Bitcoin update: With a new low established and an attempted retrace higher it may look like a good time to buy, but there’s a problem: price structure does not agree. Although buying near a low is better than buying near a high, it helps to have a sense of context about the environment and a clear measure of risk. How much lower can Bitcoin go before it reaches the next relevant support? There is no precise answer, but it is possible to estimate where the next potential low can be, and what the market needs to do to prove strength is returning.

Motivation & Momentum

Emotions drive price. Fear and margin liquidations motivate the herd one way or the other. When price decisively moves in one direction (trend), it is likely to continue UNTIL something proves otherwise.

The proof that we look for that signals a real change expresses it self in the form of price patterns. And patterns take time to develop. That is one reason why getting short on any new low is very risky. You do not know where or when a new pattern will begin. Worse, selling random lows may occasionally reward you which reinforces the bad habits that will erode your account once the next consolidation develops.

Bitcoin Chart Update
Bitcoin: Structure still favors weakness.
Current Structure

When a large move unfolds, it establishes new structure and that is the point of reference that we adjust to on the short term. Having opinions or reacting to rumors or news will not help you at all. The market builds its own path and it is up to the trader to “listen” and adjust.

With two bearish trend lines firmly intact, there is nothing that says this market wants to go higher at the moment. The 5K area is the first resistance that needs to be taken out in order for us to even think about a new swing trade long.

Even more bearish is the inside bar the is currently forming. These are momentum continuation patterns, NOT reversals. So with the most current structure pointing lower, we simply step aside. There is no reason to justify taking any new risk.

How Low?

Since there is no clear support on the chart yet, price has potential to reach the 3K level. This does not mean it will, but until price builds a support sooner, 3K serves as the next relevant point of reference.

If we were swing trading this market, we would be looking for shorts. I am not writing this because now I “feel” bearish. I am evaluating the price action and that is what IT says.

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Just like when the market is pushing new highs, new lows also generate emotions. Since many have lost and many are still losing, the sentiment becomes more and more negative. It can lead some to give up but the reality is: highs are where people should exit the game, not lows.

Remember the entire Bitcoin space is UNREGULATED. People with no experience do not fully understand what this means. It’s fine when there are no real market makers involved, but when they are, they take over the game. How? With their political connections, inside information and deep pockets.

Ever since the start of the Bitcoin futures back in December, this market has only gotten more difficult. CME and CBOT means smart money, and smart money with no regulations means they can exploit the lack of emotional intelligence that runs rampant in this space. Smart money buys low not high.

Don’t be discouraged and toss your coins into their hands. In our opinion this sell off is the conclusion of a huge shake out. They can take pain at a threshold that the small trader cannot. Even if you have been shaken out, now is the time to pay the most attention.

Ignoring Adverse Scenarios

Inexperienced investors come to this game “optimistic”. Just like when you first sit at a Poker table at a casino. You don’t sit there to lose, you sit there to win. Especially after a few drinks. Meanwhile if you are not a regular, you do not know the skill level of the other players, how much more money they can pull out of their pockets, along with the challenges that come from how the cards play out.

This “overestimation bias” is what leads to getting too big too fast. Imagine all the investors who thought 10K was the bottom and went all in. Then again at 8K, 6K and now 4K? Always consider risk FIRST.

We were building inventory in Bitcoin since 10K, but we always considered, “what if this goes wrong”? So we purchased amounts that were proportional to our account size. And now that Bitcoin has entered the “avoid” list along with most alts, we will stop buying more UNTIL this market shows a REAL recovery. It may be at higher prices, but buying into a FAVORABLE environment is more effective than continuously buying lows with limited resources.

This is why we are a strong hand and will not be shaken out. We can wait for as long as it takes, or as low as it goes. If you can’t, then you are too big, or using leverage or both.

Cheap Getting Cheaper

When it comes to the alts, there are less than a handful worth considering at the moment. The majority of them have been on our avoid list for months and that includes ETH and LTC. Just because they are extremely cheap does not justify buying more. Their charts have been pointing to lower prices and this condition has not changed yet.

One chart that still manages to stand out is XRP. It is one of the few that has weathered this sell off decently. And for the reason it is one of the few on our radar to build a long term position in.

New Strategy?

Is there a better strategy for this environment? What about all those traders making money on the short side? Most of them will give it back over the next consolidation, just like the longs.

We choose to play this market from the long side and know first hand that our strategy works. The key is to know how to adjust your strategy to the environment. For us this means step aside until conditions are favorable again. It is simple and requires no effort.

Timing markets is about knowing your environment, adjusting and following best practices. Usually its not the strategy that’s the problem, it’s the trader. More technical tools are not the answer either. Understanding the motivations of the herd and how they are expressed visually will give you more clarity than any news, gurus or chart tools. Comparing your psychology to the psychology of the herd and then watching how it plays out in the market is the best source of education you can get.

Questions and comments welcome.

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