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Bitcoin price analysis and profitable trading

Bitcoin is by far the most speculative asset that ever existed throughout the history of finance. Its logarithmic rate of growth has exceeded the predictions of the most optimistic observers during the past few years. Interestingly enough, bitcoin’s market capitalization exceeded $800 billion towards the end of 2017.

As bitcoin trading is available 24/7 on tens of online exchanges with daily trading volumes totaling billions of US dollars, it is crucial to understand what influences bitcoin’s price movements. Is bitcoin price analysis beneficial in predicting the currency’s future price movements? How can technical indicators be useful in predicting bitcoin price movements?

Bitcoin price analysis using moving averages (MAs):

A recently published research study examined bitcoin’s predictability and profitability using technical indicators that are mostly used to predict stock prices. To analyze bitcoin’s predictability via technical analysis, the study formulated an equilibrium model for bitcoin that relies on moving averages (MAs).

Even though bitcoin is somehow unpredictable using macroeconomic values, the study concluded that it is predictable via signals derived from analyzing the 5 day and 100 day MAs of bitcoin price. It was also proven that bitcoin price analysis strategies, relying on the MAs, are much more effective than the “buy-and-hold” trading strategies adopted by some traders. Strategies based on the moving averages can generate considerable profits, while also alleviating the severity of bitcoin’s potential drawdowns.

According to the paper, it is recommended to buy, or HODL (hold), bitcoin whenever its 50 period MA crosses above the 100 period MA. Such alignment of the moving averages denotes a bullish market momentum.

Bitcoin price analysis using Moving Average Convergence Divergence (MACD):

In addition to the moving averages, traders can utilize another technical indicator known as the Moving Average Convergence Divergence (MACD). The MACD is a technical oscillator that utilizes a group of moving averages to detect bearish and bullish market trends. The MACD is formulated by subtraction of the 26 day exponential moving average (EMA) from the 12 day EMA, leading to the formation of a blue curve known as the “MACD line”. A 9 day EMA is also plotted on top of the MACD line in the form of a red curve known as the “signal line”.

Crossovers are the most important MACD signals. When the MACD line crosses below the signal line, this is a bearish sign, so it means that it is time to sell your bitcoins. On the other hand, when the MACD line crosses above the signal line, this is a bullish signal, so it means that it is a good time to buy.

Bitcoin price analysis and market sentiment:

To utilize technical analysis efficiently, one must understand the trader’s psychology and how it is affecting the market’s movements. For example, assets such as stock and futures, usually exhibit cycles that are comprised of booms and busts.

Finally, it is worth pointing out that technical price analysis is usually effective due to the fact that a considerable percentage of traders use it. This was emphasized by Zivkovski, who noted:

Technical analysis is a psychological tool and works because other traders use it too … The simpler the tools you use, the more players in the market are using those too, and the more likely they are to succeed.”

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