The Truth About BTC. Bullish Selling or Bearish Dump? #46
Market Meditations | November 27, 2020
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Market psychology is a weird beast. Barely 2 months ago, targets of $17,000 per bitcoin were considered surreal and irrationally bullish. Yesterday, after a ~15% correction, Twitter went silent and even felt depressed. Right when less and less traders were still expecting it did we finally see that correction we’ve been writing about for a while.
Hindsight analysis is always easy, but I think that by looking at some factors that contributed to this dump and explaining why this isn’t necessarily bearish, we can put some of our readers at ease and better prepare them for the next time this happens. Let’s dive in!
Possible Trigger? Rumors Around New U.S. Regulation
It’s hard to pinpoint a specific reason why the market started selling off as it did. Traders will tell you the chart showed a double top with a swing failure pattern (SFP). Others indicate that an unexpected tweetstorm by Coinbase’s CEO Brian Armstrong was responsible for tipping the scales in favor of the bears in an already vulnerable market. To be honest, it’s almost always a combination of several factors and looking for narratives after the fact does not help us as traders. As a famous trader once said: “Show me the chart, and I’ll tell you the news.”
In the days leading up to the correction, funding on derivative exchanges was rising significantly indicating that the market was starting to overheat and more long positions were being opened, even this close to a major resistance level. With fresh long positions and the amount of leverage in the market increasing, the market naturally became more vulnerable to any kind of uncertainty or negative event. As news came out about potential regulations, those high leverage long positions had to close or were liquidated which caused the market to roll over and lose the short-term uptrend, which led to more positions having to close or new short positions that were opened because of a change in momentum.
Markets are not known to give everyone a free pass to ride the trend without taking out accumulated stop-losses once in a while. Triggering stop-losses at levels that are watched by most traders creates liquidity for bigger market participants to accumulate their positions.
That’s exactly why a correction like this is actually healthy for the existing higher time frame (HTF) uptrend, it essentially balances out the derivatives market. High leverage long positions get flushed out, new traders start panic selling their positions and new short positions being opened provide the necessary ‘fuel’ for the market to eventually break higher. A ‘shakeout’, as Crypto Twitter likes to call it.
On days like yesterday, some players lose perspective and can’t see the forest for the trees. Unless you’re a scalper, it’s almost always worth zooming out to not lose sight of the HTF uptrend. If we draw some Fibonacci retracement levels on the uptrend since the low in early September, we see that the market could even correct further without losing the HTF trend. Generally speaking, a bullish trend like this does not correct beyond the 0.618 Fibonacci retracement level, which we can find at $13550. Only closing below that level would be a major sign of weakness and a reason to re-evaluate our HTF bias.
What Can We Learn From 2017?
“History does not repeat, but it does rhyme” – Mark Twain
If we take a look at any bitcoin chart from 2017, we can see that this week’s sell-off was not a rare occurrence. Bitcoin corrected 25-40% multiple times during the last bull run and although volatility has decreased, we shouldn’t be surprised to see it happening again. In a bull market, dips are for buying and I believe that the same is true today. Price always extends further than most traders expect, so do not over-leverage yourself thinking you’ve caught the bottom.
This is especially true for altcoins, where liquidity dries up even further during a panic like yesterday and some coins drop 30-40% in less than a day. As I wrote wednesday, altcoins perform great when bitcoin consolidates but tend to suffer more once bitcoin becomes volatile on either side. As history has shown us multiple times, selling on a red day during a bull market is generally not a good idea.
As usual, let’s wrap it all up so Market Meditators know what the key takeaways are. First and foremost, this correction should not come as a great surprise. As discussed, a range of factors were at play: the announcement from Coinbase’s CEO and highly leveraged long positions set the scene. However, this is a scene some will remember from the 2017 bull run when Bitcoin corrected 25-40% multiple times. In fact, this kind of ‘shakeout’ can be healthy in the long run, provided we don’t close below certain rectracement levels.
Chinese Police Have Seized $4.2 Billion Cryptos From Plustoken Ponzi Crackdown. For the first time, a Chinese court has detailed the breakdown of all the crypto assets seized from the PlusToken Ponzi scheme crackdown. A massive amount of both bitcoin and altcoins has been seized by the Chinese police, amounting to $4.2 billion in total at today’s prices. The court said the seized cryptos “will be processed pursuant to laws” and “forfeited to the national treasury.” According to the latest ruling, the Plustoken scheme officially started in May 2018 and advertised a (non-existent) crypto arbitrage trading platform. The platform advertised daily payouts but required users to deposit at least $500 worth of crypto in order to participate. Read more.
