I want to take a minute and analyze how there are certain characteristics of price volatility that can help you determine whether you are reaching a top in price. I won't go too deep into the actual numbers, but just an easy way you can see with your own eyes.
How do you know when you are reaching a top?
Let's take a look at the daily chart of Bitcoin
If we look at the green box, we can see that we are moving up steadily with the range of the daily price being more or less about the same size as the previous days. As the "FOMO" or fear of missing out from traders who are missing out on this move becomes more evident, the proceeding candles start to get much larger, two or three times the size of the previous candles as traders rush in to try to get in on the ride.
When you reach tops, you will see a massive increase in the volatility in price, and the price range of days goes from steady, to outright crazy. In the red box, you can see these daily price bars are now the size of WEEKS worth of trading days. This is generally known as capitulation, an area in the market where there is huge volatility and a massive increase in trading volume. As you can see both increased volume and volatility have been present in the past three trading days. Capitulation can happen at market tops and bottoms.
Let's look at the tops of how other Bitcoin bubbles have popped in the past and see if there is a resemblance
Notice how we were seeing a steady march higher, until FOMO took over and traders started to rush in, followed by a capitulation in volume and HUGE swings in volatility. Price corrected almost 50% from the highs to the eventual low. You can see similar patterns in any market when there is a fury of people tripping over themselves and rush into trades.
The Good News
Bitcoin and other altcoins have seen many boom and bust cycles, but ultimately recover and march higher. This is not indicative of future price performance as we can never predict for sure if this pattern will continue but if you are a true believer in the technology and cryptocurrencies in general, enjoy the ride!
In my next article, I will breakdown how you can spot a market bottom and what things to look for.
Until next time, happy trading!
I wanna know when they bottom...
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I will post an article to identify bottoms tomorrow. Stay tuned!
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