Timing tops and bottoms is a difficult feat, even for experienced traders. Only a lucky few are able to truly enter at a bottom and exit at the absolute top. But spotting when a top could be in, or incoming, and when a bottom is in, or just setting in, is possible. Technical indicators of strength – demand and supply – along with behavior go a long way in finding these reversal zones.
It’s difficult to come to terms with trading markets if you truly believe fundamental factors are the main drivers of the Bitcoin Price. Fundamentals are a tertiary aspect because they create an impact on behavior, which in turn influences demand and supply.
As a result, you should be looking at behavior and demand-supply mechanics directly. An interesting way to gauge behavior is with sentiment indexes, such as the Fear & Greed index. These indexes track the way people react with respect to the market momentum. 100 indicates an extraordinary amount of greed, while 0 basically means people are capitulating in droves.
One of the Rothschild clan once said “buy when there is blood on the streets”. This basically means when people are in fear, they sell the whole way down. Then there’s nothing left to sell, and those accumulating reap the rewards of being patient and confident.
Bitcoin’s fear and greed index is similar to that of stocks. Timing it is difficult if you haven’t followed the index before, but the gist of it is that you want to look for levels where price action has historically reversed.
Currently, it sits at 14. In Sep. 2019, it was at 12. The China pump came soon after, and greed shot up very quickly. Things began to decline quickly and the market resumed its bear trend. Sentiment is a direct gauge for how demand and supply are going to move. The way to act on it is to wait for the extremes. When the extremes set in, a bottom or top is inevitable as hysteria dies down and a reversal of trend takes place.
Some people don’t understand the value of sentiment analysis; they write it off as unreliable. This is as far from the truth as possible. Yes, various indexes can be faulty in the way they gather and evaluate data, but sentiment as a concept is incredibly reliable.
If you’re active on various social media avenues, sentiment is quite easy to estimate. Sentiment is nothing more than the way people react and feel about an asset class. Emotions matter, because emotions drive decisions – especially in a nascent market such as Bitcoin.
Behavior drives everything. Ignoring it is futile as psychology is the basis for all trade. Incorporating it directly into the way one thinks about markets is a useful practice as the person will then consider how people may react.
Sentiment indexes could be flawed, so it’s important to ensure you understand and agree with the methodology behind the way a certain index is estimated and calculated.