Bitcoin can go lower but a professional sees a LONG opportunity
TL;DR - We are at a major support area (20k - previous ATH from 2017. Despite all the "we are in a bear market" nonsense, as price has continued lower, probability for bullish price action has grown. A professional trader knows this and so looks for specific price action in support areas like this to trade. We now have a perfect example of this.
The sentiment is extremely low in Crypto and in the wider market. Everyone KNOWS we are in a recession / bear market and price will 1000% go lower! When the market is screaming from the rooftops that something is a certainty, it is extremely likely that this assumption is wrong (check out my last post to see why we aren't in a bear market - shameless plug). Markets are random entities - no one person decides where a market goes and so even if there is insurmountable evidence that a market must move in a certain direction, more often than not this does not happen.
Take Covid for an example - the world economy stops and millions die. Yet after just one month of declining prices the stock market and crypto market enter the strongest bull market ever seen in human history. For nearly two years as waves of disease spread and rippling lockdowns shutdown travel affecting billions of lives, stocks and crypto went far higher than even before the pandemic had destroyed the world. And no one could have predicted that would happen.
Now (in a much more complex picture of geopolitical and macro-economic climate) your barber is telling you we are in a recession so get ready to buy stocks/crypto in 18 months as that's the average length of a bear market and Oh baby there's going to be a massive bull market after! What do you think will happen?
In a much more clinical (yet over simplified) explanation: when the majority of market participants have bias in a certain direction, their actions in the market (in this case selling) have already been executed. When most people are bearish, this means most people have sold and so the number of sellers in the market runs out, allowing for bullish price action to emerge. As such, when most people are bearish that is often when the bearish movement is close to exhaustion.
This is why professionals never let news influence their mindset. Instead they attempt to contextualise the market that they are looking at to see if it has a favourable probability towards either bullish or bearish trades. This might be understanding we are in a recession but realising that sentiment is overly bearish to
With Bitcoin the context is: A bearish wave that has exhausted much of its potential as black swan events have driven prices well beyond true value. This means that there is a higher than 50% chance of bullish price action emerging from support levels. This is a fact, not an opinion - it doesn't matter if you think we are in a bear market (we aren't check out my previous post), the simple fact is that is it more likely than not that price will go bullish on supports than break them down. Once the professional trader has established this, they then look for the appropriate area and signal.
Now we have established the context of the over all market (and that there is a statistical probability of favour of bullish price action at the moment, above is the breakdown of the exact area and signal someone would look for. Bitcoin is sat on a historic support area (2017 high), and has tested the 20k level once already in the past few weeks before returning to it now. This in itself isn't good enough, we also need a confirmation that price action is reacting bullish. This has come in the form of a hammer candlestick pattern. The psychology of this pattern is as follows: The candle opened high and during the course of its time the bears tried to break price down through the support area. Bulls quickly and decisively took control of price, closing the candle at its high. This means there is a statistical probability that the bears have failed to break down the support area and bullish price action will emerge in the near future. We confirm this by waiting for the following candle to break the high of the hammer candlestick. Combine this statistical probability of bullishness and the fact that it is more likely than not that bullish price action will emerge from a support area given the context of the market and we have ourselves a trade opportunity that, if repeated 100 times, would mean we make money more than 50% of the time. In each of those trades, if we net $100 in the winning trades and only lose $50 in the losing trades we. will. make. money. That is it. that is how professionals trade (sounds dam easy right? The hard part is disciplining yourself not to fomo in btw).
The next step is to apply that "net $100, only lose $50" aspect. The hammer candlestick also gives us a blueprint to do this. Psychologically speaking, if the hammer candlestick has it's low broken down, that voids the market's behaviour that formed it (i.e that the bears tried to break lower and the bulls took it back so there's a statistical chance of more bullishness). If the low is broken, this means the circumstances that give us a statistical probability of being right (in this case bullish) are void and so we trigger our stop loss - and there we have it, we have our stop loss level. The stop loss is set at the low of the hammer candle because if that low is taken out it tells us that the bears are still strong and statistically there is not as high a chance of bulls taking over price action.
