You will learn to identify the future price momentum, estimate its potential and direction.
When will the momentum begin? What direction? How strong? You’ll find the answers in the post.
The falling market is a good time to kind of take our mind off trading and go in for self-education.
Watching the price moving in the exchange terminals, and first of all, in the cryptocurrency market, many notice that the market moves with momentums – strong moves in a certain direction.
It is easy to figure out an emerging momentum; I’ll describe in the post how to do it quite accurately.
It is harder to find out the direction of the momentum, and I could hardly do it until recently.
Seeking to identify the future price direction, I’ve tried quite a lot of ways, including polls on Telegram. Today, I’d like to share my experience and describe these ways in detail.
Before we start studying the momentum with technical analysis, let’s find out its nature.
I once wrote very long ago that you can read the price chart in your screen as a psychiatric patient’s medical record. Each price move is featured by their moods.
But the cryptocurrency market peculiarity is that when you analyze the chart, you must understand that it features not a single patient, but at least two ones.
It results from the historical factors of the cryptocurrency market pricing and self-regulation. The matter is that the cryptocurrency decentralization is one of the myths, we like to believe in.
Fortunately, all cryptocurrencies are based on blockchain, i.e. the wallets and the amount of money, stored on them, as a rule, can be freely accessed; so this myth is quite easy to bust.
Only 115 wallets from 22 mln hold over 20% of the total amount of the present BTC.
Besides, just four wallets own 549.486 BTC or 3% of the total bitcoin amount in the network.
Do manipulators affect the market? Of course, they do!
To make it clear, let’s study the example:
In the four-hour chart above, there is a common situation of consolidation in the market.
Pattern doesn’t matter. It can well be a triangle, and a wedge, and a flag, no matter what formation it will be, provided that it suggests the market uncertainty.
That is the situation, when you don’t know what to do, when market makers can “suggest” it.
Imagine you were a person, holding 100 000 BTC. You know, in the moment of uncertainty, only 1% of your deposit creates an increase in trading volume. That can well be a signal for most traders, and especially for trading robots.
In the chart above, there is a clear example of such manipulation. A great deal of bitcoins is dumped into the market, pushing the market in the needed direction. The support level is broken through, which is a wake-up signal; and then everything happens almost automated:
- The stop orders of those, who expected a rise, are triggered (automated sales of the positions).
- Sellers receive a sell signal and go short.
- Fear-mongers, having seen a drop, start dumping their deposits.
Market makers, as any other trader, see the key levels, where there are multiple buy orders of most traders, and going ahead, start buying out the bitcoins, much cheaper already.
In 30-minute chart, you see large volume of purchases (marked with a green circle).
Getting bitcoins at a discount, manipulators can buy more coins with the same money, and increase their influence.
Finally, there is another wave of sales, to build on their success completely.
If they can’t, they buy out again, adding to their resources to move the market (see the chart below).
After that, they dump it again.
Finally, you see three attacks in the minute-chart, which look like a strong price momentum in the hourly one.
During the momentum emerging, there are usually there such dumps, but, sometimes, there may be four or five. Manipulators, as a rule, leave the market after series of dumps and let it a kind of calm down and restore.
Therefore, to figure out, when the momentum will begin, you need to understand only one thing – when the market manipulation is the cheapest, the most exemplary for other traders and the safest for the manipulators.
All the above conditions are met at the moment of the greatest uncertainty, when the market is trading flat for hours. Under such conditions, trading volume is the minimum. Neither buyers nor sellers want to enter a trade before the market is finally determined.
Graphically, such situation is the clearest with Bollinger bands. This indicator shows the price standard deviation from the market moving average; when the market isn’t moving, this this deviation tends to zero.
In the chart above, I marked such a signal with red arrows. Before a new momentum starts, the market typically features very scarce trading volume; as you from above, trading volume is the lowest in the marked price range.
It looks like “calm before a storm”.
Another indicator that helps you identify an approaching momentum is ATR (Average True Range). It was first mentioned as early as in 1978 in book “New Concepts in Technical Trading Systems”, but it is still relevant.
This indicator’s advantage is that it helps you not only estimate the volatility degree and identify the levels, where the market is the most subject to manipulations, but also assume what level the manipulation is going to finish.
In the chart above, I gave the example of how I use this indicator.
To trade BTCUSD, I prefer to apply ATR in 30-minute chart.
To figure out a future momentum, I identify the momentum that was the last before the current market state and mark its highs and lows in ATR indicator window.
The next momentum is has usually a narrower range than the previous one. So, I mark both extremes, moved by 10 points.
Finally, I have a kind of a range; when the price enters it, I understand that there will be a momentum soon and I can figure out the levels, where it is going to finish.
Now, if you look at the momentum, we are studying, you’ll see the following:
In the chart above, you see that the ticker was for rather a long time in the ATR zone we marked, which sends a signal of the momentum. The longer is the indicator in this state, the stronger momentum can we expect. Finally, the momentum emerged; I marked its start with the red circle.
In addition, the intermediate peak of the momentum and its final were exactly at the top border of the marked range.
So, I’ve describe the momentum signal, now, I’ll tell you how to find out the momentum direction.
Of course, the surest ways is to wait until the current consolidation is broken out, and only after that enter a trade. But this way has two flaws:
Breakout can be false.
You lose some profits, as you miss a part of the price move in the needed direction.
In fact, there are a few ways to find out quite accurately the momentum direction in ample time before.
Way 1. Identify the trend, both the local one in your main timeframe and that in the two orders higher one. If both trends have the same direction, the future momentum is likely to continue this direction.
I’ll devote a whole education post to how you can identify the trend. But you are likely to know that if you have been trading for a long time.
Way 2. Calculate the number of momentums in the same direction. If the previous one was downward, the next one is likely to be also downward. Remember the rule of 3-5 momentums turn.
Way 3. Open a position, opposite to MACD.
This way is my personal know-how that I share with all my readers for free. It is quite accurate in 4-hour BTCUSD charts.
To find out the momentum direction, you need to analyze MACD current state. If it is going up, the momentum is likely to be in the opposite direction, i.e. there will be a sharp drop.
In the chart above, I marked the downward momentum with red circles and the price rise before the dump – with green one. Finally, you see this way works during the whole period, studied in the chart.
I’ve described only the simplest ones.
You are welcome to apply them!
I wish you good luck and good profits!
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