Bitcoin – “Show Me Time” Compounding Capital & Taking the Long Road

Overview:

After a 4 day slow grind lower, Bitcoin is attempting to break higher.  There were subtle clues of accumulation and sell side order flow waning during this swing lower. So we held our initial trade position and mentioned this was just “show me time” for the market.

In lieu of reacting to all the Fud of those following every blip on a 1 hour chart, we were focused on the daily.  Here the market was telling a different story.  It was showing us that sell side order flow was likely exhausting. 

We mentioned to our members to simply wait for more proof.  This requires patience and discipline.  Finally, last night, the market revealed itself, through price action, that order flow was likely flipping to the buy side.

We are not out of the woods yet.  There is still a possibility we retest the previous low around 9k, but the probability of a swing higher just increased.  It is all about probabilities and identifying them, not some silly pattern on a chart.

Portfolio Timing:

Many trying to time the market with their entire portfolio will eventually come to grips that this is a fools errand.  Markets do not care about oscillators or indicators, or what happened in 2017, they are comprised at any point in time of equal buyers and sellers.

Though markets are based on the fundamental premise that  an equity is either under valued or over valued, the daily price action is solely based on sentiment.  With sentiment relatively low, price action was not really confirming strong sell side order flow.  This is not a battle of bulls and bears it was a battle of patience and discipline.

BTCUSD Daily:

 

The consolidation is unfolding as a bullish flag type pattern.  There is a valid 3 leg correction cycle.  Being that leg “C” terminated between the 38.2% and 50% retrace levels, we can consider this enough that profits have been locked in, and that weak hands have been pushed out.

The morning article to our members yesterday “Is Sell Side Momentum Slowing” laid out various pieces of evidence that this pullback was starting to lose its momentum.  There were no oscillators or indicators that pointed this out, it was simply price action and proportional levels of interest.

How the pullback unraveled over the past 4 days, showed evidence that sell side momentum was stalling.  A slow grind lower, in the face of bearish sentiment, was the initial key.

Then the market revealed its true colors as a pinbar formed off the 9500 level.  This has been a key level since the start of the correction.  The market was showing us that sell side pressure was starting to exhaust.  At least in the interim.

At this point, most have either locked in profits or been scared out of their positions.  This is evident in numerous social media blogs that only a month ago were slapping “blue origin” stickers on their computers.

Suddenly those chart flippers were making calls of 8k and lower.  More evidence for the bullish thesis as the herd is generally positioned wrong at pivot points in the market.

Not that we discount a move to 8500 or even 7500, but with herd sentiment flipping like flap jacks,  and price action not making any further progress to the downside, it was a lower probability than a bullish reversal. 

BTC On Sale:

Whether stocks or cryptos, investors look to buy the dip in strong markets.  We would expect a strong market to find buyers in the 9500 area, as it represents a 30% discount to the relative high just below 14k.

As mentioned to our subscribers over the past few days, ignore the Fud, and let the market unfold. Unlike the numerous fortune tellers, we did not know how the market would play out.   We let the market reveal itself in lieu of guessing an outcome and looked for evidence.

Our position was, there was no evidence that the market was poised to break lower, so we remained long.

Last night we added another position to our portfolio, and also issued an alternate trade idea.  The market unfolded as we assumed it would, but it took patience to let the probabilities align in our favor.

Taking out the 10,320 level increases the probability of a leg higher and we are looking for a retest of the high or the upper range of the channel.  This may be the initial leg of a broader bullish move, or we could see the market pullback and continue to consolidate.

Regardless in my personal opinion this is an area to position for the next leg higher. 

BTCUSD Weekly:

With the probable completion of wave 2 completed, or nearly complete, the market is positioned a bullish wave 3.  The next major proportional level of resistance is the 61.8% retrace of the overall bearish move from 2018 at 15,750. 

Taking this level out, reduces the probability of being in a broader corrective cycle or leg “B” from the 2018 high.  This opens the gates for retesting, and in my opinion, taking out the previous ATH of Bitcoin.  This is where timing a market with your entire portfolio is a fools errand.

If you don’t believe in the future of Bitcoin you shouldn’t be investing in the space.  IF you do believe in the fundamentals of wide spread adoption, does it really matter if you the market pulls back 30%?   In the long term markets move higher in general.

Of course this is predicated on the assumption that Bitcoin becomes adopted by more and more market participants.  I believe it does, and this is the sole reason I was not worried last year during all the FUD.

The trick with any correction or consolidation is whether this is the next leg up, or a continuation.  We don’t know, but taking out the 14,500 goes a long way to favoring a broader 3rd wave is in process.

This overlaps closely with the 15,750 level for the most part, so it either blows through this level as it did with 9800, or we see some consolidation before taking it out.  Let the market decide lets not guess.

