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Bevan:
Having some time on my hands again, being winter and all, I thought I would do a weekly (or thereabouts) post on some trading advice. Hope some people might find it useful.

First, some background... I co-founded the global coal market around 1998 in London, UK, becoming essentially an online coal (commodities) broker at the time. Later I moved into trading commodities with a couple of investment banks, returning to South Africa in 2008 post the credit crunch. I now run Thrive Centre in Hogsback where we make compost, grow awesome organic food and teach people how to become self-sufficient. I also run African Source Markets which is commoditising strategic African commodities in much the same way that globalCOAL did. For reference I've traded FX, commodities, stocks, swaps, futures, options and several other private variants as part of corporate finance deals.

I find financial markets (alongside religion) one of the most amazing concepts invented by Homo Sapiens to date. However, I just wish that we could all get our egos in check and learn to live in harmony with Nature, instead of raping her for profit, without accounting for any externalities, although I think that movie is still playing out as climate change starts to make itself felt. Anyway, on with the journal...

Bevan:

In any market we need to understand that there are different timelines operating...
a) The long term, passive investment funds (like Patrick  ;) ) who have no option but to religiously invest their cash in the market every month. Consider this as akin to a 200 day moving average line.
b) The medium term professional investors (investment funds, hedge funds, professional traders), who rebalance investment portfolios quarterly or monthly. Consider this as the current flowing in an ocean. We model this using the signal line (red line) of the MACD indicator i.e. Moving Average Convergence Divergence.
c) The short term traders (including bots, scalpers, option delta traders, amateur day traders etc) who are in and out of the market regularly. Consider this as the wind blowing across the ocean. We model this using the MACD (blue line) of the MACD indicator.

We also need to understand that any market has an inherent stretchiness to it. Think of an elastic band being tight or loose. This stretchiness is a measure of the daily volatility that any market can bear and is nicely illustrated by Bollinger Bands, approximated as the standard deviation. Of course markets will often stretch beyond their band, but its usually only temporary.

Bevan:
Now let's look at Bitcoin ("BTC") to start with.... We start with a monthly chart to get an overall helicopter view.

We can see that we are easily within the Bollinger Bands, indicating that monthly volatility is way down from previous levels. This therefore gives us no indication of price.

However, in the MACD chart, we can see that both the MACD line itself (blue) and the signal line (red) are in positive territory, and have been for the last 3 months i.e. 3 green bars of late. When the current (signal line) and the wind (blue line) are moving in the same direction, and especially when moving in same direction as the long term 200-day MA, then we expect strong moves in that direction i.e. similar to strong, rolling swell in an ocean. When current and wind are opposite to each other then we should expect choppy, sideways price action.

Even though the bulls are clearly in charge in this monthly view, we see that price action has been weak and has failed to break above the 10,000 level again. We also note that an average run above or below the signal line is about 6 months, and we are in the 3rd month now. To me this indicates that BTC is quite a tired market, with many participants having given up on it.

It's inevitable that momentum will break down once more and when it does, we could see major capitulation from buyers finally throwing in the towel. However, for now the monthly chart is telling us to probably hold onto any long position, if already long. For any new position, it's too early to short and probably not wise to go long this late in the cycle.

Bevan:
Let's now check out a daily chart, for a more granular interpretation....

Here we see MACD breaking down over a rising signal line, although the signal line is nominally in negative territory still. As a scalper one might be tempted to short BTC at this point, but for me this is tricky. This is a situation where the wind is now blowing across the swell, creating choppy sideways price action.

Judging from the last few weeks of price action, I don't like the downside potential here anyway and the daily Bollingers are really close as well.

As one should always be looking to trade less, thus saving you precious brokerage costs, going short now is not great risk:reward trade. Capital and margin is probably best employed elsewhere for now. However, BTC looks to be setting itself up for a great short trade in a little while. One to keep on the watch list for now....

Patrick:
Following with interest. Not because I want to try, but because I find it fascinating!

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