-only tokens, I simply bid at the resistance (now support) level and manage the trade. If the level does not hold, I exit the position.

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Of course, there are some cases when a retest is not likely to happen. This totally depends on how much hype and activity there is around an asset. It also depends on if there is a catalyst and how important this catalyst (e.g., new feature, announcement, etc.) But gauging this is tricky and sometimes it feels random.

Getting Started on a DEX

Many DEX traders will lose money simply because they decide to buy when everyone else is already buying. More often than not, smart traders will choose to sell into pumps and set fresh limit orders back at support levels. 

In my trading strategies, I try to be strict about only bidding at support unless there is a strong reason to get into the trade immediately. By bidding a clear support level, the risk-reward ratio for a trade is exponentially higher and a trader can quickly cut the position at a 1-5% loss before moving on to the next trade. 

Ultimately, trading is about probabilities and opportunities. DEX-only markets offer a lot of both. Hopefully the ideas and strategies in this post help other trades to explore opportunities for profit and keep their winning probabilities high.