This Bitcoin Consolidation Is A Signal For Big Profit

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This Bitcoin Consolidation Is A Signal For Big Profit

Bitcoin Price Action Is Bullish

The Bitcoin price action of late is bullish. The world’s reserve cryptocurrency has been consolidating near recent highs after break a significant resistance level. The move bears the hallmarks of a triangle/flag-pattern but one of great magnitude. The consolidation has already been underway for three weeks and may go on for three or more weeks. Resistance is at the lofty price range of $13,000, support between $10,000 and $11,000, so we are talking about big numbers in terms of our targets and projections once the break out is formed.

Looking at the weekly charts gets me really excited. This chart shows a strong rally that moves up from the $3,000 level all the way to the $12,000/$14,000 level where it has begun to consolidate. The consolidation is less apparent at this level but still there, brewing up a nice little rally for later this year. The salient point here is that our flag pattern, the one forming on the daily chart, has a flag-pole worth $9,000. There is never any guarantee with technical analysis but it is accepted practice to project the magnitude of the flagpole from the consolidation to get targets for the break out.

In this case I will project from the $10,000, $11,000, $12,000 and $14,000 levels for safety. This brings targets of $19,000, $20,000, $21,000, and $23,000 which means there is a high probability Bitcoin will reach its all-time high and set a new one.

In the near term traders should expect this consolidation to continue. If it doesn’t that’s great but that’s not a scenario you can bank on. A move sideways with slowly rising support levels is a more likely scenario, the very next move may be a little bounce up to retest resistance. I don’t expect the $13,000 level to break this time around but it may, if so $14,000 will likely contain prices for a little while at least. I would not trust a bullish break-out unless the candle is strong, closes above $14,000, and then stays there a day or two.

Litecoin is offering up a nice entry point. The coin has fallen to retest support at the $105 level and support is likely to be strong. Fundamentally, Litecoin has the halvening backing it up. The halvening is in a couple of weeks and will greatly reduce the available supply. Technically, Litecoin is now at the bottom of the second Elliot Wave retracement following a recent high. Well set up to rebound and at least retest the recent high near $140.

The Single Most Profitable Bitcoin Indicator

Have you ever wondered what the single most profitable Bitcoin indicator is? In this article I’ll show you the results from backtested strategies for 6 major indicators, and reveal the most profitable one.

If you don’t know what the most popular indicators are, then read this article first, because you’ll get more out of this article if you know how each indicator works.

This experiment is about showing how useful a single indicator is as a trading signal. I backtested strategies that buy and sell BTCUSD based on signals from these 6 indicators, for a period of over 3 years:

  • MACD
  • RSI
  • Parabolic SAR
  • Bollinger Bands
  • Stochastic
  • Ichimoku Cloud

I’m going to show you how each strategy performed, compare them to each other, and also to a buy & hold strategy.

Before doing the experiment I wrote down my hypothesis:

Single indicators are not good trading signals, they won’t produce double-digit profit but they will produce double-digit drawdowns.

With that said, let’s get started!

How Did I Do The Experiment?

I’m a big fan of TradingView, so naturally I used their Strategy Tester. This allows you to backtest any strategy on any chart. Luckily they already have many strategies in their Indicators & Strategies library, so I was able to use the pre-made strategy for all the indicators, except the Ichimoku Cloud.

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TradingView has a simple scripting language called Pine that is used to code strategies, so it wasn’t too difficult to edit the existing Ichimoku Cloud indicator source code to include a strategy.

The strategy consists of entering a long position when the Chikou Span crosses the price in a bottom-up manner, and entering a short position when the Chikou Span crosse the price from top-down. It took all of about 10 minutes for me to write up the simple strategy.

As I mentioned, all of the other strategies already existed in TradingView’s library, so it was just a case of adding them to my chart.

For simplicities sake, I chose to use the default parameters for all strategies.

I applied each of these individually to the BTCUSD daily chart. Here’s a sneak peek:

As you can see, TradingView plots the trade entry points on the chart. Red being a short entry, and blue being a long entry. And they provide you with a great summary table of results! It doesn’t get any easier than this.

What’s Back-Testing?

Before we dive into the results, I want to give you a bit of info about what backtesting is and why it’s useful, because it’s a great tool to have in your trading toolkit.

With backtesting, you can test trading systems against what has already happened. You can quickly see how a strategy would have performed under certain market conditions.

We’ve all heard the phrase “past performance is not an indicator of future results”, which is true, but only at the surface level. If you analyze the different market conditions and understand why your strategy performed a certain way, then you can adjust and refine it, so that it performs better in the future.

