Identifying Bitcoin’s Trend Allows for More Manageable Trading

I usually present my Elliott Wave Principle count, but I would like to focus on something else since the Bulls fumbled the ball a few weeks ago (see my previous update here). In this case, identifying a trend as “the trend is always your friend” in trading. Why? It helps us determine to be aggressive, conservative, or downright Bearish and make trading less complicated.

I always start my daily crypto trading updates with my “the trend is your friend chart.”: see Figure 1 below. It is so simple; one does not even need to know BTC’s actual price to tell us if the price is trending higher or lower and how one should position oneself.

Figure 1. Bitcoin daily chart with moving averages and Ichimoku Cloud.

The trend is down. Trade it accordingly.

Here I plot BTC’s price as a dotted line because I only need to know where it is concerning the following indicators: four simple moving averages (SMAs), the Ichimoku Cloud (the Cloud), and the Bollinger Bands. These variables help determine what the trend is. Namely, the SMAs are: very short-term (VST), short-term (ST), intermediate-term (IT), and long-term (LT).

It is a Bullish trend when BTC’s price is above the VST, above the ST, > IT, > LT. In addition, all SMAs should be rising. Besides, one also wants the price above “the Cloud,” The Cloud needs to be green (rising) too, to know the trend is 100% Bullish. Lastly, the uptrend is powerful if the price is at the upper Bollinger Band. Trading strategy: by the dip (BDP), stay long, sell into strength.

Figure 1 shows three such periods with the blue boxes. As you can see, with such a setup, the trend is your friend for long positions. Yes, the VST-SMA can dip below the ST-SMA, but that’s your “BDP” for shorter-term traders.

Conversely, the trend becomes Bearish when BTC’s price drops below “the Cloud,” subsequently below more of the SMAs, and “rides” the lower Bollinger Bands. Figure 1 shows two such periods over the past 15 months: red boxes. Trading strategy: become conservative, i.e., raise cash, sell the rips, possibly short the crypto.

As you can see, following this chart could have avoided a lot of pain during the May through July sell-off. And avoiding significant drawdowns is still the most effective way to riches as it allows one to preserve capital, which is then ready to be deployed during the next uptrend. Or, as they say, “(s)he who loses the least amount of money comes out the winner,” and “rinse, lather, repeat.”

Unfortunately, BTC entered an initial downtrend for the Bulls in mid-November early December as the VST and ST-SMAs dropped below the IT-SMA. That does not happen in strong uptrends (see blue boxes). In early December, the initial downtrend was confirmed when BTC also moved below “the Cloud.”

Adding insult to injury, the crypto is now also trading below its LT-SMA. Thus, there is now a BTC<LT>VST<ST<IT<the Cloud setup, exemplified by the five red arrows in what I call “the traffic light.” The traffic light has been almost entirely red over the past several weeks. That means “caution, stop, etc.”. Something I communicate with my premium crypto trading members daily.

Thus the current trend is not the Bulls’ friend and similar to June-July when BTC lost another 25%. As such, the trend tells us to look lower, not higher. Two weeks ago, I was already looking for preferably $28-36K. See here. With BTC currently trading at around $46K it has room to drop some more, which is what the “trend is your friend” chart tells us.

Bottom line: The Bitcoin Bulls fumbled the ball already two weeks ago, and since the price of BTC has declined another 10%. Here I present a simple “the trend is your friend” chart that objectively helps identify if BTC is trending higher or lower and if one, therefore, should expect lower or higher prices. That trend, in turn, enables us to determine how to trade BTC. The current setup already called for “raising cash, conservative mode” a few weeks ago, and that strategy has yet to be proven wrong. When the trend changes again, we have plenty of time to ride the uptrend and deploy the cash stashed on the sidelines. Because please remember, “cash is also a position.” Trade safely!