Tune Out the Noise - How to Track the Active Trend (Your Best Friend)
<table> <tr><td> <a href="https://www.reddit.com/r/CryptoCurrency/comments/wnlrhq/tune_out_the_noise_how_to_track_the_active_trend/"> <img src="https://b.thumbs.redditmedia.com/1_2Li4uaRIRCRKpJRFEieTTLR9ocSPKUk1TBSEpwAZM.jpg" alt="Tune Out the Noise - How to Track the Active Trend (Your Best Friend)" title="Tune Out the Noise - How to Track the Active Trend (Your Best Friend)" /> </a> </td><td> <!-- SC_OFF --><div class="md"><h1>Four Weeks Ago, I Posted That We Were Witnessing the Birth of a Nascent Uptrend in $BTC and $ETH</h1> <p>This is by no means a victory lap; I am here to <strong>offer my approach and analysis to anybody who is open to new ideas.</strong> My goal in this sub has been to share expensive lessons that I learned from past mistakes. I don&#39;t mind the criticism if it means <strong>helping just one person have a better financial future.</strong> If you still believe that Technical Analysis doesn&#39;t &#39;work&#39; on crypto, you&#39;ve probably been watching Furu&#39;s who sell shovels during a Gold Rush.</p> <p>Some of you may have read prior posts where I discussed <strong>the Market Cycle</strong> and how it applies to all tradeable instruments, including cryptocurrency. Below is a simplified overview of how to identify the current (active) trend. Even if your long-term plan is to DCA, I believe that having a <strong>basic understanding of charts</strong> can be beneficial for your investment strategy on any timeframe.</p> <p><strong>TLDR:</strong> The past is not an indication of the future; nobody can predict where prices will be tomorrow. <strong>However, trends are the most powerful force in the market.</strong> Therefore, it pays to be able to identify an uptrend, a downtrend, and a range. I won&#39;t be discussing Bollinger bands or garage bands, no moving average convergences, divergences, crossovers, or sport utility vehicles. No voodoo, astrology, witchcraft, or entrail readings. Just a <strong>quick and objective method</strong> to monitor the direction of price. As always, <strong>the average retail investor is typically better off with passive and regular DCA over a longer time horizon.</strong></p> <h1>The Mighty Moving Average</h1> <p>If you don&#39;t trade actively for income, then candlesticks probably don&#39;t mean much to you. Green is up. Red is down. There&#39;s actually a lot more to it than that. Reading price action is both an art and a science; it takes months to study and years to master. Rather, today we&#39;re going to talk about <strong>Moving Averages</strong> and how they can be useful for both traders and investors, from the beginner to the advanced chart reader.</p> <p>Moving Averages are a mechanism to <strong><em>smooth out the noise</em></strong> created by the fluctuations of individual candlesticks over time. The Simple Moving Average (SMA) is the &#39;rolling price&#39; of an asset over the <strong>prior n periods</strong>. If you are looking at a daily chart, then the 5-day SMA is the average price over the past 5 days. Here&#39;s a simplified example:</p> <ul> <li>Day 1: $1</li> <li>Day 2: $2</li> <li>Day 3: $3</li> <li>Day 4: $4</li> <li>Day 5: $5</li> <li>5-Day Simple Moving Average = (1+2+3+4+5) / 5 = $3</li> </ul> <p>Now let&#39;s say that tomorrow the price goes up again to $6. The new 5-day SMA would be (2+3+4+5+6) / 5 = $4</p> <p><a href="https://preview.redd.it/v53w4j8quih91.png?width=790&amp;format=png&amp;auto=webp&amp;s=ed406f626d54a2b5407790711341a39873b4fc00">Simple Moving Average for Simple Folks</a></p> <p>If we plot the above numbers on a chart, the SMA is steadily rising--it has a positive slope. Also note that price is going up as well. At the present time, i.e., the right-hand side of the chart, price is increasing and is above the ascending moving average. These two components are necessary--but not sufficient--to define an uptrend.</p> <p>Take a look at the daily chart of Bitcoin below. It has been making higher-highs and higher-lows along the rising 20 SMA for nearly a month. This is what the backside of a reversal looks like (in previous posts I mentioned that these are the safest areas to enter for a potential move back up). We can assume that price will continue grinding higher until it doesn&#39;t: <strong>remember the trend is your friend.