‘Technical analysis’- the phrase that launches a hundred arguments. “Technical analysis and crypto” causes fist fights 🙂
It’s voodoo. It’s witchcraft. It’s unscientific nonsense. Can’t be used when liquidity is low. It tells the future. It’s foolproof.
All incorrect, in my opinion. Technical analysis (TA) is simply a tool which looks at price and volume action that has occurred in the past. It looks for patterns and basically attempts to answer the questions “what has happened before, when the price of this thing I’m looking at got to x level?” , “Has it happened often at that price level?”, “If it happens again at that price level, what does that tell me?” and equally importantly “If it doesn’t happen again at that price level, what does that tell me?”.
Technical traders will use the changing information revealed by the market to frame their decisions around buying and selling, to set entry and exit targets and to set “I’m wrong” lines. And they use it because the history of supply and demand, driven by human behavior, tends to repeat.
For many traders, technical analysis doesn’t replace fundamental analysis, it complements it. Where fundamental analysis tries to tell you what to buy or sell, technical is much more focused on when to buy or sell it. Fundamental analysis then, is the study of the causes of price movement while TA is the study of the effects of the supply and demand.
There are many different approaches to TA and many different kinds of charts. For this initial blog post I’m going to focus on candlesticks as the chart type, and bollinger bands as the indicator.
Quick background- candlesticks charts have been around since the 1600s and were originally used by Japanese rice traders. The candlestick has a body which reflects the difference between the trading session’s opening price and its closing price. That is important because it reflects momentum, the market’s consensus on value and who was in charge during the session: the bulls or the bears. Small candlesticks represent a real tug-of-war with less of a change in value during the session, whereas long candlesticks represent a significant change that merits significant attention.
Bollinger bands were invented by John Bollinger and are a kind of moving average envelope. The standard bollinger band uses a 20 day simple moving average (sma) of the price, and have a moving average that is 2 standard deviations above the 20 day and one that is 2 standard deviations below the 20 day. The envelope captures approximately 90% of the normal trading for the thing being studied. You can also add in a set of 3rd standard deviation bands which statistically will capture 99.7% of the normal trading range. Where something sits within the envelope and in relation to the 20 day sma can be very informative and whether the outer bands are squeezing or expanding can be very informative.
So, let’s look at NIM and see what the candlesticks and Bollinger bands are indicating at the moment. I’m using the chart for the NIM/BTC trading pair, from Tradingview.com
This chart shows the 2nd deviation Bollinger bands and shows clearly how when NIM pops outside of the bands, it always comes back inside. There’s no magic to that, it’s just math. But, it can be very useful on its own and particularly useful when you pair it with an examination of the candlesticks that occur after a major pop outside the bands.
An explosion in any direction is not sustainable, so watch for the first candle after the pop which indicates the move has exhausted itself. If the move was up, watch for the first red candle. If the move was down, watch for the first green. These reversal points can be very informative.
If you are willing to miss some of a move in order to be a bit safer, a simple way to trade NIM is via the 20 day sma alone. Sell if NIM closes below the 20 day moving average, buy it when it closes above it. You would have caught some major moves over the past year just trading off that middle red line.
So.. what’s NIM up to right now (*)? Let’s look at a chart covering a smaller number of days:
You can see that during the end of July and again in the second half of August, NIM had periods where there was lower volatility. Neither the bulls nor the bears were making any major moves and the price didn’t change much. The bollinger bands, which reflect volatility of price, squeeze together more closely during those periods. The very cool thing about Bollinger band squeezes is that they tend to resolve; volatility will tend to revert to the mean, and that can mean explosive moves one way or the other. Think of it like a coiled spring- the longer the squeeze, the larger and more sudden the potential move.
We saw big moves after the July squeeze, but it wasn’t so explosive that you couldn’t catch it. The July squeeze resolved downward, and if you watched for the first green candle to close back above the 20 day sma, you’d have bought in/back in around 580 (5800 on the chart, but they use too many decimals imo) and you’d still be long. The August squeeze wasn’t much longer, but it certainly popped harder. You can’t tell how the market is going to react just based on squeeze length, is what I’m saying.
One other thing to know about Bollinger band expansions from squeezes is that they tend to come back to test the breakout point. In the chart above, you can see that in early September we broke out at around 775, exploded quickly outside the 2nd std deviation band to 1000, and have now come back inside that band. I expect that we will come further back in to test the breakout, probably down to resistance at 750. If that doesn’t hold, I’d be watching the 20 day sma as history suggests we’d go back down to around 680. A close back below the 20 day and I’d be looking for support way back down at 475.
On the upside, if there is no test of the breakout, or if there is and we successfully test it (meaning the support holds) where do we go from here? We could churn sideways for a while, or we could stairstep higher. In any event, I think the next major resistance ceiling looks like 14500. If we’re lucky, we’ll form a cup and handle at that point and set the stage for a significant move higher, but a) that’s for another blog post and b) we don’t hope or anticipate, we watch and we let the market tell us what’s what and trade accordingly.
Happy trading and full disclosure, I am definitely long NIM.
(*) charts current as of 10:45am Thursday September 5th 2019
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