04/10/2018/08:30CET
Volatility and Liquidity are very important concepts to trade crypto markets more successfully. So lets do a quick and dirty dive into this...
I have taken a break from my normal Crypto TA on steemit and am doing some research into indicators. In particular to do with #Volatility and #Liquidity. In the process I will deconstruct some basic fundamentals about the markets every trader should know.
At the same time I want to share 2 chart indicators that I have been looking at that fill in part of the blanks in the story of bitcoin and cryptos in general.
In the process I hope to infuse you also with a sense of the shortcomings of indicators. We must always remember that no indicator can predict with certainty a rally or a crash. This simply does not exist. It is intrinsically because the past cannot predict the future. Markets are stochastic and as such, all indicators are only an algorithmic analysis of the past.
Volatility and Liquidity
These are slippery concepts for the amature trader to comprehend, but they are of vital importance to trading and investing. I use a simple metaphor to picture the market forces in play. It is the game of tug-of-war.
If we have just 2 people, one on either side, if they are evenly balanced the stress on the rope is rather low and the marker on the rope does not move too much.
Add 10 more people on either side of the rope and we find that the chances of evenly balanced tension increases, the overall power of each side is likely going to be more balanced. Now we add 100 on either side. Tension in the rope is high and equilibrium is again more likely to be maintained.
In this mental image one can imagine volatility and liquidity in the market dynamics.
Liquidity is represented by the number of people in the game. Even though we do not indicate on what side they of the market they stand, they participate and as such contribute to liquidity.
Volatility is a function of liquidity. The more liquid a trading pair, or in our case a tug-of-war the more likely it is that the opposing forces are balanced. But participants can change sides at any moment. The rate at which they change sides is where volatility comes from.
So let's look at our daily #btc chart with these indicators laid over...
CHOP
The first indicator aims to give us a feeling for energy in the market. This is not strictly a continuation of my introduction to volatility and liquidity, but is heavily influenced by them. This indicator aims to show us when there is pent up "energy" in the market. It aims to give us an indication of the probability of a rise in volatility.
To overlay it onto our metaphor, this indicator aims to indicate rate of change of participants in the tug-of-war game.
Another mental metaphor that helps to visualise this indicar is to picture it as a battery or a spring coil.
A high value indicates there is more pent up energy in the market, thus it tries to predict the onset of a more rapid price move. A low value indicates a dissipation of energy in the market, thus it tries to predict the end of a rapid price move.
As you can imagine this indicator is probably more useful on the sell side. It may be useful to foresee the beginning of the end of a rally for example. Conversely if you like to catch falling knives, it could also be used to predict the beginning of the end of a crash.
If we study this indicator historically, it is not foolproof but does a reasonable job in achieving its goal.
Volatility
This is the second indicator. It is not a pure indicator but a derivative of the True Range calculation developed by J. Welles Wilder, Jr. and first featured in his 1978 book, New Concepts in Technical Trading Systems.
The concept is simple though, it uses price ranges in trading periods to indicate volatility. There are thousands of ways to rehash this kind of calculation but the result is usually the same. We have a chart that gives us an idea of our current volatility in relation to historical experience. It is a derivative of price only. It does not take volume into account at all.
Chart Indicators analyse previous data from the market and present it with the goal of teasing out some hint of the probability of the future direction of price. It is that simple!
No indicator can predict future price action, they can only hint at it by mathematically analysing historical data.
Indicators are like rear vision mirrors. Studying them can tell you a lot about where you have been, but only hints about where you are going.
This is why it is important to understand the limitations of chart indicators. Remember we will never get a 100% success rate in our trades, we only need to be better than 50% to be profitable.
So to wrap up, what are these indicators telling us about bitcoin right now?
We see volatility is quite low and trending lower. Though I expect that it will only reverse its bias once the bulls push us north of 7.5k, or south of 5.5k. We can see that this is a very slow moving indicator and is more a large scale overview of where we are at the moment historically in bitcoin.
The CHOP indicator may tell us more about the immediate future. It indicates that we have a lot of pent up energy waiting to get released. It does not tell us the direction that this energy will take, but simply it is there ready to go.
I hope this post taught you something you did not know. It was the intention.
As always guys, leave comments, have fun and trade safe.
Disclaimer: This post is not financial advice. Before investing any funds do your own research and make your own decisions. Cryptocurrencies are highly speculative.
And finally: Do not invest money you are not comfortable losing.
Help me to make more content like this.
Upvote me, comment and resteem.
Thanks
Great article!! Signed up for You, I will be glad to reciprocate!) Follow me!!!
thanks
Feels like it's more difficult to earn Steem with this HF20 Update? I like how steemd shows the Resource Credits now instead of the Bandwidth.
Seems like this platform slowed down a bit, that's not a bad thing.
hmmm, I was never really into earning anything with steem. I own steem but this is speculative and not earned on the platform. Have considered moving off exchange to Steemit to see if this boosts my awards, but somehow this is not what I am chasing.
I use this blog platform as a kind of notebook for my charts TA and crytpo education.
It keeps me honest.
A bit like a diary on blockchain if you will - immutable and so keeps me honest
(not really immutable for me since I can edit posts for a short time).
I think we need to try out how blockchain works with social media in order to create a true open platform. Steemit is the most well known version of this so far but I am not sure it will be the winner in the long run.
What I do know is that FB and the like are not good for humanity. If they are allowed to continue on their evolutionary path, we will be in the "1984" world before long