Is Technical Analysis Prophetic or Ridiculous? We asked 7 Crypto Traders

The cross of death. Just say it out loud. It doesn’t sound good. And it isn’t. Actually, it’s pretty bad.

For most of October, analysts in the bitcoin market warned that the death cross was coming – using what is known in the trading business as technical analysis.

Technical analysis, or TA for short, is the art of predicting future price movements by studying charts detailing how various assets have traded in the past. Patterns are discovered. Those patterns are compared to patterns that have occurred before. The assumption is that the past patterns will hold in the future, providing price predictions and a good chance to profit.

A death cross, in the practice of TA, occurs when the line following an asset’s price average over the preceding 50 days falls below the line following its 200-day moving average. The appearance of a death cross is considered the beginning of a bearish trend: The last time this happened in the bitcoin market, in March 2018, prices tumbled by more than half over the next nine months.

So it was considered unusually clumsy when this year’s death cross finally appeared on or around October 25th. Bitcoin’s price closed at $8,662 that day, and over the next few weeks it would tumble over $2,000. Some analysts say the price drop was caused by a crackdown on cryptocurrency speculation in China. But TA believers say the whole thing was clear from the charts.

“Once the death cross happens, we’re in a situation where the moving averages scream bearish,” said Big Chonis, a pseudonymous 41-year-old Massachusetts man with 43,000 Twitter followers and a separate, subscription-based TA feed . He asked that his real name not be used, he said, to avoid diluting the power of the Big Chonis brand, but added in a phone interview that he typically makes $3,000 to $4,000 a week as ‘ a full-time trader earns, and relies mainly on technical analysis.

The concept that traders can reliably make money – or avoid losing it – by watching when a blue line might cross a yellow line seems like a false balloon to many investors in traditional finance (not to mention journalists and other observers of crypto trading do not). But in bitcoin markets, TA is ubiquitous. Binance, one of the world’s largest crypto exchanges, said in a Nov. 22 research report that TA was the second most followed investment strategy in digital asset markets, after high-frequency trading.

Joe DiPasquale, CEO of BitBull Capital, argues that TA helps break through the hype that often drives crypto prices high or low.

“The recent rally at the end of October, due to the Chinese media hype, is a good example of an unsustainable speculation-driven move that has now returned to our previously indicated support around $8,100,” he said. “Technical analysis is what led us to believe that the high reached after Chinese President Xi Jinping spoke was short-lived and would retreat to just over $8,000.”

TA was originally developed for markets where trading has a long history and data is abundant. For stocks, TA outperforms analysis based on business fundamentals, including factors such as earnings growth, according to an extensive 2015 study by three Israeli researchers. The finding held for investment horizons of one to 12 months.

True believers say TA is even more important in cryptomarkets, since no one can really yet confidently determine the fundamental value of bitcoin, invented by a small cadre of libertarian computer coders just 11 years ago. Is it a store of value, an inflation hedge, a digital form of gold? The future of money? Or simply the rewards for the owners and operators of the computers that help keep the world’s largest blockchain running? It can be all of the above.

“Absent real fundamental news, people rely on charts and price and volume,” said Greg Cipolaro, a former Citigroup equity researcher who now helps run cryptocurrency analysis firm Digital Asset Research. “It’s always been kind of a dark art.”

With little else to go on, traders put their faith in the cards. They are telling themselves, and anyone else who will listen, that classic technical analysis will now tell us that the price of bitcoin is about to break much lower – like in the next week or so, because this candle chart looks like this, and that Christmas card looks like this; in other words, you have to wait a little longer before going back into your accumulation phase. Even Big Chonis admits there are limits to TA’s usefulness, or at least its application. In his Twitter feed, he says, he tries to point out “notable things” or patterns he sees in the charts. But he admits he’s not quite as prolific with the price predictions: “You’re right to say that you don’t see me saying buy, buy, buy, sell, sell, sell all the time, because it’s all subjective.”

What’s interesting is that even many bitcoin investors who scoff at the chart removal, preferring the long-term digital-gold narrative, for example, tend to watch the charts, which can become self-fulfilling. So many people look at the same price points as key levels of support and resistance – TA-speak for when bitcoin is apparently unable to penetrate some invisible moving price ceiling, or when it can’t really go any lower – that the market often acts accordingly.

For example, many traders set up their systems to automatically sell out of a position if the price of bitcoin suddenly falls below a certain threshold; the exercise is known as a stop loss order and roughly translates to: “Get me out now before I lose any more money.” Once those stop-loss orders are turned off, the price movement accelerates, and many beginners trading bitcoin futures soon get “REKT.” This is crypto-speak for when heavily leveraged traders are liquidated due to a margin call. Rapid selling as those liquidations take effect only makes the price fall faster, and bitcoin has just proven once again how volatile it can be.

