For years I have studied the patterns of price movement in the markets. Price movement reflects the “herd mentality” of the participants in that market. The emotions of “Fear” and “Greed” are what move the price up and down, mostly due to Fear, which is the more powerful emotion of the two.
Fear causes people to pursue emotional decisions, such as panic-selling at the bottom of a crash, or FOMO-ing at the top of a parabolic rally. In the way that people enter orders (at the “market” price) it causes the price to move; if the majority of orders are entered at a limit price (i.e. market “makers”) then the price tends to stay range-bound. No one who is panicking to exit a position will do so with a limit order, it’s a “pull the ripcord and exit now!” market order.
So how do we explain this current rally in Bitcoin? To me, it resembles “The Impossible Rally” which was not meant to happen yet, for all the wrong reasons, and will exclude the majority of participants until the very end.
The “timing” of this rally seems all wrong to most people. “We don’t have a Bitcoin ETF yet!” they claim. “The Baakt Futures exchange is not live!” “Binance was just hacked!”….and a hundred reasons more as to why this rally should not be happening. But it is.
Millions of investors who have sold out at the bottom of the crypto Bear of 2018 are now patiently waiting for the “right” pullback to enter, and the price is stubbornly avoiding anything resembling one. But what these investors do not realize is that the “right” pullback, one that feels “safe,” will probably not materialize. In fact, quite the opposite will occur. The pullbacks will continue to be more and more shallow until people begin to “chase” the market higher into an intermediate blow-off top, at which point the pullback WILL materialize, but not the type that most will find comfortable. (see the flash crash on 17May!)
For these reasons, I believe that we’ll continue to see Bitcoin move in an “impossible” manner, moving in a way so as to confuse and deny entry to all but the most contrarian investors.
How should you approach this going forward? Much of the answer depends on whether you are an “investor” or a “trader.”
An “investor” has a much longer time horizon, meaning that you intend to hold this asset for perhaps years until the value peaks out. In this case, you should be looking to accumulate “value” either by regular “cost-averaging” contributions, or by using good-til-cancelled limit orders to pick up more inventory during deep discounts. (i.e. a really deep pullback in price!)
A “trader” has a shorter time horizon, and is looking to participate in short-term swings, with their assets being mostly parked in cash/fiat/base currency. The only signals that create “edge” in this environment will be ones that feel particularly perilous to enter; this is because you’re going against the grain of the crowd. And many of the breakouts will occur at odd hours, so a trading bot might be required to take these entries if you cannot monitor the market 24×7, and who can?
If this “Impossible Rally” is giving you heartburn while you sit on the sideline, first understand the dynamics as to why these rallies occur. (hint: it’s not “market makers” or “whales” or whatever the latest conspiracy theory is) Once you understand the “why,” then focus your efforts on determining what your approach should be. Many people claim to be a “long-term investor” until that first red candle shows up, then they’re scrambling to sell at very poor terms.
Fortune favors the prepared, in the face of the impossible.
Doc Severson
enroute Preston to Glasgow