The Art of Cryptocurrency Price Predictions and Technical Analysis

The Art of Cryptocurrency Price Predictions and Technical Analysis

This article was originally published on the author, Kenny Li‘s Medium blogLi is a co-founder of Cloud Spectator, an MBA student at MIT’s Sloan School of Business and actively involved with the Cosmic Trading Group.


When it comes to pricing predictions, we see all sorts of claims: one person says Bitcoin will hit $900, while the other says it will skyrocket past $100,000. This article explores the world of cryptocurrency signals and technical analysis to clarify the methodologies behind pricing predictions.

When new members join the Cosmic Trading Group, one of the things they look forward to most is the cryptocurrency signals. A signal is just a message letting people know what a cryptocurrency’s price might increase to; people can use this information to help decide whether or not they want to buy into that crypto in order to take advantage of the potential price prediction. This article goes into what signals are, how to interpret them, and the underlying factors that contribute to their success, including an emphasis on technical analysis.

How Do Signals Work?

A detailed look at a previous signal from Cosmic Trading.

Essentially, when an analyst is confident enough in his or her prediction of an upcoming price trend (usually an opportunity to buy a coin), it gets published in the group. Community members can browse through the various signals, and decide which ones he or she agrees with to participate in. Usually, these predictions come with a few bits of information:

  1. The buy range, which indicates which range is a good time to buy in (usually indicated in Satoshis);
  2. The sell targets, which tell the members at what price the analyst believes is a good price to sell (also indicated in Satoshis). Sometimes, sell targets come in various tiers, with low goals for less risk and higher goals for people who anticipate higher returns and accept the higher risk associated with it;
  3. The stop loss, which indicates when the members should sell the coin and cut their losses in case the prediction is inaccurate.

Those three pieces of information are usually enough for a member to have all the pricing information he or she needs to decide whether or not he or she will purchase.

But signals are only as accurate as the analysis behind them. There are some obvious ways that some signals are suggested, which are more focused on qualitative analysis on things such as:

  1. Upcoming milestones and how those milestones might affect the price;
  2. News and associated sentiment analysis regarding how the news will be perceived;
  3. General makeup of the community and team including the team’s credibility, track record of execution.

The majority of cryptocurrency signals, though, especially short-term ones, rely primarily on Technical Analysis, or TA for short.

What Is Technical Analysis?

Technical Analysis from Xander in Cosmic Trading.

You might’ve heard of technical analysis, or similar terms to describe the same process including risk/rewards analysis or market psychology. Technical analysis (TA) is a trading strategy that has been traditional used in stock market trading for high-frequency traders, hedge funds, brokers, and individually; basically, lots of people use TA to study pricing patterns and try to make predictions about psychological behavior. In a nutshell, it looks at the current behavior of all the buys and sells for a particular coin and tries to answer the question:

Based on the recent and historical pricing patterns, what do you think traders will do next?

The Effectiveness of Technical Analysis in Cryptocurrency

Technical analysis is especially powerful in cryptocurrency markets due to several factors. We know that the cryptocurrency markets are largely speculative, and the spectrum of investors range from veterans of the stock market to crypto traders who have been in the space for years to people who don’t even know what a stock is and heard about Bitcoin 5 minutes ago and are now investing in cryptocurrency. Due to the lack of general understanding of cryptocurrency and its underlying value, we see a lot of pricing sensitivity pegged to things like news, hype, and sudden drops/increases in price.

Also, the overall market cap of cryptocurrency is under $500 billion (source: CoinLib) at the time of writing. Apart from that, some of the trade volume for smaller coins are so low that even buying $10,000 worth of the coin can result in a significant increase in the price, which is what leads to price manipulation and potential pump-and-dump schemes. In other words, the current market is especially sensitive to buyer and seller behavior.

Finally, another contributor is bots. Trading bots are pervasive in the cryptocurrency world, and most of these bots take advantage of technical analysis to make trades. The combination of low volume and technical-analysis trades made by trading bots contributes to the potential effectiveness of the overall practice of technical analysis on the marketplace.

