Bitcoin, which to some is a promising new/alternative electronic currency, has seen a sharp rally in recent months. The decentralized currency traded around 60 in July but today has broken through to new all-time highs above $400.
While the concept for Bitcoins has been floating around for a number of years, it wasn’t until around 2011 that the charts began making sense to track in a more meaningful way. After looking at Bitcoin charts in multiple time frames over recent weeks, I noticed several constructive patters that would be conducive to profitable technical analysis.
After all, technical analysis in various forms isn’t just used to analyze stocks — it’s also used by some economists, weather forecasters and others for understanding trends. So there’s no reason we shouldn’t at least be able to use some basic pattern and trend analysis in Bitcoin investing.
Allow me to outline the four points that I deem important a security, currency, or other financial instrument should have in order for technical analysis to make best sense.
Volume is important in any chart analysis. A security or currency without plenty of volume is much more prone to big up- and down-gaps.
But while volume in absolute terms is important, even more crucial is some sort of reliable daily minimum volume. Charts with sporadic volume mean there is no real market (or at least not sufficient for true technical analysis). Technical analysis works best when something is constantly being traded, so any single large transaction can’t move the market in too big a way and completely alter the charts.
The chart above shows that aside from a massive spike in volume in late 2011, the estimated transaction volume in Bitcoin is relatively stable, broadly speaking.
Charts that display auspicious setups for TA show some sort of a repeatable rhythm. Repeatable chart patterns — and thus a rhythm in a tradeable asset — is a reflection of fluid transactions on the part of market participants and thus some sort of consistency in volume.
Bitcoin charts over the past 12 months have shown consolidation after each spike, which led to next breakouts.
#3: Trading History
Trading history is important because it means that when applying technical analysis to the charts, we have some sort of reference as to the asset’s past behavioral patterns, as well as potential reference points/price levels.
In the case of Bitcoin, which has trading history looking back to 2011, we have enough data to analyze for at least basic technical analysis.
#4: Lack of Headline Risk
Just like lack of volume can make the charts of any asset trade in a choppy fashion, so too can a propensity to headline-risk shocks. Stocks, commodities and currencies that lend best to technical analysis have moderate to little headline risk, and market participants have certain daily, monthly or quarterly events to focus around for above average price movements.
Given that Bitcoin checks all four of the above points, I think using basic technical analysis to understand trend and overbought/oversold levels makes sense.
My quick two cents for now?
Looking at the big run in Bitcoin prices in recent months, prices likely need to at the very least consolidate in coming weeks.
Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the “Essence of Swing Trading” eBook by clicking here. At the time of publication, Berger had no positions in the securities mentioned.