</strong></p> <p><a href="https://i.redd.it/9ff6jy6ruih91.gif">August 13, 2022 - Bitcoin daily chart with 20 period SMA</a></p> <p>Now let&#39;s take a look at the Ethereum daily chart below. Notice anything different? The slope of the rising 20 SMA is much steeper. That means price is increasing at a higher rate. In other words, <strong>money is flowing in faster.</strong> $ETH has relative strength and is currently leading this rally; it is more Bullish than $BTC at the moment (clearly).</p> <p><a href="https://i.redd.it/ser5919suih91.gif">August 13, 2022 - Ethereum daily chart with 20 period SMA</a></p> <p>Furthermore, each time price retraces back to the rising 20 SMA, it has bounced; this has occurred 3 times in recent weeks. <strong>Hmmm... I wonder who keeps buying $ETH there? They must have enough money to make the price go up immediately.</strong> I&#39;m not going to try and convince you the reason why this happens. TA is astrology for men, after all. Just observe that <em>it is happening</em> for the time being.</p> <p><strong>Note:</strong> Anybody who is familiar with SMA, EMA, WMA, etc. already knows that <strong>moving averages are lagging indicators</strong> by their very design. Mathematically, we are using n periods in the past to derive a value in the present. This is why many traders do not incorporate moving averages into their strategies. However, that doesn&#39;t mean they are completely useless.</p> <p>Personally, I use them as <strong>visual guides to assess trends</strong> at a glance. This is why I believe it doesn&#39;t matter if you use a 7, 8, 9, 10, 20, 21 SMA, EMA, WMA, or TMA. Moving averages are most valuable when <strong>price is directional and on the correct side of the sloping squiggly line</strong>. This concept is true on all timeframes: from the 1-minute chart all the way up to the yearly chart. The higher the timeframe, the less noise to smooth out. That is my opinion and I respect anybody who may disagree.</p> <h1>Back to the Future</h1> <p>Let&#39;s go back to last year when everybody was calling for $BTC to $100k. I want you to observe the relationship between price and the 20 SMA leading up to the $69K all-time high. <strong>The black line was sloping northeast.</strong> That&#39;s good. <strong>Price was above the black line.</strong> That&#39;s great.</p> <p><a href="https://preview.redd.it/2vvd45htuih91.png?width=846&amp;format=png&amp;auto=webp&amp;s=554001da1cdf1fcc05f45a9fede5ecfea9b37f17">Bitcoin daily chart - Q4 2021 to Q1 2022</a></p> <p>Then on November 16, 2021, price collapsed below the 20 SMA with <strong>a very large red candlestick</strong>. That&#39;s bad. Was this the beginning of the downtrend? Maybe, maybe not. But it was an <strong>early indication</strong> that the uptrend might be in jeopardy. The trend was <strong>acting out of character</strong> and should have been questioned. Especially since we had failed to hold the new ATH and formed a double top.</p> <p>Now notice how the 20 SMA was no longer rising after that point; it began descending southeast. Although Bitcoin was able to penetrate above during the December rally, <strong>the slope of the 20 SMA never changed</strong>. It continued to decline for <strong>two-and-a-half months</strong> until $BTC settled at $40k: a 42% drop from the all-time highs. Were you Bullish during that downtrend? Not me.</p> <p>It wasn&#39;t until late February where the moving average was able to recover slope and price got back above it. Did that mean we were headed back to ATHs? No--we entered a period of volatility and indecision, marked by price coiling around a sideways/oscillating moving average. <strong>This is called a range, or consolidation</strong>, where no active trend is visible.</p> <h1>History Doesn&#39;t Repeat but It Often Rhymes</h1> <p>Finally in mid-March, Bitcoin looked like it had officially broken the downtrend. Many of you may remember what happened next: the infamous <strong>fake-out rally that failed at $48k</strong>.</p> <p>What were the warning signs of this Bull Trap? Well on April 6, it happened again: <strong>a very large red candlestick caused Bitcoin to collapse below the rising 20 SMA.</strong> Remember: that&#39;s bad. This flipped the relationship between price and the moving average once again. $BTC would remain below the now declining black line <strong>for 60 days straight.