Bitcoin price Bub and Bob below my bail-out line.
Bitcoin price Bub and Bob below my bail-out line.
Gox Bitcoin Price, Volume, Fib Levels and MACD
Gox Bitcoin Price, Volume, Fib Levels, trendline and MACD (2012-12-21)

In the above daily chart of the Mt. Gox Bitcoin price in USD, we’ve also got relative volume bars semi-visible in the background. Also shown are Fibonacci levels, a trendline and the MACD indicator. In the first section, I’ll cover these details and why I consider them important. In the next section, I’ll formulate a trading plan.

1) The Chart of the Past

The colour-coded areas correspond to the Fibonacci retracement levels. The levels are traced from the “Silk Road seizure” low of $109.50 in early October, up to the $1250 highs in late November and early December. A quick refresher on Fib levels:

the red zone at the top represents a Bitcoin price range between the high and 23.6% lower,
the next level down in yellow is the continuation of the range down to a 38.2% drop (or “retracement,” in trading terms) from the uptrend highs,
the green covers a continuation down to 50% (not a true Fibonacci sequence value, but frequently included for its utility),
the weird greenish-blue colour covers a continuation down to 61.8%,
the blue covers a continuation down to 76.4%. and finally,
the grey area shows the Bitcoin price range back down to the 100% which would represent a full retracement.

Unless the Bitcoin price falls into the deadly mists of the grey zone, it remains valid to consider price as being in a long-term uptrend. Within this long-term uptrend, we’re currently experiencing a medium-term downtrend / retracement, as represented on the chart by the yellow line. I would consider a break to the upside of this trendline on strong volume to be a partial buy signal.

Next we come to the MACD (Moving Average Convergence / Divergence) indicator shown in the lower block. As the name suggests, this indicator plots two moving averages against each other. The values used in my chart – and the default values on BitcoinWisdom, where the indicator is also available – are for a 9 day exponential moving average (9D EMA) signal line and a 26D EMA minus a 12D EMA line. The pink histogram displays the difference between these indicators – shortening bars indicate convergence and lengthening bars divergence.

I include the MACD as it gave a very clear signal on 2013-12-05, as indicated by my “sell” arrow annotation and the grey, dashed vertical line connecting it to price. The signal was given when the fast signal line crossed the slow MACD line to the downside and the histogram flipped into negative territory. 

A discrepancy between the Bitcoin price peaks and the peaks in the fast line is also visible. Price peaks at the same level, whereas the MACD shows a slip in the fast line peaks.

Coupled with a lower high on what was then the leading market, BTC China, the MACD indicator signal and the inability of the Bitcoin price to breach $1250, we had a clear confluence of signals shouting “SELL!” 

2) The Plan for the Future

As I’m now in the market waiting for a good entry-point to buy back in, I am looking at all the above signals for an equally strong “BUY!” signal from the market. Let’s consider what the chart is showing us:

1) The Bitcoin price, always the most direct and important indicator, displays lack of conviction above the 50% Fib level. Sellers seem happy to supply volume above this level for now. This 50% level is also significant as the “dead cat landing area” where price bounced on its first leg down.

2) Even if the downtrend line is broken to the upside on convincing volume, we’d still need to see a future low-point above the previous low / 61.8% Fib / major breakout confluence around $550 before we can officially declare the downtrend dead.

3) The MACD is displaying a “pre-signal.” Compare the depth of the histogram around the last low at $550 and the previous low and note that the rate of divergence is contracting. This tells us what we can see from price anyway; that the sudden violent drops which occured from the 5th to the 8th of December have now decelerated into a slower-paced downwards drift. This suggests that downwards pressure is easing, just as upwards pressure clearly eased before the MACD “sell” signal.

I suggest studying the MACD’s historical performance on a daily timeframe to evaluate whether it’s a tool worth including in your own analyis. In my view, it’s given enough useful signals to be worthy of consultation. You’ll notice however that its sell signal came late when the previous Bitcoin price “bubble” burst around April. The collapse happened too quickly for the MACD to sound an actionable warning signal. The MACD is a somewhat lagging indicator which nonetheless offers helpful clues as to when trends are ending and beginning.

