Technical Candlestick Chart Analysis and Prediction for Bitcoin BTC Cryptocurrency

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bitcoin technical analysis

As many people begin to embrace Bitcoin and adopt it into their day-to-day lives, what does the future hold for this cryptocurrency? The recent success of Ethereum has brought about some significant changes in how Bitcoin will be designed and marketed in the very near future. Here are some of those changes that we can expect.

When we evaluate investments for our clients, we use three types of analysis:Quantitative: Do the numbers make sense? Qualitative: Does the story make sense? Technical: What do other investors think?

Our belief is that quantitative and qualitative fundamentals are the determinants of long-term value, while technical factors are the determinants of short-term value. An investment may look good on a fundamental basis, but the technicals may indicate that it would be better to wait for a better entry price.

Thousands of volumes have been written on technical analysis. Let us consider the candlestick chart, a method that originated in Japan in the 1700s. We use it in our routine investment process. 

What Is The Best Candlestick Charting System?

Candlestick charts were created by Homma, a rice trader in Japan, to analyze rice prices. The human brain understands pictures better than numbers. Multi-axes of data are converted into graphic representations that convey information rather than just data in candlestick charts.

The candlestick chart illustrates an asset’s open, high, low, and close price over a set interval of time. Each candlestick represents one period of time, such as one hour, one day, or one week.

As candlesticks comprise a bar – a “real body” – the top and bottom marks indicate the range set by the opening and closing prices, while the “wicks” indicate the high and low prices for each period.

Green (or white) candles indicate that the close was higher than the open, while red (or black) candles showed that the close was lower. 

Candlestick charts indicate investor emotion through colors, sizes and directions. A small real body denotes little activity and stable emotions. A long real body — positive or negative — denotes a big mood swing.

Trading volume histograms below price charts provide additional insight. Large trading volumes confirm price direction. A significant decline on high volume signifies a bear market.

Learn How To Use Kitco Bitcoin (Candlestick Charts)

The metals trading company Kitco exhibits one of the best candlestick charting systems available online. Let’s examine bitcoin in real time. Check the chart for “Kitco Bitcoin” in a browser adjacent to this one while reading this column. 

In the upper-left corner of the chart, change the scale to “1 week” if the chart looks random at first glance.

As the chart extending from 2013 shows, there were many small gains through 2017, an abrupt selling ramp from 2018 to 2019, and a period of sideways trading until 2021.

We see an interesting pattern in October 2021 when modest gains turn into large gains. Anyone who bought bitcoin above the 2020 low of $4,500 is in profit.

Traders should sell into rallies in principle, but 98% of investors increase their holdings when they make a profit, which is why up-week rallies get more extreme when prices rise.

Around January 2021, the “smart money” took some profits, leading to a short sell-off, which naïve investors responded to as a “buying opportunity” to add to their holdings. After the first half-year, bitcoin doubled again, but with less conviction. A big green up-week is followed by a big red down-week as experienced investors unload during rallies.

The percentage of bitcoin investors who lose money rises sharply with each downturn by April 2021. Due to their limited capital and psychological incapacity to lose money, these investors begin to panic sell. The price of bitcoin fell 50% to the “floor” set by the last sell-off in January 2021 during two down weeks in May 2021.  

Between July and November 2021, we see choppy gains to an all-time high. This is barely breaking through the “ceiling” established from February to May 2021. As soon as retail investors break even on their original buys, they sell — “smart money” gets out. There are long, red down weeks interspersed with small, green up weeks, indicating sustained and precipitous selling.

After falling from an all-time high of $68,958 to $33,278, bitcoin is down 52% in just three months. What does this mean? Bitcoin sits on a “floor” of $30,000 to $32,000, defined by the lows reached in January 2021 and from May to July 2021.  

If bitcoin trades below $30,000, the next floor dates back to September 2020 at around $10,000. What are the chances that bitcoin will rally from current levels?

Buyers who acquired bitcoin prior to January 2021 are still showing some gains. However, buyers who acquired bitcoin since January 2021 are at best breaking even, and at worst showing a 50% loss. Sadly, most recent investors are undercapitalized retail investors who bought on the hopes and dreams of future growth. Investors like those are most likely to lose money when the market declines.

In light of our candlestick chart analysis, we estimate that bitcoin’s probability of gaining from current levels is low, while its probability of losing from current levels is high.  

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