</strong></p> <p><a href="https://preview.redd.it/mhjexdquuih91.png?width=847&amp;format=png&amp;auto=webp&amp;s=f513bc1cdccd2bbcf14c541233757434cc91caa6">Bitcoin daily chart - Feb to Jun 2022</a></p> <p>You may recall the multi-day rout which started May 5 following the breakdown below $37.5k. I certainly do; it was <strong>shortly after I liquidated whatever was left of my portfolio</strong> (was already 95% cash) and warned a friend to reconsider their recent &#39;<em>dip buy</em>.&#39; Bitcoin collapsed to $26.5k within a week--shedding 33% in just 8 days.</p> <p><a href="https://preview.redd.it/naqq8msvuih91.png?width=880&amp;format=png&amp;auto=webp&amp;s=1cbfc60fba4ef65437c27b3082e65319ce714619">Bitcoin daily chart - May and June Base Breakdowns (my favorite technical pattern)</a></p> <p>But how was any of this information useful after the drop had already happened? Well, the <strong>exact same thing occurred on June 9th</strong> when price lost support. After a lengthy sideways consolidation, $BTC broke below $28k and made a vertical drop to the $17.5k lows. Another 37% decline in a mere 7 days. I remember this collapse clearly because it was when <strong>I decided to become active on Reddit and begin writing these posts.</strong></p> <h1>Cool Story Bro</h1> <p><em>Why are you recounting what has already happened and is clearly visible to everybody else?</em> Because: for months this sub was filled with <strong>people screaming Bull Trap or calling for a bottom</strong>, oblivious to the fact that we were in a textbook downtrend that showed zero signs of reversing. If anything, the momentum was accelerating until we went full climactic into $17.5k. I&#39;ll ask again: Were you Bullish during that downtrend? Or were you predicting a bottom at $15k? Or was it supposed to be $10k? $6k? I&#39;ve completely lost track.</p> <p>Let&#39;s fast forward back to the present. For the past few weeks, we have been witnessing the exact opposite phenomenon: many are waiting for $BTC to return to $20K and $ETH back to $1k. It might happen someday--who knows. But the <strong>trend is currently going in the opposite direction!</strong> That is all that matters right now. The Trend is the Truth, yet the Power of Inversion causes many to realize this way too late. <strong>This is how FOMO is derived.</strong></p> <h1>Always React and Never Predict</h1> <p>If I still have your attention this deep into story time, I know what you&#39;re probably thinking. <strong><em>Hindsight 20/20!</em></strong> <em>It&#39;s easy to say these things now after looking in the rear-view mirror. You&#39;re cherry-picking examples! You retroactively changed the indicators to fit the narrative. You suck at MS Paint!</em></p> <p>I agree with you completely; a healthy dose of skepticism is always warranted. However, at one moment in time, <strong>the past was actually the present</strong>. Agreed? If you knew what to look for while staring at the charts every day, then perhaps you could&#39;ve acted accordingly. Like sticking to your DCA plan instead of trying to time the market. Or taking profit when you were up 2x but being stubborn because you were up 3x just a week ago. <strong>We study the past to be better prepared for the future. We learn from history in order to avoid repeating the same mistakes.</strong></p> <h1>Nobody Ever Nails the Absolute Top or Bottom</h1> <p>For anybody interested, this is the story of how I got out of <strong>$ADA</strong> back in September 2021. I consider this single event as the <strong>canary in the coal mine for the entire crypto market</strong>. When Cardano failed to breakout over $3, to me it meant that risk was coming off the table.</p> <p>The Alt Coin which was named &#39;<strong><em>Best DeFi project of the Year&#39;</em></strong> had just made new ATH&#39;s and was leading the rally. The technical pattern was as Bullish as ever. And somehow $ADA unexpectedly lost the rising 20 SMA <strong>two whole months before $ETH/$BTC</strong> topped in November. It wasn&#39;t a good look.</p> <p><a href="https://preview.redd.it/xu3yeojxuih91.png?width=847&amp;format=png&amp;auto=webp&amp;s=c295fe222be67b3bebbad4550d892104d880f08b">Cardano daily chart - Q2 to Q3 2021</a></p> <p>My $2.68 stop loss triggered on that gigantic red candle Sep 7. The exit involved <strong>zero predictions</strong>, my friends. All I did was react to information that the market was providing at the time. </p> <p><a href="https://preview.redd.it/c9zh2l5ntjh91.png?width=383&amp;format=png&amp;auto=webp&amp;s=b7828c19d950422771336c129a7fed00303e14a1">September 7, 2021 - $ADA stop loss executed</a></p> <p>If the uptrend re-established itself, I would&#39;ve gladly jumped back in. As we all know, it never did. I started trimming the remainder of my crypto positions over the following months at the first sign of weakness.