The above points suggest to me that the time to buy in is… not quite yet. If we see a re-test of the previous low / $550 / 61.8% level, with price then bouncing quickly on strong volume, ideally without first sending a long tail down into the blue zone, that’d be a decent price signal that the downtrend has abated.

Before pulling the trigger on a buy, my plan is requires me to wait for clear signals from price, volume and indicators. If the next low prints higher or equal to the $550 low, I’d take that to mean the Bitcoin price has found support, and that the risk / reward ratio is now slanted to the upside.

This brings me to my management strategy for trades. Let’s imagine a hypothetical case: price prints another low around $550 then starts moving back up to challenge that yellow trendline. At that point, hoping to get in early on a possible uptrend at a nice cheap price, I’d probably buy in with about 1/3 of my trading capital; the amount of money I can lose without getting so pissed off that I punch doors and crave intoxicants. If price then smashes through that yellow line on rising volume or the MACD shows the fast line passing through the slow, I’d then add in another 1/3. Finally, if the Bitcoin price passes the 23.6% Fib and the previous high point just under $1050, I’d add the final third.

Position-weighting like this is good trading practice. Rather than blowing your wad on what you hope is the best price-point, it makes more sense to add to your position only if it proves itself to be a winner.

Having established a buying plan, the next consideration is deciding my (mental) stop-loss. In the hypothetical, Bitcoin price has bounced at a point higher or equal to the last low and I’ve taken an opening position. A close below these lows and ruh-roh, the threat of further downside becomes apparent. To control this risk, I decide now on a level to place my “point of maximum pain.” Below $400 seems a likely area, if price breaches this level there’ll really be “blood on the bits” and a spate of panic-selling.

Bitcoin price Bub and Bob below my bail-out line.
Bitcoin price Bub and Bob below my bail-out line.

Although it’d suck to sell there and lose money, at least I can only suffer the loss on a fraction of my trading capital. If I had all my capital invested, selling and taking the loss might be painful enough to lead me into “I’ll just hold out until price comes back, however long it takes” territory. That is dangerous ground as it slopes towards the threat of total wipeout. Triggering your stops is never pleasant and a test of your discipline as a trader. Always honour the wisdom of stops though. Despite what your instincts will tell you, it’s a lot better to accept small pain today than risk great pain later.

Finally, let’s talk targets. Say the Bitcoin price behaves such that I can get in somewhere in the blue, aqua or green zones. Then once price nears the all-time high around $1250, I’ll sell 1/3 of my position. This level is likely to present resistance, so it’s a great place to take profit. Beyond that level, I’d probably do a Fibonacci projection to determine my next points to take profit, or just watch price for signs of it banging up against serious resistance, like with the MACD sell signal discussed earlier.

This is pretty much my trading plan going forward.I should emphasise that it’s a trading plan, designed to make profit without risking too much capital, and not any kind of long-term investment strategy. Such a strategy would be based less on technical analysis than fundamental considerations of such as regulatory risk, decay rate of the legacy financial system, global Bitcoin network growth and merchant adoption, etc. In any case, I generally prefer to build my cryptocurrency investment portfolio from my crypto earnings (“and tips,” he said hopefully) rather than fiat conversions.

I’ll be giving updates on this trading plan whenever I make buy or sell decisions. If you haven’t yet done so, I hope you’ll consider how stop-loss disclipine, setting targets and weighting your position according to price action can help you improve your own trading. I also hope stating my plan will help me stick to it! I’m looking forward to trading Bitcoin actively again.

Although price has fallen off dramatically and a lot of people are miffed, I believe the recent moves show the health of the cryptocurrency markets. After all, the Bitcoin price rose on good news and fell on bad news – just like one would expect logically. Contrast the behaviour of stock markets, which have risen to all time highs on central bank money printing despite a slew of negative or only vaguely encouraging data from the real economy. As mental bonkers central bankers can only run their printing presses for so long before destroying their currencies, there’s no doubt which is the healthy, sustainable and rational market!

Disclaimer: if you decide to follow my trading plan and it all goes to hell for whatever reason, it’s not my fault. Anything can happen in the markets, so always do your own research, use stops and only risk money you can afford to lose.

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