Show Me The Charts and I‘ll Tell You the News
By Wes Carlson on ALTCOIN MAGAZINE
It is common to find Bitcoin enthusiasts and influencers with strong conviction when it comes to the fundamentals of Bitcoin and the long-term price prospects. In the short-term, however, some participants in the market rely on technical analysis to guide their trades and decisions in the market.
According to the International Federation of Technical Analysts (IFTA) technical analysis refers to:
“The systematic method of analyzing financial instruments, including securities, futures and interest rate products, with only market-delivered information such as price, volume, volatility and open interest.”
The IFTA definition explains further that measurements and derivatives of price such as on-balance volume, price oscillators, momentum measurements, and pattern recognition are all part of the toolkit of the technical analyst. With such tools, the technical analyst is able to forecast and time trades and investments. With respect to the Bitcoin and cryptocurrency market at large, the same tools are being used to predict the best times to buy or sell crypto assets in order to make gains and prevent loss of capital.
How It Works
To arrive at highly probable price predictions using technical analysis, objective market data is used as input for the charts. The historical bitcoin price, trade volume, and volatility are all used in charting for this purpose. It is important to note that only data from the market is used in technical analysis.
Analysis of the historical data and trends is then made to determine the most likely points to which price would fall or rise within a given period of time. The information gained here gives the technical analyst a picture of the direction in which the market is likely to move in a given period of time. Based on this information, trading strategies and decisions can be made.
More often than not, skilled technical analysts get their calls right. However, predictions made from technical analysis are by no means 100% accurate. Information from technical analysis only reveals how markets might act, nothing is certain — being able to identify high probability setups is the name of the game.
Why does it work?
A proponent of technical analysis like myself would go out on a limb and say technical analysis works because it is the best means of drawing a picture of the market within any given period. This is because the data that serves as input for technical analysis are true reflections of how the market has acted over a given period and not hearsay or rumor.
Another possible reason is that most actors in the market are staring at and studying the same charts. Studying the same indicators and patterns and using similar analytical tools means that most analysts end up drawing similar conclusions. Having similar expectations of future, more often than not, causes actors in the market to take similar decisions and actions. What happens, in the end, is that the predictions as a result of technical analysis become self-fulfilling prophecies.
Another reason why technical analysis works is that it is basically a map of the psychology behind what the participants are thinking with regards to an asset within the market, is it undervalued or over-valued?
What the Technical Analysis Skeptics Say
Trading based on technical analysis has been likened to gambling by some skeptics. Reasons given are that historical data and patterns from the past do not necessarily indicate the direction the price of an asset would go in the future. However I find this argument somewhat misleading since patterns do repeat in the market, even though they may not be identical they do often “Rhyme”.
Other groups of people who distrust technical analysis point to the subjective interpretations of data as a problem. The argument here is that analysts use different indicators when it suits them.
It is true that the use of different indicators and tools can lead to different conclusions. However, choosing the right indicators for various situations depends on the skill and experience level of the analyst or trader. The fact that different approaches lead to different predictions is not necessarily a problem with technical analysis as a whole.
Opponents of technical analysis also have problems with the fact that the interpretations of the charts are done in a subjective manner. Different analysts are likely to read the same chart and have different interpretations.
Firstly, it is important to note that technical analysis is not an exact science. Technicians are bound to have different perspectives when interpreting charts — its probably best thought of as an art.
Making the right call most of the time is what eventually separates the better analysts or trader from the rest. Even if that edge is ever so slight.
The News Doesn’t Matter That Much
Opponents of technical analysis often attribute price movements to news reports and events. This might seem obvious as the bitcoin price sometimes tumbles after bad news breaks and vice versa. I will explain why this assertion is not as factual as it sounds.
The recent fall of the bitcoin price below the $6000 point was quickly attributed to the infighting in the Bitcoin Cash camp. The 2017 bull run was also attributed to the influx of institutional money. Such occurrences seem to buttress the point that price movements follow the news. It is, however, easy to miss the fact that throughout the current bitcoin bear market, there have been several occasions on which the price remained stable in the wake of positive news like the high probability of the approval of numerous ETF proposals and the Bakkt platform for physically settled bitcoin futures contracts. Also, the 2018 bear market seems to suggest that there wasn’t that much institutional money pouring into the bitcoin market after all.
Any technical analyst worth his salt would agree that the charts indicated that the bitcoin price was set to drop below $6000 long before we were even aware of the Bitcoin Cash fork. However, when this eventually happened, community members had to find a reason to attribute to the decline in price which many Technical Analysts had been predicting for months. This time around, the Bitcoin Cash infighting seemed like a good reason. In many similar cases, major upward or downward movements in price are attributed to the most recent positive or negative news.
As Bernard Baruch once said, “show me the charts and I’ll tell you the news.”
Perfectly encapsulated in his quote is the phenomenon of explaining price movements with events and news reports.Information about the state of a market can be read from chats using technical analysis tools and techniques. The news often associated with the price swings are often irrelevant.
Technical analysis is sometimes dismissed as a viable means of forecasting the future price movements of the bitcoin market as it is believed to be too volatile, non-liquid and rife with “market manipulation” for it to make sense. These issues may be up for debate but bitcoin is still suitable for technical analysis to be applied on. The data used as input are real figures including price, volume and time. Consequently, the result of the analysis and interpretation of such data is a true reflection of the emotions of market participants and their sentiments towards an asset such as bitcoin.
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