Dai Price Increase Led to a Massive $103 Million Worth of Liquidations at Defi Protocol Compound. The market-wide correction on Thursday was yet another stress test for the decentralized finance (DeFi) ecosystem. Because of a momentary price increase in the DAI stablecoin, massive liquidations with a total worth of $103 million occurred at the DeFi protocol Compound. The price of DAI at Coinbase, which is used as the source of Compound’s price oracle, increased by 30% which led to under-collateralized loans on the protocol and thus resulted in a massive amount of liquidations. Market conditions were also cited as the reason for $8 million worth of liquidations at dYdX. Read more.
Gold Drops Below $1,800 to Lowest Since July on Vaccine. Risk on leads to a decline in the value of safe haven gold. Gold slid below $1,800 an ounce to the lowest since July as positive vaccine news and a clearer political picture continued to undermine the haven. Bullion fell steeply in a repeat of losses seen Monday, when news of AstraZeneca Plc’s effective vaccine and positive U.S. economic data hit demand. The decline accelerated after gold moved below its 200-day moving average. Prices are heading for a third weekly drop as investors swap into risk assets looking to profit from the eventual economic recovery. Read more.
Libra Plans Dollar-Pegged Stablecoin Launch in January 2021. On Thursday, The Financial Times reported thatThe Facebook-led Libra Association is targeting the controversial launch of its first stablecoin in January next year. According to one of the sources, the first stablecoin would be dollar-backed while other planned single and multi-currency stablecoins would be launched later. In order to launch, Libra needs to get a payment services license from the Swiss Financial Market Supervisory Authority (FINMA), which could be granted in January. Read more.
Trump, Still Defiant, Says He’ll Give Up Power If the Electoral College Backs Biden. President Donald Trump said he’ll relinquish power if the Electoral College affirms Joe Biden’s win, but he signaled he may never formally concede defeat, and may skip the Democrat’s inauguration. Trump fielded questions from reporters on Thursday for the first time since his election defeat, speaking at the White House after a Thanksgiving teleconference with members of the military. Read more.
#27 Waro: Publicly Turning $10,000 Into $1,000,000
Waro (@warobusiness) is a futures trader who publicly traded his portfolio from $10k to $1 million. Before trading full-time, Waro was a front-end developer.
In this episode, we talk about how Waro managed to make 10,000% profit through trading. We talk about risk management, his strategies for buying the dip and the importance of managing your psychology as a trader.
Were You Overexposed to BTC? Let’s Recap on Risk Management
Market Meditators, we have experienced a lot of volatility this week. As per my tweet, I like to hope that everyone is coping ok. Perhaps some people were overexposed and this calls for a recap on risk management. Let’s get started.
1. Trade with Stop-Loss Orders. Stop loss orders are the ultimate risk limiting tools. If you trade without stop-loss orders, you are exposed to virtually unlimited risk. Always have a stop loss order in place for every open position, and don’t move the stop-loss order except to protect profits. Do your analysis and risk calculations before you enter the trade, and then stick to your trading plan.
2. Leverage to a Minimum. Don’t be seduced by high leverage ratios and take too large a position. Trading too large a position relative to your available margin reduces your cushion against routine, adverse price movements. Keep your use of leverage to the minimum needed to trade your strategy. You can request a lower leverage ratio from some brokerages to systematically limit your leverage utilisation. Just because they offer 100:1 leverage doesn’t mean you have to use it all.
3. Trade with a plan. The best way to limit the inevitable emotional reactions that come with trading is to develop a complete trading plan from entry to exit (stop loss and take profit) before you ever open a position.
4. Stay on Top of the Market. Make sure you have a firm grasp of what’s happening in the market. This won’t guarantee a winning trade, but it will alert you to potentially disruptive circumstances that you can factor into your trading plan to limit overall risk. If you follow Market Meditations, a correction should have been on your radar for some time.
5. Trade with an Edge. Pick your spots and choose your timing; don’t get pulled in by the noise. Keep your ammunition dry, and look for trade setups with a clearly defined risk/reward scenario. Be opportunistic and spend your time and efforts looking for trading opportunities still to come instead of getting caught up in the market move of the moment.
6. Take Profit Regularly. Taking profit regularly is the surest way to limit risk. By definition, if you take profit (even partial profit) you’re reducing your exposure to the market. You can’t go broke taking profit.
7. Taking Money out of Your Trading Account. If you’ve made some money in the market, make periodic withdrawals from your trading account. If it stays in your margin account it is subject to future trading decisions which represents an unknown risk. Remember why you are trading, it’s not just about the money but what you can do with it. Withdraw your profits from time to time, and spend or invest them in the way you always said you would.
And there you have it. As essential as your trading strategy is your risk management. For more information, check out my free course.
Disclaimer: The content in this newsletter is for informational purposes only. Nothing in this email is intended to serve as financial advice. I am not a financial advisor. Every investment and trading move involves risk. Do your own research when making a decision.