We often see smaller time frame charts with so many indicators and too many oscillators. All of these are trying to make sense out of a bunch of noise. Intra-day price movement is noisy and random in general. This is especially true in low liquidity markets like Bitcoin.
When we are looking for trades and setups, or potential entries for investing, we start with the weekly and a simple naked chart. We are looking for order flow nothing more, nothing less. So what do we look for in a chart, and do you need to have anything special to recognize this order flow?
Keep it Simple:
You do not need to be an art expert, with a Doctorate in Philosophy and 20 years of experience to look at a painting and go “wow that is a beautiful work of art”! You don’t need to be a chef that studied culinary in France to know if your dinner is delicious.
The same with charting. You do not need to be an expert to recognize a strong chart and the direction of order flow.
The purpose of this article is to get rid of all the crap that distracts from the strength of a chart. Distracts from the structure and framework which provides more insight into order flow than any oscillator or indicator ever will.
Many new traders and investors depend on stuff that really doesn’t matter.
They focus on smaller time frames, ignore the obvious, and hope some indicator that will provide an answer. There are simply no such indicators, and in a day of wash and bot trading even volume has little significance.
When we look over charts to find trades, we simply look at a naked chart. A quick glance is all we need to determine whether it is strong or weak, and the direction of order flow. This is the purpose of this article.
We are going to start with a clean slate and just look at the chart for what it is. From this we will gauge a perspective of structure, strength, time and of course price action. These provide an idea of the order flow. Forget all the oscillators and indicators useless at this point. This is literally how we initially observe a chart, simply naked.
What observations can we make just looking at the raw chart?
Is the order flow in the direction of buyers or sellers?
We don’t even need the prices on the right to be honest, it is all about structure, proportion and framework.
If you want to be a good trader and investor, you should be able to scan charts and recognize the strength and direction of order flow. So what do you see in the structure, proportion and framework of this chart? What observations and conclusions can you draw from this chart about order flow? There are many but here are a few of mine.
- Bitcoin took out the previous weekly high. Order flow to the buy side is increasing.
- Three months of a slow grind higher. Order flow accumulation.
- We see a pretty tight consolidation, unlike other rallies that were either choppy or gave it back quickly. Order flow is currently absorbing sell orders.
- There is an obvious level of resistance from 5900 to 6800 where we saw accumulation and support prior to the dip. This is an area to look for order flow to the sell side.
- The obvious level of support where we would expect buyers to step in is in the low 4k area, just prior to the breakout.
Since mid January we have a series of higher highs and higher lows. This is bullish. Regardless of what the MACD says, where the RSI is, or how cloudy it is in Ichimoku right now. The naked chart tells the story of order flow, and this is all we care about. Everything in TA is about finding the direction of buy and sell orders. This is an important concept to understand and we only touch on it here.
So let’s start adding some basics here. Nothing major or complex just a couple trend and support-resistance lines.
BTC Weekly 2:
No MACD required or other advanced charting techniques. Just some basic support and resistance lines, and a couple basic trend lines. There is no need for anything more. As basic as it may be, it provides more insight than the MACD will ever provide. What can we observe from this chart.
- We took out the previous bearish trend and will likely have 3 weekly closes above it.
- We have established a strong bullish trend line.
- Currently Bitcoin is about midway between support and resistance.
- Bitcoin is consolidating tightly after a strong swing higher.
Based on our initial observation, there may still be some room to run. Yet midway between support and resistance is a risky area to take new longs. We are looking for buy orders to start exhausting, though there is no evidence of this yet.
Bitcoin also, has no business being in the 4100 area, so a push through 4100 would have us stepping back. Strong markets see orders flow into the buy side on bearish swings lower. If we do not see buyers stepping in around the 4500-4700 area, on a pullback, we should pause.
The market has also set in place a solid 3 month long bullish trend line. When was the last time we had a solid 3 month bullish trend line? 2017.
Now until it takes out the 6800 area we should manage our risk tightly. Tight consolidation patterns often results in a swing higher. Of course this is a tricky area midway between support and resistance increasing the potential for a pullback.
The probability is still in favor of a move higher, but we must remain cautious. We can not ignore the current position relative to the structure and framework.
There is also something different about how price action is responding at this high. Notice how quickly the market gave back the bullish swings previously. It quickly took out the lows of the previous weekly candle. Order flow to the buy side quickly turned into sell orders. Weekly candles carry more weight than daily or lessor time frames. This is very important to understand.
Regardless of the pattern on a 4 hour chart, the weekly trumps it. We are still seeing buyers step in over a period of a week. If this candle closes the week out strong, those waiting to buy may get impulsive, step in, and guess what?