Many strategies may work well in the run-up to $20K that we experienced in late 2020, but this could be a fluke just because the market was rising. But in the downturn that we’re experiencing now, they may not do so well.

Backtesting allows you to see what happens to your trading performance in both of these different conditions, and will arm you with information to improve your strategy. And that can only be a good thing!

Be aware that good backtesting results does not mean that your strategy is foolproof, particularly in a market as young as BTCUSD. Or any cryptocurrencies for that matter! It’s very unlikely that the period you choose contains all possible market conditions. This is apparent in BTCUSD because there hasn’t been a major bear market.

You might say that we’re in one now, but only relative to what we’ve seen Bitcoin do in the last years. Relative to that, yeah it’s a bear market. But it’s got nothing on the recent bear market in oil.

The price of a barrel of oil dropped from $106.9 in July 2020 to a low of $26.05 in February 2020. That’s a 19-month bear market that still hasn’t broken through the July 2020 price. A few months of Bitcoin consolidation is nothing.

There will be days, weeks, even months, when your system experiences big drawdowns. It’s all well and good backtesting your strategy and seeing that it lost 50% over a few weeks back in 2020, but what happens when that’s going on in real time? How would you react to that? Can you stomach watching your account being drained day after day for weeks on end? Knowing that you can stop the bleeding by turning off the system?

There’s a big difference between running a test and seeing the results, to actually going through the highs and lows of the market in real time. Backtesting doesn’t give you that experience, only real trading does.

The point is, backtesting doesn’t guarantee that your strategy is going to perform the same way in the future, because markets change. So you can’t just blindly trust backtesting. You need to be always monitoring what’s going on, always watching for changes in performance, and understand why those changes happened.

It’s very easy for anyone to open a trading account and make a few trades, it’s very difficult to consistently make a profit over a long period.

The Results

Here’s the moment you’ve been waiting for, the results! Just to remind you, my hypothesis is that none of the indicators will have positive double-digit returns and they’ll all have double-digit drawdown. Drum roll please…

We’ve really got a mixed bag here. Half of them have obviously done badly. RSI, Bollinger Bands, and Stochastic, all have negative returns and drawdown greater than 10%.

I’m actually quite surprised that the other 3 indicators (MACD, Parabolic SAR, and Ichimoku Cloud) made positive returns. MACD even got a return over 20%! The drawdown for these 3 are pretty good, all less than 10%.

MACD is the obvious winner here.

And that’s it. MACD wins the title of THE MOST profitable Bitcoin indicator. See ya next time!

Hold on a sec! That’s not the end of the story.

The best return from any of these indicators was 22.51%. Remember that’s over a span of more than 3 years. It’s not great if you think about what’s happened to the market in those 3 years! Bitcoin has gone from $300.00 to $19,891.99 (as per Coinbase) and back down to $5,873.00. Those changes are more than 22.51%!

Take a look at the strategies compared to buy & hold. The buy & hold starts from the point the strategy makes it’s first trade. This varies, so the relative buy & hold return varies quite a lot too. But there’s an obvious difference between buy & hold and the indicators.

The indicator strategies pale in comparison to buy & hold. They’re just not good enough!

Even an S&P 500 tracker would have beaten these indicators. On Dec 1, 2020, the S&P closed at $2,053.44. On Mar 27, it closed at $2,612.62. That’s a gain of 27.23% in the same period as my Bitcoin study.

That’s right, holding an S&P index tracker would’ve beaten all of the strategies above!

You can do better than this.

What’s the point?

So I’ve shown you that single indicators suck. MACD is THE most profitable indicator for BTCUSD, but it ain’t got nothin’ on the buy & hold returns.

The point I want to make here is that no single strategy is perfect by itself. There’s no magic bullet. All indicators have their limitations they’re bound by strict rules, making them inflexible.

A strategy that works in a ranging market might not work in a trending market, and a strategy that works in a volatile market might not work in a calmer market. You need to be flexible in your approach. Learn to identify different market conditions, and what works best for each.

The best approach over the long-term is to change your approach as markets dictate. A sure-fire way to lose money is to stick to be rigid and inflexible when it comes to changing your style and strategy, because the market doesn’t care. It’s gonna move in whatever way it wants, and you’re gonna get washed along with it, whether you like it or not.

As always, you need to build risk management into your strategy. No matter how confident you might be in a strategy, you cannot predict every possible move, and good risk management means you don’t have to!