The pattern also gives us an appropriate entry. This entry is designated by the high of the hammer candlestick being broken by the following candle (in this case this has already happened).
And finally the target ( this completes the 'making the $100 to losing the $50', otherwise known as risk/reward). This is a bit more complex to explain but given the context of bearish price action pulling Bitcoin down from 65k to 20k, we can expect selling to be heavy on any retrace (because most people think we are in a bear market and so will say things like "Bitcoin has gone up to quickly for a recession!" and so sell or reinforce shorts). This means targets need to be relatively pessimistic and so targeting the closest support/turned resistance is appropriate. In this case the 29k-32k. Here is where a bit of math comes in.
To make $100 for every $50 we lose, that translates into winning $2 dollars (reward) for every $1 we lose (risk). This gives us a reward/risk of 2:1. The industry standard is to flip those around as it is known as 'risk/reward' and so that means that to make a profit in trading we need to only take part in trades that at a minimum have a 1:2 risk/reward.
Incoming maths: With this risk/reward ratio, we can lose 2 trades for every 1 trade we get right and still break even. And so if we wait for circumstances that have a higher than 50% chance of us being correct, then statistically we will be profitable. Broken down further, with this risk/reward ratio, we only need to be right 33.3% of the time to break even (100% is the sum total of times traded with this risk/reward, split into three trades [Risk/reward of 1:2 = 3 total trades account for 100% of total trades meaning each trade accounts for 33%). If we choose circumstances where the probability is above 50%, as is the case at the moment, ATLEAST 22% of our trades will result in profit.
While that quick maths was relatively confusing as it needs a more detailed explanation, to simplify this: with the stop of this trade set at the low of the hammer candlestick (I have set it slightly further just to avoid Bitcoins tendency for fakeouts), and a target of 29k (the next support turned resistance level where sellers are likely to emerge), we actually have a risk/reward of 1:2.11. This means for every $1 we risk, we can gain $2.11 and so the trade is viable and can be executed.
The professional trader will only execute a handful of these trades each month/year. It doesn't matter what asset they choose, where they are, or what they are doing when the trade is active - they are patient and wait for the correct probability to emerge that allows (just like a poker player) to gain a statistical advantage and earn consistent profits.
That it. Sounds simple right?
P.
The sentiment is extremely low in Crypto and in the wider market. Everyone KNOWS we are in a recession / bear market and price will 1000% go lower! When the market is screaming from the rooftops that something is a certainty, it is extremely likely that this assumption is wrong (check out my last post to see why we aren't in a bear market - shameless plug). Markets are random entities - no one person decides where a market goes and so even if there is insurmountable evidence that a market must move in a certain direction, more often than not this does not happen.
Take Covid for an example - the world economy stops and millions die. Yet after just one month of declining prices the stock market and crypto market enter the strongest bull market ever seen in human history. For nearly two years as waves of disease spread and rippling lockdowns shutdown travel affecting billions of lives, stocks and crypto went far higher than even before the pandemic had destroyed the world. And no one could have predicted that would happen.
Now (in a much more complex picture of geopolitical and macro-economic climate) your barber is telling you we are in a recession so get ready to buy stocks/crypto in 18 months as that's the average length of a bear market and Oh baby there's going to be a massive bull market after! What do you think will happen?
In a much more clinical (yet over simplified) explanation: when the majority of market participants have bias in a certain direction, their actions in the market (in this case selling) have already been executed. When most people are bearish, this means most people have sold and so the number of sellers in the market runs out, allowing for bullish price action to emerge. As such, when most people are bearish that is often when the bearish movement is close to exhaustion.
This is why professionals never let news influence their mindset. Instead they attempt to contextualise the market that they are looking at to see if it has a favourable probability towards either bullish or bearish trades. This might be understanding we are in a recession but realising that sentiment is overly bearish to
With Bitcoin the context is: A bearish wave that has exhausted much of its potential as black swan events have driven prices well beyond true value. This means that there is a higher than 50% chance of bullish price action emerging from support levels. This is a fact, not an opinion - it doesn't matter if you think we are in a bear market (we aren't check out my previous post), the simple fact is that is it more likely than not that price will go bullish on supports than break them down. Once the professional trader has established this, they then look for the appropriate area and signal.