BTCUSD Monthly:

As the month closes out, we are showing a doji or consolidation pattern that carries a lot of weight.   This is an accumulation of order flow over an entire month, not a day or two worth of data.

These types of formations are more often than not, continuation patterns and after five (5) months of solid buying it would be expected to see the market take a breather.

Even in the hype of 2017 there were periods the market took a breather after solid swings higher.  We may continue to see further consolidation but unless we see evidence the market is topping we remain long and look to buy any dip.

You are never going to perfectly time every selloff in a market.  To think you will AND get back in before the next leg higher is a fool’s errand.

Wasn’t so long ago during the 2012 initial swing higher with the S&P many “analysts” were calling it a big bull trap.  Again in 2016 so many “analysts” were calling for a 50% retrace, yet today we are pushing new highs. 

Hmmmm history repeats but not necessarily as a pattern on a chart, just the herd’s mentality.

Personally I believe Bitcoin will emerge a store of wealth in the future, and if it hits 100k will it matter if I cost averaged in from 13k?  Not really!

Yet there is nothing wrong with trimming out some inventory at extreme highs whether interim or long term.  Nothing wrong with taking some profits off the table I just do not like to be completely out of the market.  This is where swing and position trading comes in. 

Compounding:

These little position trades, can compound a portfolio dramatically over the long term.  The risk to not being in a market is the largest gains generally come in a short period of time.  In the 32 weeks since the bottom, 6 weeks comprised most of the rally.  

Statistically speaking 20% of the weeks accounted for the majority of the gains.  If you were out of the market just one of those weeks, you missed at least 25% of the total move. If you sold at 5100, as many did, you missed a 75% swing in the market over the next 4 weeks, where Bitcoin pretty much went vertical.

Same goes for trading.  The goal of a trader is to increase their trading capital catching small moves in a market. Losing 10% on a trade reduces your future earnings 10 fold over time.  Every 1-3% profit compounds your future earnings every loss reduces it.

Many do not understand this concept, and haphazardly manage their capital.  A 20% profit for the year trading increases your position size for future trades, increasing your potential future profits as well.  Every trade the 2nd year after a 20% gain, is 2% more than the previous.  The 3rd year it is 4.2% and after 9 years your profit is greater than your initial investment.  After 13 years it is double your initial investment ($2000+) and you are up 10 fold ($10,000).

However few want to take the long game, they want to get rich over night.  The years pass faster than you think, and when you hit 45-50-55 years of age, you will wish you took the conservative approach in lieu of the get rich quick schemes. Imagine what 20-30 years can do with a $1000 trading portfolio? I’ll tell you, after 20 years it is nearly 40k, after 30 it is nearly 250k. 

This does not include if you add to your initial trading capital monthly or on a continual basis.  Imagine the compound then!  Yet many just churn in the mud taking too big of positions, and hoping to hit the lottery.  Being up 10% on the year swing trading, may not be sexy to some, but if you can keep your eye on the prize, it will pay off in the long term.  

Summary:

Long term investing does not imply buy and hold forever. You don’t make money unless you take profits at some point.  But taking profits too often can lead to missing broader moves.  Set your targets based on the long term chart not a 4 hour one.

As for those with a shorter term time frame strategy.  The market is starting to reveal that the consolidation is likely nearing an end.  Consolidations are difficult to trade to begin with, and attempting to trade long, short, long…wait its a short, will have you depreciating your trading capital in the long term. Remember every loss negates your compounding.

Just like investing, short term strategies are a compounding game.  One percent here, two percent here, and over time your capital grows allowing you to take larger positions.  Hence compound your trading returns.  In order to compound your capital, it is important to minimize your losses.

What the market will do tomorrow is anyone’s guess, it is a show me market.  The key is looking at the broader picture and ignoring the interim noise.  We have no control over what the market will do, but we do have control over how we manage our money.  The fastest path to being broke is over trading markets.

Do not confuse a genius with a bull market.  Consolidating markets are great at separating them out.  The are also good at reducing your potential growth through long term compounding.  This is what separates winners from losers in the long term.

2 Responses
  1. Adritrading

    Hi Andrew,

    Great article thanks !

    However I have a question regarding the way you figure out the 15,750 level for BTC. You say : “The next major proportional level of resistance is the 61.8% retrace of the overall bearish move from 2018 at 15,750.”

    When I do my Fib levels using the following :

    ATH Dec 2017 100% : $19,891
    Dec 2018 low 0% : $3,215

    The 61.8% level is 13,520, not 15,750… what do I do wrong ?

    Have a good weekend 🙂 !

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    1. Andrew Gonci

      Hi Adri, actually you did nothing wrong, 13.600 or there abouts is the 61.8% retrace. Thank you for correcting that. The 15,750 is the 61.8% extension.

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