I have been investing/trading in the Financial Markets since before the first Bitcoin was minted. What I am about to post comes from years of study, analysis, and screen time. I have survived multiple Stock Market corrections, the rise and fall of Commodity cycles, Black Swan crashes, and Crypto Bubble/Winters. I also saved many people from losing money before Quadriga exit-scammed the Canadian crypto market in 2018. This post is meant to share–at a high level–what I have learned from losing my own heard-earned dollars in the past.
TLDR: Many people here believe that Technical Analysis is witchcraft. What I am about to discuss has nothing to do with indicators, squiggly lines, ratios, sentiment indexes, or making long-term predictions. It has to do with understanding how Markets move–something I tried posting about back in Feb when BTC had freshly broken $40K support. Back then I stated that $20K was possible given the momentum of the current downtrend and the economic headwinds that lay ahead. Please check out those posts since there will be a lot of overlap.
Know your Timeframe
Technical Analysis comes in many shapes and forms. Some methodologies are better than others, but they all serve different purposes. If you are Day Trading, certain indicators can help you quickly scalp in/out of moves. If you are Swing Trading, then another set of indicators will allow you to ride multi-day moves. For Position Trading or Long-Term Investing, there exists other techniques to help you decide when to enter, add, hold, trim, or exit positions.
Ask yourself: How long am I willing to hold onto an asset for a return? The answer to that will determine how closely you should monitor the charts. It also dictates how often you should be buying/selling positions. Below is SPY vs. BTC and demonstrates that both are in Macro Uptrends (Bull Markets).
Personally I don’t use any technical indicators except for Trend Analysis, Moving Averages, and Support/Resistance. Combined, they tell me the direction the market is moving, what price is currently doing, and how much room until the next price area where a reaction is likely. Below is a crash course in the Trend Analysis portion.
The Market Cycle
Directional price movement is based on a fundamental concept called the Market Cycle. You may have seen variations of the graphic below which sometimes overlay the emotions tied to each stage (euphoria, panic, capitulation, etc.). Zoom-in to a 1-minute chart or zoom-out to a Weekly chart–you will see the market going through these 4 stages like clockwork. This is because humans (and the algos they program) have been buying/selling assets in this manner for centuries.
The Building Block
Nothing goes up/down in a straight line. Price tends to move in waves, both during Markup (uptrends) and Markdown (downtrends). There are pullbacks/consolidations along the way as buyers and sellers take profit, get out at break-even, or re-enter to drive the next leg. If you are familiar with pivots then you should understand the graphic below.
Remember above where I said timeframe matters? This is important because up/down legs in larger timeframes consist of up/down legs on smaller timeframes. This is how you can get a micro uptrend during a macro downtrend. So no–each little pullback is a not a fake Pump or a Dump. It is not a Bull Trap or a Bear Trap. It is the Market doing it’s thing; become familiar with this ebb and flow movement, please. It will help keep your blood pressure levels more stable.
The Trend is Your Friend and the Truth
When price begins a directional move, this is called an Uptrend or a Downtrend. Trends are the most powerful force in the Market. An Uptrend means that people are willing to pay more and more for an asset (greed); in a Downtrend people are selling for less and less (fear). The trend should be respected as long as it is active. As obvious as this sounds: the goal is to buy during an uptrend and sell during a downtrend. The majority of retail has no problem with the former, but they fail to do the latter. Bagholding.
Healthy trends typically continue until they lose structure. This may occur at areas of support/resistance (BTC $20K, anyone?). At important technical levels, price can either consolidate and resume the trend, or it can enter Stage 1 (accumulation). Trying to predict the absolute bottom is a fool’s game. You will run out of fingers before finally catching that knife. There is a graveyard filled with accounts who think that this single candle is the reversal point.
Side note: I blame knife-catching on the old adage of Buy low, Sell high. The true way to get involved is to ride an uptrend and Buy high, Sell higher. And vice versa in a downtrend: Short low, Cover lower.
The Consolidation Base
I have seen the term Crab or Bart used a lot in this sub. In Trend Analysis it is called a Consolidation. This is a special type of pullback within an active trend. Rather than correcting through price (retracement), the chart corrects through time (sideways). This price action is considered very Bullish (uptrend) or very Bearish (downtrend) because it means that the opposing side is unable to even form a pivot. Orders stack at the extremities of the range, and once the ceiling/floor is taken out: BAM! It is my favorite pattern of all time due to its potency.
It’s Better to Be Late to the Right Party than Early to the Wrong Party
One thing that TA provides is an educated guess into what is likely to occur in the immediate future. There is little value in overlaying previous cycles for comparison since every market situation is unique. Each trend occurs during different fundamental and economic conditions. There are also new market participants. That being said, nobody can predict the future; all we can do is analyze what the chart is telling us. And in the cryptocurrency market, at this very moment, we are in a classic downtrend until proven otherwise.
As an active trader, your goal is to make an educated guess regarding the next few candles that will appear on the right-hand side of the chart. That is it. You set a stop and take profit at your targets. If-then statements; rinse and repeat.
As a long term investor, you should become familiar with Trends: how they are born, how they behave when active, and how they end. Pull up a chart of BTC right now and ask yourself: what stage of the market cycle we are in?
I will leave you with this textbook example of a Market Cycle that spanned about 15 years from Bottom to Bottom. I’m not saying that crypto will mirror or follow this whatsoever. It is meant to help you identify the pivots, trend structure, and big picture. Notice how the bottom was confirmed after the fact: Once price failed to make a Lower Low (LL) and made a Higher High (HH)? Getting in when a Stage 1 morphs into Stage 2 (i.e. the backside) is the safest/smartest entry for the next Bull Run.
Nobody every gets out the absolute top or in at the absolute bottom. Accepting that fact has helped me navigate the markets without my biases and emotions getting in the way.
Disclaimer: Not financial advice. Sold majority of Crypto end of 2021. 100% cash since early May. Will attempt to re-enter on next Stage 2.