When it comes to Bitcoin trading, there are a wealth of trading signals to follow. Sometimes, not all of them coincide. This is when some traders who follow a particular set of signals might assume a position that opposes the consensus. Lately, with the price rally following tension between the US and Iran, traders have run into some confusing Bitcoin signals. There are many out there pointing out to buy signals whereas a strong minority seems to be taking the opposite position based on different signals. In such an environment, it is of paramount importance to understand each Bitcoin signal, where it comes from and how you should position yourself in the market.
Too many Bitcoin indicators
Before you pick your position, it is important to understand that there are way too many Bitcoin indicators out there. With Telegram channels, traders on Twitter and social trading tools on exchanges, it seems that the amount of data a trader has to digest far exceeds their cognitive ability. Choosing wisely is the first and most important point of all when it comes to Bitcoin signals. Remember to choose trusted platforms like eToro, for instance, always do your own research and be cautious with your sources of information.
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Bitcoin SAR indicator flashes buy
One of the most popular indicators out there is the SAR. And this indicator turned bullish on Bitcoin recently. SAR, which was developed by J. Welles Wilder Jr shows reversal trends on price and has been quite accurate in predicting medium-term Bitcoin price movement over the last 2 years. Here is how this indicator works:
- Technical analysts place a dot under a candlestick on the chart if the price is moving upward
- Conversely, if the price is moving downward, they place a dot on top of the candlestick
- When there is a sustained upward trend, and the chart’s direction is still steep, this signal indicates a buy
- As the dots start showing a slowdown on their upward trend, it is time to consider selling
- The same is true about buying signals but instead of taking a cue from the dots under the chart, traders take their signal from the dots above the chart
- When the dot above the chart are falling steeply, it is time to wait until the downward trend slows down, at which time traders can consider buying
This indicator, which is currently signaling a buy according to prominent traders like Financial Survivalism, is not a good indicator when the market is moving sideways. Another drawback is that traders must make a choice that could be wrong because the market could take a sudden turn. Therefore, it is important to complement this indicator with other signals like the moving average. Traders must also understand that following SAR can result in increased trading frequency, which can become costly and should be factored into profit calculations.
Bitcoin signals flashing sell
Since SAR is not a supreme indicator despite its success over the last 2 years, it is important to take a look at those Bitcoin signals that are telling traders to sell. There are a few of these, but the most prominent of them involves a factor that points to the actual fundamental growth of Bitcoin. Joseph Young recently pointed out that a key indicator of Bitcoin fundamentals is flashing sell.
Young looks at the Bitcoin price and Bitcoin address growth. This signal tells traders to buy when Bitcoin address growth is greater than price growth, and to sell when the opposite happens. Basically, this Bitcoin indicator relies on the assumption that new address generation is a good proxy for growth. Therefore, if new addresses are being generated at a greater rate than the growth of Bitcoin price, demand is outstripping supply. The opposite is true when the price grows more quickly than new address generation.
Assumptions are Bitcoin trading signal killers
But what if people who own considerable amounts of Bitcoin start generating new addresses to distribute their coins more evenly as a security measure? What if price is growing as a result of traders who are already Bitcoin holders who think that they should buy more and are adding to the addresses they already control? This is where the indicator that Young points out starts to get messy. It doesn’t give traders clear-cut information, although it is a good proxy to understand the fundamentals of Bitcoin growth.
Indicators that worked yesterday might not work today
At this point, it seems that SAR and the Bitcoin price vs address growth are at odds with each other, so which one should you follow? There is no simple answer here. It all depends on your assumptions, your short-term needs and of course, your appetite for risk. But in this situation, you should definitely check your assumptions first.
Bertrand Russel, the British philosopher, famously warned us against assuming that the future will somehow resemble the past with a wonderful analogy. To paraphrase Russel: if the chickens on a chicken farm assume that the farmer is interested in their wellbeing because he feeds them well and has done so for a long time, they would be surprised when they find themselves in the slaughterhouse. The farmer only feeds them until they are fat enough to eat, so assuming that the special treatment will continue in the future is a gross mistake.
Technical and fundamental analysis is based on the past
Since there are no traders out there with data about how the future will look, all the signals, whether they are based on technical or fundamental analysis, rely on historical data. Scenario planning is the only way to understand what might happen in the future. It also leads to longer positions and less trades. Hodlers might be the most faithful scenario planners out there, so if you believe that Bitcoin is superior to fiat or that the world is coming dangerously close to a new recession, you should take a cue from the hodlers.
The bottom line here is that you should consider a wide range of Bitcoin indicators. Just make sure that you don’t get caught up following too many indicators at the same time, lest you fall prey to paralysis by analysis. At some point you will have to decide, and abstaining is a form of decision making as well.