You have to react to what the market is telling you, a bear market won’t turn just because you prefer to long side, and a market won’t stop trending just because you want to trade the Bollinger Bounce. Be in tune with what’s happening, develop different strategies for different conditions.

You can’t rely on a single indicator or strategy to get you through.

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DISCLAIMER:The information in this article is provided for educational purposes only. I am not a financial advisor and this article does not contain financial advice. Make your own decisions about risk, or consultant a professional financial advisor.

Here’s Why the Bitcoin Price May Not See a Big Correction At All

Bitcoin (BTC) has been on something of a tear as of late. You know that, of course, but the strength of this move shouldn’t be understated. In the past six weeks, the crypto asset has moved from $4,200 to $8,300 — a growth of nearly 100% — while altcoins have also seen lofty gains.

Yet, throughout this entire swing to the upside, there have been analysts incessantly calling for a correction, looking to charts to accentuate that Bitcoin rallying here is uncalled for. The technicals would agree. On-chain data shows, however, that BTC is still looking strong, and could continue even higher, barring a bad news event or another bearish catalyst of a similar caliber.

Related Reading: Study: Despite Perceived Riskiness, Bitcoin Has a Higher Risk-Return Ratio Than Most Traditional Assets

Analysts Call For A Bitcoin Correction

Bitcoin’s monumental surge over the past couple of months has caught traders with their pants down, there’s no doubt about it. Almost no one expected for the asset to pass $6,000, let alone $8,000 in early-2020. Yet here we are, sitting above a level that was a quixotic dream just months ago. Some now claim that it is a perfect time for the asset to retrace, however.

As NewsBTC reported previously, the last time Bitcoin’s chart looked as it did now, a strong pullback ensued. Analyst Josh Rager recently pointed out that during 2020’s recovery out of a brutal bear market, which was much like the one seen in 2020, BTC bottomed around $200, accumulated around $300 for months, went parabolic to tap $500, and then saw a 40% pullback. What’s more, the three-day Super Guppy, a key long-term trend indicator, didn’t signal a “buy” (green) until after the pullback.

Amazing similarity between the last bear market prior to uptrend

Bitcoin had a similar parabolic push out of accumulation, followed by a pullback and uptrend

Watching for a potential pullback where I’ll add more to the stack

Sound familiar? Well, that’s because Bitcoin is seemingly doing effectively the exact same thing, but in an entirely different price region. If history is followed to an exact tee, BTC may top out around this region, plunge by approximately 40% to the low-$5,000s, and then slowly return to the $6,000 and $7,000 region.

And from there, as trader Horn Hairs points out, the cryptocurrency market should enter a period of consolidation, during which investors will be given a second chance to accumulate Bitcoin.

$BTC The last parabola that broke us out of a bear market resulted in a near 7 month consolidation. With alts at their ATL supports against USD, if this sort of consolidation happens again on BTC after it tops (likely), we could be in for the REAL #altseason.

Not So Fast, Analytics Hints

This might not happen though. First off, while the crypto market’s nature is one of intense cyclicality — booms and busts, parabolic run-ups and heartbreaking drawdowns — historical price action isn’t indicative of future performance. As Interchange’s Dan Held recently pointed out, the dynamics in this market are entirely different than 2020, 2020, or even 2020. Things have changed to put it briefly.

Case in point, the industry has some of the biggest names in finance and technology delving in. Square, through its Cash App and chief executive Jack Dorsey; Fidelity Investments; E*Trade, Bakkt, and ErisX are among the developments in the space that make this rally entirely different than anything before it. Thus, some deem it logical that warnings of a large market correction can be deemed moot.

Related Reading: Why The Next Bitcoin Bull Run Could Eclipse The Last Crypto Bubble

On-chain data may corroborate this. Renato Shirakashi, a lesser-known yet respected Bitcoin analytics guru, notes that the Spent Output Profit Ratio (SOPR), an indicator he recently created to predict local tops and lows, is currently “relatively high”, signaling a local peak. However, Shirakashi notes that this sign, which could mean there is an increase in selling pressure, would “normally push prices down”.

The big correction everyone is waiting for may not come right now. Why?

But with the market continuing to head higher, he suggests that demand for BTC is increasing, thereby absorbing the increase in market supply. What’s more, the median lifespan of unspent outputs isn’t changing, meaning that “HODLers” continue to “HODL”, and that the only BTC being circulated on exchanges right now are those recently mined. As Shirakashi explains:

“If we take a look at the median lifespan of outputs, we can see it isn’t changing. This means that old coins are not getting into trades. It looks like that long time hodlers aren’t willing to sell. This makes our supply limited to the circulating coins.”

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