</p> <h1>Know Your Timeframe</h1> <p>Many people in this sub are still Bearish about the future of cryptocurrency prices. How can that be possible when $ETH and $BTC were demonstrated above to be in early uptrends? <strong>Easy: Zoom out to a weekly chart</strong>.</p> <p><a href="https://preview.redd.it/9kxeqqiyuih91.png?width=847&amp;format=png&amp;auto=webp&amp;s=95ce26b70f48bd19049ca7163663e622cdd3b6d2">Bitcoin weekly chart - 20 SMA going southeast</a></p> <p>Bitcoin is below the declining 20 SMA and is pulling back towards the black line for the first test in months. What do we know about price being below a descending black line? <strong>It means on this (larger) timeframe we are still in a downtrend until proven otherwise.</strong></p> <p>So, does that mean we are for sure headed lower? I won&#39;t pretend to know the answer to this, and neither should anybody else. <strong>We respect the active trend until it gives us a reason not to</strong> (I repeat this in every single post because the trend is truly my best friend, since I have none in real life). The best we can do is monitor multiple timeframes to see when they align again (i.e., daily and weekly no longer conflicting). <strong>That will be the true signal that the worst is behind us.</strong></p> <p><strong>But wait, there&#39;s more! Zoom out again.</strong> Look at the monthly chart for the 10,000-foot view. Bitcoin has been in a cyclical Bull Market for over a decade. On the longer time horizon, price has been making higher-highs and higher-lows (the definition of an uptrend). <strong>The current Bear Market barely registers on the bigger picture.</strong></p> <p><a href="https://preview.redd.it/z4330mezuih91.png?width=797&amp;format=png&amp;auto=webp&amp;s=8f7a2ba7bedf0fcf0bba6f4f1ba38d73b7a86905">Bitcoin monthly chart (log scale) - 2011 to present</a></p> <p>The above chart is the reason why DCA has been the recommended approach: <strong>time is on your side.</strong> Many believe that $BTC will eventually make new all-time highs since that is what it has done before. How about that: <strong>using the past to make predictions about the future!</strong> I thought only silly Technical Analysts do that.</p> <h1>That Was a Long Read</h1> <p>Does applying Technical Analysis mean being able to predict the future? Absolutely not. It does, however, provide objective criteria to base your decisions upon. If anybody claims to be certain that the price of x, will be y, at z date: please unsubscribe or unfollow them immediately. <strong>They wouldn&#39;t need a following if their magic 8-ball worked.</strong></p> <p>Do moving averages provide a <strong>quick visual aid</strong> for investors who aren&#39;t trained in reading candlesticks and charts? I would argue <strong><em>yes</em></strong>. It is more beneficial than random guessing or gambling off the 1-minute chart from your phone while smoking a cigarette like Matthew McConaughey.</p> <p>Thank you for reading this far. I am not on a mission to find converts for the <strong>Church of Branch Technician.</strong> I am simply sparking some minds and offering a different viewpoint than the majority of this sub. Constructive discussion is always good, especially inside the <strong>echo-chambers</strong> of Reddit which are often prone to <strong>confirmation bias.</strong></p> <p>&#x200B;</p> <p><strong>Disclaimer:</strong> Not financial advice. For educational purposes only. Do your own due diligence. Only invest with money you can afford to lose. If doing passive DCA, ensure assets align with your personal risk profile/tolerance. To the brave few who trade actively: please educate yourself before going against professionals and the algos they have programmed to siphon money from the markets.</p> </div><!-- SC_ON --> &#32; submitted by &#32; <a href="https://www.reddit.com/user/Cranky_Crypto"> /u/Cranky_Crypto </a> <br/> <span><a href="https://www.reddit.com/r/CryptoCurrency/comments/wnlrhq/tune_out_the_noise_how_to_track_the_active_trend/">[link]</a></span> &#32; <span><a href="https://www.reddit.com/r/CryptoCurrency/comments/wnlrhq/tune_out_the_noise_how_to_track_the_active_trend/">[comments]</a></span> </td></tr></table>