BTCUSD Short Interest:
Shorts are piling in once again. Two solid days of short selling and price has moved higher not lower. Seriously who is shorting into a market that is absorbing the short sell orders like a whale inhales krill? This could be the catalysts to push us into the 6k area.
This does not imply that we can not swing lower. My personal opinion is any swing lower is going to be bought up quickly, especially if we hang around these levels and time passes.
Market sentiment and human patterns have not changed since markets evolved. History repeats and we may see history repeat as a short squeeze higher.
People get impulsive and for a couple weeks we have been hearing “I’m buying the dip at 4100, 4300 etc” and the dip has not come. The longer price stays elevated the more likely those waiting to buy the dip, buy any dip. This creates more buyers and an area to look for this is just under the psychological level of 5k.
Just think of how your own emotions are acting here. Do you wish you bought at 4900? Did you sell just above 5k and are you thinking, maybe I sold too soon? If you are thinking this, most likely others are as well. Lets zoom in on the daily to see if we see evidence of order flow or participants buying the dip.
Nothing has really changed on my chart since the beginning of April. The 5k level was a shallow support area and we saw order flow absorb selling at this psychological level. This is key here and it is now forming a more solid support level. We are also seeing a series of higher highs, and higher lows. This is an indicator of order flow to the buy side. Of course lets not ignore the obvious.
The 5340 area is significant as this is where longs sold previously. This implies that there may be some shorter term selling pressure here and we may pullback to test the 4700-5k level. As we can see Bitcoin is attempting to push through this level and shorts are piling in around here.
If selling pressure prevents a push through this level, those with an impulsive finger will breath a sigh of relief and 4700 becomes important. Confirmation Bias steps in and they will wait for better prices. “I knew it would pullback and now it is, so I will wait”.
However if Bitcoin can take out this area, the 5000 level becomes more significant going from a minor support level to major one. Psychologically it sets the bar higher. Those that did not buy, suddenly start thinking “maybe we don’t pullback to 4700” and set their eyes on 5k. This is why these round numbered levels are important from a psychological level.
We are now starting to go into the psychology of levels which is for a different article, but you get the point. You will often hear us say, if we break this level, this level becomes important and so on. Much has to do with psychology and notice we have not used any Fibb or EW though they are shown on the chart.
Resistance / Support:
There are some clear areas of resistance in the low to mid 6k area which we should be aware of. This is a generally an area we look for selling pressure. The reason is simple, the 6k area was an area of support where buyers stepped in for nearly 8 months in 2018.
They were buying the dip, and so were we. I bought several times in the low 6k area but am I a seller there? No I am holding out for higher prices, but many may find themselves at break even and sell any sign of weakness. Who knows what the market will do and only time will tell when we get there.
Remember the float is very small with Bitcoin, so this is not a traditional instrument of trade. Also keep in mind, there are many like us that added in the 3500 area cost averaging down, and are holding for longer term prices.
Nearly a 3 month uptrend, a higher high, and tight consolidation. Price action recently broke through the bearish trend with strength along with the lower resistance area. These are not just the signs of an initial bull rally, but a strong market. It is all about order flow, and orders are flowing into the buy side, even as many are selling and taking profits, and others are shorting into the swing higher.
This is why I did not have any issue adding a 1/2 position in a couple coins. As Marc pointed out I do not mind buying shallow pullbacks in bull markets, but there is some risk to this. The risk is a retest of the support and the market is not fully evolved yet.
How do we balance the risk of a pullback with the potential of a bullish swing higher? We manage our risk by adding small positions and keeping cash for a possible market sale.
Bitcoin can move lower and is in an area between support and resistance which makes it exposed to selling pressure. However if I was a betting man, my money is on a swing higher. Whether it happens or not is insignificant. We are positioned and have a plan to take advantage of the market either way it goes.
In the end you do not need to be an expert in EW or Fibonacci retracement. There is no need to be a Gann guru or dive into a 230 page book on the RSI and moving averages. The naked chart gives you more insight into order flow than any of these indicators ever will. This does not imply other TA tools are completely useless, but they should be used to fine tune entry points, sell areas, and provide further insight and potential outcomes.
Tools like EW, Fibb should compliment what you are seeing on the naked chart not be the relying factor. You do not need to be an abstract art expert to look at the work of Salvador Dali and go “Wow that is just a beautiful piece of art”. You do not need to be a French Culinary Chef in determining if your Steak Diane taste delicious. The same goes for charting. You do not need to be an expert on indicators to see a good strong chart.