Does technical analysis work on bitcoin?
IX Investor Bulletin
Wednesday, 26 July 2017
** Why charting works…
** Gold at key technical level?
** Does charting work on bitcoin…
As I’m sure you know, technical analysis is the study of chart patterns.
Technical traders look at charts to figure out where the price of something is heading.
And as you’ll know if you’ve made a start with TA, charting does work. Understanding how price has behaved in the past really can help you predict where it’s going in the future.
It’s all about psychology and behaviour. See, a chart is a visual record of how price has moved over time. It records when buying sent the price up and when selling sent price lower.
That’s what ‘support’ and ‘resistance’ is all about. A support level is a price level where historically traders have bought. So technical traders mark that level on their chart. And often if price comes down to that level again, buyers come in and that sends the price up again.
Charting works well on popular markets. Take gold.
I don’t know about you, but I love to trade gold. It moves enough to make it worthwhile. But it’s not so volatile as to make it tricky and cause sleepless nights. (Well, not usually.)
So let’s look at a chart of gold. This is an hourly chart, so each of the green or red candlesticks represents a 60-minute period.
What do you see?
The first thing I see is that gold’s been trending up these past couple of weeks.
Not in the bigger picture. If you look at a daily or weekly chart, you’ll see that gold is trading within a sideways range. It’s up about 8% since the start of the year, but it’s been bouncing around between $1,200 and $1,290 since February.
But on the hourly chart, the trend is up. And right now, it’s at what seems like a pivotal level. That level is $1,247, right in the middle of that $90-range.
And see how that level has acted as support and resistance over the past six months. When the price breaks through that level, there is potential for a decent intraday move.
My bet is that technical gold day traders are looking for a break of $1,247 today to set up a move towards $1,250-$1,252. At the same time, a break down from this $1,247 level could set up a $1,236 downside objective.
Those are decent moves for the day trader – equivalent to 50-90 pip moves in forex. And that $1,247 level is significant on daily charts, too. A decent beak to the upside brings $1,260, $1,280 and $1,300 in as achievable targets over a period of a few days.
The point is, with these long established, heavily traded markets like gold, major currency pairs and stock market indices, charts can work well…
Traders have key levels marked out on their charts and they will have entry and exit orders based on those levels. And it’s those orders that create the supply and demand needed to drive market price action.
But what about newer markets – can charting work on those, too?
Of course, I’m talking about bitcoin and all those other cryptocurrencies everyone is rightly so excited about.
I’ve seen some guys trying to map out price targets for bitcoin. But I’m not so sure I’d be able to figure out a trade based on bitcoin charts and then sleep well at night.
I’m just not convinced there’s enough past price action… enough history… to be able to say with confidence that traders are likely to buy or sell at such and such a level.
People talk about $1,800 being an important level for bitcoin. And for sure, it has done well to support the price the last couple of times it went there, in May and earlier this month. Both times, bitcoin went on to rally some 60% within weeks of those lows.
So perhaps traders are using charts to time their bitcoin trades, the same way as any other market.
If so, what happens if $1,800 doesn’t hold the next time it’s tested (if indeed it is)? I guess that means other major ‘big round numbers’ like $1,500 and $1,000 will come into play as downside targets?
And by the same rationale, if chartists are looking at bitcoin, then the all-time high of $3,019 must be a very plausible target to the upside from here. And if reached, we can expect to see some resistance at that level as people take some profits off the table.
But if that level breaks… where’s it heading? $5,000? $10,000? $100,000 per coin (as Saxo Bank predicts over the next 10 years)?
Personally, I want to see more testing of key levels on bitcoin, ethereum and other cryptos before I’d be comfortable trading them on a technical basis. Let’s see how they behave around some of the levels in the months ahead…
Of course, if you’re simply looking to buy and hold for the long term, these levels aren’t so important.
Certainly if some of the big potential targets the experts are laying out come true!