“If you understand what everyone else is doing, you understand the trade even better,” says David Martin, chief investment officer at Blockforce Capital in San Diego. “It’s basically technical analysis of technical analysis.”

CoinDesk spoke to seven professional crypto traders and analysts about TA. Here’s what they said:

Greg Cipolaro, Digital Asset Research:

I don’t believe in technicality. If I found something that was consistent and would work I’d use it, but since I don’t it just seems like you’re talking about throwing triangles around. Absent some real fundamental news, people rely on charts and price and volume, and in that respect it’s more like FX or commodities short-term trading, but for me that’s just not where I play. It’s always been kind of a dark art. There are times when you see support and resistance, like with even numbers – $9,000, $10,000. When it breaks through those levels, the price suddenly breaks up or down, but that’s because a lot of people are kind of keying in on the same thing.

Joe DiPasquale, BitBull Capital:

At BitBull, technical analysis is an important part of our active management, and works well in conjunction with news analysis to reveal likely movement patterns and downside / upside limits. Since crypto markets are highly volatile and generally speculation-driven, technical analysis provides key indicators of price movements, especially support and resistance zones. The recent rally at the end of October, due to the Chinese media hype, is a good example of an unsustainable speculation-driven move that has now returned to our previously indicated support around $8,100. Technical analysis is what lets us believed that the peak reached after Xi Jinpeng spoke was short-lived and would retrace to just over $8,000. Using technical analysis allows us to trade crypto’s volatility, buy low and high with confidence to sell. For example, in the past year (11/1/18-11/1/19), Bitcoin returned 44 percent, while BitBull’s Opportunistic Fund returned 101 percent, about 2.3 times more.

David Martin, Blockforce Capital:

When I first got into crypto in 2016, I did so purely from a technical perspective. I didn’t understand bitcoin or what it could do, but I just wanted to trade it because it had a lot of volatility. It was largely based on support and resistance, wave cycles and fibonacci retracements. We do not use it for the fund. We mostly use machine learning algorithms. But what I see is that technical analysis actually works better in crypto because you don’t have the fundamental analysis that you have in stocks and other asset classes. What else are you going to trade? For example, if you trade Apple, you can have so many external macro factors that affect the price of the stock. Technical analysis can be one part, but not the only one. In crypto, it is still retail dominated, so everyone is looking at chart patterns. So if you understand what everyone else is doing, you understand the trade even better. It’s basically technical analysis upon technical analysis. Once you figure out, where everyone thinks there is support, where everyone thinks there is resistance, you can set up your trade based on how everyone else is reading the market.

Traders care a lot about technical analysis. They are in the market for a short period of time; investors less. When we make a trading decision here, we look at the macro environment, we look at the fundamentals, and then we look at the charts. We do have to look at the technical aspects because there are less clear fundamentals in crypto. In general, this is something that is almost a self-fulfilling prophecy. If you look at technical analysis as a tool that many traders look at, and everyone looks at the same indicators, they see the same things and adjust their trading strategies accordingly.

I am a firm believer in technical analysis and how it can translate to bitcoin mapping and identifying where we are in the market structure. Bitcoin normally goes sideways; there is a range most of the time, and bitcoin price action can be very boring. Because it’s a thin market, there aren’t many retail-driven price actions pushing it. It wouldn’t take more than a few million market purchases to raise the price a few hundred dollars just based on the fact that the retail market is so thin. I like to take a broader 50,000-foot view, look at the daily chart, the 3-day, the weekly, to get an overall sense of where we are in the market. I accept the fact that if I look at a certain time frame on my chart, and I say, Hey, if the indicator reaches this level, it’s a good buying opportunity, but then if it continues to fall, it tells me I can may be on the wrong time frame.

Dan Matuszewski, former Circle trader, now a partner at CMS Holdings:

I tend to be of the mindset that it’s mostly hocus pocus. We do want to know where people are placing their stops, but when we trade, we’re really just trying to find inefficiencies in the market and arbitrage them out. We’re doing it more than saying, OK, bitcoin just crossed the 50-day moving average. It’s just not our game.

Nicholas Merten, DataDash Trader:

In the short term, I believe that technical analysis is completely irrelevant. The only type of TA that will be relevant is naked trading, where you use support and resistance as levels to enter and exit, on the hourly or the daily chart – to see when the last lows and highs were set, and if you can see consistency. If you can see that certain candles always exit at a specific price, say $8,000 several times, if you are long bitcoin, it may be a good time to take some profit or possibly close your position. When it comes to indicators, I only use them on weekly time frame. It is much easier to gauge momentum on a longer term time frame; the MACD on the weekly chart is so good at predicting common bottoms and tops. For day trading, this is really not an effective strategy.