Bitcoin Market Cycle. Psychology & Mechanics.

21 дек. 2019 г.

Just as important, riding a bicycle, or even a supercar, doesn’t fall under the train, in order to understand when and in which direction to trade - you need to figure out who you are playing against, how to behave in each of the phases of the market, and how to identify these phases.

Today we’ll talk about the mechanics of the market and its participants. According to the postulates of technical analysis, which in turn is based on the law of market fractality, there are market cycles in which 4 phases can be distinguished:
1. Accumulation
2. Acceleration
3. Distribution
4. Shaking out

There is also theory that divides the cycle only into accumulation and distribution, we distinguish 4 phases, which, in our opinion, describe in more detailed market participants behaviour.

The problem of many novice traders and investors is precisely the lack of an optimal exit point from the transaction. Understanding the phases of the market will be helpful in solving this problem.

Consider each phase in more detail:

Accumulation - this phase visually looks like a horizontal corridor with low volatility and increased volumes. On Bitcoin, this phase can be observed twice on weekly charts in 2015 and 2019. At this moment, large limit players of long positions are activated. Lows and highs cease to be updated. These market participants operate on the principle of buy low - sell high. Accordingly, they have models of fundamental asset pricing, and the fair price that it should cost. Purchases are made below this price. As a result, there is an imbalance between buyers and sellers, which affects future pricing. The latter is becoming less and less inside the accumulation. At a time when there are not enough sellers on the market ready to push the price further, a control purchase on the market occurs, which causes the first update of three-month highs and the subsequent market reversal. Then begins the phase of overclocking the market.

Acceleration - at this moment, traders on 1D or less charts are activated. Highs begin to update and lows cease to be updated. A growing market is starting to create excitement and attract new money, interested in future benefits. These participants can act for fundamental, technical, or emotional reasons and with their money push the course upwards by buying market orders. Participants in the purchase phase during the accumulation phase begin moderate sales above their “fair” price starting distribution.

Distribution is the culmination of closing purchases made during the accumulation phase. In this phase, the highs cease to be updated, but the lows have not yet begun to be updated. At the potential top of the bull market, large players will want to sell stocks previously purchased at low price levels, which will take profits. Most of them will place large sell orders in a certain price range. Each sale should be absorbed by market makers who create the market. Some orders will be executed immediately, another part will go to the order book. Market makers will resell, which must be executed without lowering the selling price of their own, or other traders. Large limit orders in a glass can maintain a rate higher than the price at which the remainders of the "initiators" are added to players who are too optimistic about prices in the near future. After closing the deals of the “initiators”, limit purchase orders disappear from the glass and the remaining mass of the market falls under the influence of the supply thrown onto the market - a bearish trend begins, and with it the shaking out phase.

Shaking Out - new minimums becomes lower. The market is accelerating in down trend and trying to get balance. Afterwards market starts to slow down and then volatility goes down. At some point, traders who are already trading short positions leave the instrument for other, more volatile ones. The strongest holders who have not yet sold their assets remain in the cold darkness. At one point, market capitulation occurs. The market cycle is over. There is no weak holders anymore. If fundamentally there is a potential for growth and the price is "underestimated", a new phase of accumulation begins. If fundamentally everything is bad, the asset goes into non-existence and is replaced by dozens of new ones.

For hundreds of years, technology, markets, products have changed, but not psychology - the psychology of the masses, built on greed and fear, remains unchanged for hundreds of years.

In order to learn how to successfully trade, unlike investing, you must forget about the intrinsic value of a stock, or any other instrument. All that you should care about is the perceived value - the value that professionals imagine, and not the one that reflects the interests of the issuer. Intrinsic value is only part of the perceived value. Remember that instrument quotes reflect precisely its perceived value, and not internal, as you might have thought.

When to quit:
1. The ideal way is to exit at the beginning of the distribution phase. At this point, the new high will be lower than the previous one. The first signals will be reversal candle patterns, with a continuation in the form of bearish volumes. many technical indicators will show divergence signals.
2. If you missed this moment, after the first downward wave, there will be a correction. Oscillators will show a way out of the oversold zone with the high below the previous one.
3. If you missed this signal, then it is advisable to exit on the signal-momentum indicators, or on the next correction wave of lower time frames.

Congratulations! Now you understand the mechanics of the market and, perhaps, this article will help you not to fall into the trap of the market. And if without multiyears of trading experience you want to be profitable on cryptocurrencies market from the begin - join to FOBS!

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