Now we have established the context of the over all market (and that there is a statistical probability of favour of bullish price action at the moment, above is the breakdown of the exact area and signal someone would look for. Bitcoin is sat on a historic support area (2017 high), and has tested the 20k level once already in the past few weeks before returning to it now. This in itself isn't good enough, we also need a confirmation that price action is reacting bullish. This has come in the form of a hammer candlestick pattern. The psychology of this pattern is as follows: The candle opened high and during the course of its time the bears tried to break price down through the support area. Bulls quickly and decisively took control of price, closing the candle at its high. This means there is a statistical probability that the bears have failed to break down the support area and bullish price action will emerge in the near future. We confirm this by waiting for the following candle to break the high of the hammer candlestick. Combine this statistical probability of bullishness and the fact that it is more likely than not that bullish price action will emerge from a support area given the context of the market and we have ourselves a trade opportunity that, if repeated 100 times, would mean we make money more than 50% of the time. In each of those trades, if we net $100 in the winning trades and only lose $50 in the losing trades we. will. make. money. That is it. that is how professionals trade (sounds dam easy right? The hard part is disciplining yourself not to fomo in btw).
The next step is to apply that "net $100, only lose $50" aspect. The hammer candlestick also gives us a blueprint to do this. Psychologically speaking, if the hammer candlestick has it's low broken down, that voids the market's behaviour that formed it (i.e that the bears tried to break lower and the bulls took it back so there's a statistical chance of more bullishness). If the low is broken, this means the circumstances that give us a statistical probability of being right (in this case bullish) are void and so we trigger our stop loss - and there we have it, we have our stop loss level. The stop loss is set at the low of the hammer candle because if that low is taken out it tells us that the bears are still strong and statistically there is not as high a chance of bulls taking over price action.
The pattern also gives us an appropriate entry. This entry is designated by the high of the hammer candlestick being broken by the following candle (in this case this has already happened).
And finally the target ( this completes the 'making the $100 to losing the $50', otherwise known as risk/reward). This is a bit more complex to explain but given the context of bearish price action pulling Bitcoin down from 65k to 20k, we can expect selling to be heavy on any retrace (because most people think we are in a bear market and so will say things like "Bitcoin has gone up to quickly for a recession!" and so sell or reinforce shorts). This means targets need to be relatively pessimistic and so targeting the closest support/turned resistance is appropriate. In this case the 29k-32k. Here is where a bit of math comes in.
To make $100 for every $50 we lose, that translates into winning $2 dollars (reward) for every $1 we lose (risk). This gives us a reward/risk of 2:1. The industry standard is to flip those around as it is known as 'risk/reward' and so that means that to make a profit in trading we need to only take part in trades that at a minimum have a 1:2 risk/reward.
Incoming maths: With this risk/reward ratio, we can lose 2 trades for every 1 trade we get right and still break even. And so if we wait for circumstances that have a higher than 50% chance of us being correct, then statistically we will be profitable. Broken down further, with this risk/reward ratio, we only need to be right 33.3% of the time to break even (100% is the sum total of times traded with this risk/reward, split into three trades [Risk/reward of 1:2 = 3 total trades account for 100% of total trades meaning each trade accounts for 33%). If we choose circumstances where the probability is above 50%, as is the case at the moment, ATLEAST 22% of our trades will result in profit.
While that quick maths was relatively confusing as it needs a more detailed explanation, to simplify this: with the stop of this trade set at the low of the hammer candlestick (I have set it slightly further just to avoid Bitcoins tendency for fakeouts), and a target of 29k (the next support turned resistance level where sellers are likely to emerge), we actually have a risk/reward of 1:2.11. This means for every $1 we risk, we can gain $2.11 and so the trade is viable and can be executed.
The professional trader will only execute a handful of these trades each month/year. It doesn't matter what asset they choose, where they are, or what they are doing when the trade is active - they are patient and wait for the correct probability to emerge that allows (just like a poker player) to gain a statistical advantage and earn consistent profits.
That it. Sounds simple right?
P.
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