Burning the candle at both ends

Burning the candle at both ends
December 18 22:32 2018 Print This Article

TA isn’t always reliable. TA is open to interpretation. TA can be tricky. 

Crypto makes it even worse. 

Why?

From https://www.maxpixel.net ; used under CC0 license

Burning the candle at both ends

Half of the TA tools don’t work on crypto!

Bit Brain, don’t be foolish, TA of crypto is the same as TA of anything else, the principles don’t change!

Unfortunately they do.

Granted: “half” is an exaggeration. But there is a genuine problem here – read on and see…

We could start with the fact that crypto is very new

As as entirely new asset class crypto is still finding its trading feet. This wrecks havoc on long-term charts. The reason for this is that long-term patterns have yet to be established. As I said yesterday:

As a young market it lacks well established patterns and trends, making TA particularly tricky. 10 years is a long time in crypto (basically its entire lifetime!), but is still a rather short-term compared to the age of most other asset classes. Crypto continues to break new ground and to forge a new path on a daily basis.

The next issue is one of logarithmic growth

This is not an entirely new concept to TA. To some degree, there are tools to account for it. This is also why I almost always view my long-term crypto charts in logarithmic view.

Logarithmic growth isn’t intuitive to use and creates misperceptions. I am convinced that most of the “Bitcoin Bubble” talk is because people don’t understand logarithmic growth and often fail to view charts using a logarithmic scale.

The logarithmic history of BTC – No problems here! (From https://coinmarketcap.com/currencies/bitcoin/)
The exact same chart as above, only this time it’s not in logarithmic view: Oh no! A Giant Bubble! Panic! 
(From https://coinmarketcap.com/currencies/bitcoin/)

Such growth occurs because cryptocurrencies are essentially the embodiment of a new and revolutionary disruptive technology. Blockchain technology. This very early Bit Brain post explains logarithmic growth better: BITCOIN PRICE PREDICTIONS – Chart Display – Part 3 – The S curve (More good news!).

But by far the worst issue is the never-closing markets

Unlike most other markets, crypto markets are open 24/7 – they never close.

How is this a problem? 

Because of candles!

Without ever having to resort to trendlines, indicators, patterns etc; candles themselves can predict a lot on a chart. Part of the reason that candles can do this is because they end when a market closes and begin when a market opens. This particular characteristic of candles allows an analyst to measure the performance of assets directly from the candles, especially day long candles. Each candle tells a little story, but more than that, combining them together they become more than the some of their parts. 

For instance: if you see a candle pattern such as “Two Black Gapping” then you would have a strong indication that a bearish trend was to continue. But you can’t gap with crypto candles. It’s physically impossible because the markets don’t close. That’s just one example, but any gapping pattern becomes useless in crypto. 

Similarly any candle pattern that relies on the opening and/or closing prices of markets is useless in crypto. That invalidates many candle patterns! In fact, all of the usual trader behaviour that normally happens shortly after markets open and again shortly before they close (when volume traditionally climbs) doesn’t happen in crypto! But it goes even further:

Even patterns which are often used by some in crypto-analysis may be invalidated, or at least become extremely suspect, by virtue of the fact that the markets never close.

You’ve seen “Hammers” in crypto analysis right? Perhaps “Engulfing/Enveloping Candles”? So then please tell me how do you know when to start and when to stop something like an engulfing period? A hammer works because price starts high, is forced lower and then forces itself back up within one trading session! Pray do tell: what is that trading session in crypto? When does it start, when does it end?

Analysing crypto candle patterns in more detail – specifically when trying to apply how and why the candle patterns actually work – will soon reveal that crypto candle analysis is a very tricky game to play and requires far more guesswork than with other asset classes. Much of it is outright impossible.

It’s not impossible to use candles with crypto analysis, but you are very restricted in what you can do and your accuracy will suffer as you must e.g. “guess” the periods for enveloping candles. In other words – you need to be a damn good analyst! Beware of analysts who say otherwise: in my opinion they don’t know what they are talking about. You can tell them that I said so.

Yours in crypto

Bit Brain

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Bit Brain
Bit Brain

A walking crypto encyclopedia. Honest, Realistic, Opinionated. Futurist, Autodidact, Polymath.

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