People don’t know how much they already know about the behavior of financial markets. They attack the analysis of financial markets like Bitcoin as if they are an unknown quantity, requiring artificial intelligence and supercomputers to analyze edge and trade entries.
I think that all you need to do is to look around you for examples.
Here are a couple of ways that financial markets mirror the everyday world of “physics” that we see around us:
Range Expansion Leads to Range Contraction
You and I do this all the time. We go for 16 hours and sleep for 8 hours a day. We “move” and then we “rest.” Every physical entity out there works like this, and so do financial markets. You cannot simply run up the side of a mountain and summit it in one singular effort; you go as far as you can, then you rest to recharge, then continue. Cars cannot go forever, you must either refuel or recharge them after energy is expended through distance. And Bitcoin does the same thing.
In this chart, the yellow line signifies “energy” almost like a fuel gauge; notice that as the price coils sideways, the yellow Chop Index “recharges” and signifies that the stored energy is getting higher, until it finally breaks out and trends until exhaustion:
Note also the converse of that statement, that when the yellow “chop” index is low signifying low energy, the chart rarely continues higher until it “rests.” What we see in everyday life is also what we see in markets.
The Damped Oscillation
Think about a real life scenario of taking a rubber ball to the top level of a high building. When you do that, you introduce “potential energy” into that ball as you lift that mass to a new height. And what happens when you release it? It will drop until it hits the ground, then bounce in successively smaller heights until all of that kinetic energy drops to zero. Like this graph:
With every bounce, the kinetic energy is dissipated in either heat or friction until there is no energy left to bounce against gravity, and the ball stays still.
This is called a “damped oscillation.” The oscillations of each bounce get smaller as the effects of heat, friction, and gravity take a larger and larger toll on the kinetic energy of the ball.
But would you believe that we also see the same behavior from financial markets? When they “wind up” as in the chart above and they build up energy as shown by the Chop index, that chart is building up potential energy. And when it breaks out into a trend, that chart is converting the Potential into Kinetic energy just like the ball.
What typically happens on a breakout is similar to what happens to the “ball” example, however we have no “gravity” in markets, so they can move “up” when market forces apply. Typically a breakout leads to a large symmetrical consolidation in the form of a triangle as that “kinetic” energy from the breakout dissipates slowly, like the ever-smaller bounces of the ball:
No one can predict the future and there’s no guarantee that this week’s breakout will lead to a triangle or pennant pattern as suggested in the red, but this would be very “normal” behavior to observe, while everyone else that has NOT already made this connection will be whipsawed left and right, up and down during this period.
Markets move like everyday objects do. Start noticing how they move like things in your everyday life; once you see it, I’ll bet that you’ll see it everywhere.
Doc Severson
Westerville, OH