Disclaimer:
This article refers only to my reasoning for my Bitcoin short on a smaller time frame. I do not believe the BTC bull run has been invalidated, but I do believe those buying at ATHs need to put down the joints…
Always: NFA, DYOR.
Prologue:
Recently we saw a quick flash crash in the cryptocurrency markets. Positions have been liquidated, leverage has been squeezed, keyboards have been broken.
Lets rewind back to the day before this crash. When we were approaching key levels on most major coins in the cryptocurrency markets.
I could use just about any major cryptocurrency as an example here. But seeing as I called out the crash on XRP, lets go through Ripple.
Why was I interested in shorts around these levels? Let’s look at the facts.
Chapter one - Fear…
Any time we approach all time highs, we need to be looking at the facts. Usually breaking an ATH would signal many to be euphoric, some even started to stream “watch parties” as they saw BTC break to a new ATH.
Simply foolish.
We have to understand the sentiment behind the market when approaching an all time high. Refer to the breakdown video for an understanding of how a seasoned price analyst reviews the Bitcoin price action before the flash crash.
This alone was not enough to enter a short position. But it did indicate one thing, fear.
As I discussed in the above video, we took the previous ATH with force and vivacity, high volume, heavy price movement. This meant that buyers were strong enough to keep price around the ATH and consolidate, getting ready for the next move.
However, when the next move occurred we moved towards our target with very meagre volume. An indication that large players were not happy to speculate, an indication of fear.
This technical analysis was screaming “Take a short!” at me. Henceforward I decided to delve into the fundamentals to garner a deeper understanding of what was due to happen around this ATH.
Chapter two - Fundamental Catalysts…
At this point in my thought process, it had been established that large players weren’t moving price upwards. Yet price continued to soar. I had to ask myself whom would be continuing to buy at such unprecedented levels, and the answer was clear: retail.
When retail traders invest in the market, they usually speculate heavily, often leveraging their positions on exchanges to allow them to trade with 5,10 or even 100x their actual buying power.
The first fundamental indicator I opened was all I needed to understand why the market was due for a downwards move.
The chart below represents the amount of leveraged trades currently on exchanges. The formation of the new ATH confirms my bias.
Bitcoin at this point is the most leveraged it has been throughout the whole year.
The reason that a highly leveraged asset is so precarious is due to something called a leverage squeeze.
Chapter three — Leverage squeezes, inefficient prices, healthy price action and liquidity.
A leverage squeeze occurs when we have price moving in a given direction, being delivered in a rapid and inefficient manner, while being highly leveraged.
EFFICIENT PRICING DEFINITION:
I will describe efficient pricing in another article fully, but for now I will give the basic definition. Being that inefficient pricing is where price moves in a given direction with a full bodied candle, and does not come back down to “fill the candle in.”
This is so important as it means that price has only been offered as longs in this region, and no shorts have been executed there, hence why the pricing is unbalanced (all longs and no shorts) and “inefficient.”
Below I have highlighted a recent example of inefficient pricing on the GBPUSD pair, this inefficient pricing (also known as liquidity void) was a catalyst for a recent trade.
The market wants to delivery price efficiently.
Granted inefficiencies in forex pairs are much more important than they are in cryptocurrencies, due to the manipulated nature of foreign exchange.
However price still tells the same story no matter the market, and efficient price delivery is something that all assets must adhere to.
Chapter three, continued…
So far we have discovered 2 facts regarding our trade
The inefficient pricing makes price unstable.
The decreasing volume signals fear in the market.
Now comes the final piece of the puzzle, and the reason why I was so bearish on this trade: Liquidity.
Liquidity is what drives price, if everyone wants to buy and nobody wants to sell then price can’t continue upwards. In the Forex market we study liquidity extensively, as any time there is easy resting liquidity, smart money targets it, as it is often resting in foolish places.
Remember, Bitcoin is the most leveraged it has been all year, so a lot of this resting liquidity is multiplied by leverage.
If you open a long position on 100x leverage, you close by selling on 100x leverage also, this means there is a huge amount of liquidity on the stop losses of those leveraged longs.
Pull up a BTC chart yourself and go to where Bitcoin made its high, can you draw out where the easy liquidity lies?
I’ve mapped out the liquidity below, these liquidity areas I know will be targeted. You can think of the market as a Wolf, and the retail liquidity as its prey. The wolf likes to hunt.
Hint — Liquidity rests where the stop-losses of these leveraged trades are.
Swing highs and swing lows represent liquidity. These liquidity areas are the areas that I would target to exit my trade.
Remember, price hunts liquidity like a wolf hunting its prey.
This article began its creation on the date of the flash crash, 10th and 11th of November. These levels and analysis were all done beforehand. Here you can see the aftermath of these levels, I progressively took profits at each one, 25% at the first level, 25% at the next, 25% at the final and let the rest ride.
Stress-free money baby
Could BTC reverse and take me out of this trade, yes. Could it continue to fall, yes. When we get to this point in my trade I am nowhere near as confident as I was around my entry.
ATHs, produce fear, fear produces irrational decisions. Being the rational voice in an irrational choir enables you to make decisions like the above, and reap the rewards heavily.
Thanks for reading the whole way through. I hope you enjoyed or learned something along the way. I will release more in depth technical articles in the future, but I thought I’d start off with something nice and digestible for the average reader.
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