The combination of 1) low volume that subjects certain coins to more volatility, 2) bots that leverage technical analysis to make trading decisions and indirectly move the needle of coin prices, which, again, is more sensitive due to volume limitations, and 3) the resulting response from buyers and sellers in a speculative market as they see the price changing, can suggest that traders can take advantage of technical analysis to potentially predict the price movement of coins.

The Limitations of Technical Analysis

While all of this has sounded great so far, keep in mind that there are many short-comings in Technical Analysis. Apart from the fact that TA is not a guarantee of success, one of its severe limitations is the fact that it does not account for news or events. This is one of the reasons why, when following a signal, it’s very important to set stop losses.

On February 10th, BitGrail announced a hack that lost potentially over $170m of XRB. Chart from CoinLib.

Bad news can severely impact the price of a coin immediately. To compound the situation, when heavy volumes are suddenly traded on a particular coin, the exchange for that coin can temporarily slow down or become inaccessible, making it hard if not impossible to liquidate your position during a crisis. Without a stop loss, by the time you can sell your coins the value may have already plummeted by a significant percentage. I’m speaking from personal experience.

Two assumptions that technical analysis relies on, according to Investopedia, are:

The assumption that price discounts everything essentially means the market price of a security at any given point in time accurately reflects all available information, and therefore represents the true fair value of the security. This assumption is based on the idea the market price always reflects the sum total knowledge of all market participants.

The quote above is saying that even the best technical analysis can only assume what trading patterns will occur considering the factors impacting the current situation.

The second basic assumption underlying technical analysis, the notion that price changes are not random, leads to the belief of technical analysts that market trends, both short term and long term, can be identified, enabling market traders to profit from investing according to the existing trend.

The other assumption that Investopedia mentions (see the quote above) is that pricing is not random — there is a collective thought pattern and a reason behind each trade. Although the wild-west world of cryptocurrency exchanges can feel emotional, emotional trading should not be confused with random — there is still a reason behind the sell and buy.

TA also doesn’t account for intrinsic value; in other words, TA doesn’t care how amazing a vision may be, or how effective a coin’s team may be at efficiently marketing its product. This means that if you are looking at coins for long-term portfolios, technical analysis trends for buys and sells may be irrelevant.

Executing TA in the Cryptocurrency Market

Summary of Technical Analyst Xander’s track record at Cosmic Trading.

Xander is a technical analyst who posts his analysis in the cryptocurrency trade group Cosmic Trading. During his time in the community, he has made 8 accurate predictions that have hit his target goals, and 2 incorrect predictions that have fallen out of his pattern or have hit stop loss. You can take a deeper look at each of his signals here:

From support and resistance lines to MACD, Xander leverages various TA strategies in formulating his signals. I won’t go into detail about the technical methodology for his approach, but if you have any specific questions you can always reach out to him in the Cosmic Trading Discord Channel. That being said, Xander offers three general recommendations for people who are following signals:

  1. Always set stop losses. Let’s face it — when it comes to witnessing gains, sometimes we can get greedy. Even when it hits our targets, that little voice inside us starts to wonder if it will go further; instead of selling at our targets, we wait. And then we watch the plummet. In order to mitigate the risk of loss on a signal, set stop losses to ensure that you can sell automatically in case a signal starts turning sour.
  2. Respect the time frame and stop getting trigger happy. Sometimes, it takes time for a signal to fully ripen; during that time, the ride can be turbulent both visually and psychologically. Remember to keep calm, and don’t pull the trigger too early, especially if it doesn’t hit stop loss. Even short-term signals may take days to mature or break out of a resistance line.
  3. Never go all in on a single call. Cryptocurrency is already a highly volatile market, and putting all your eggs in one basket will only exacerbate the risk. Take a look at the section below to learn more about portfolio diversification and mitigating risk.

Should You Pour Everything into Signals?

This is by no means investment advice, and ultimately, how you decide to distribute your assets is your own responsibility.

No. Definitely not. Signals are very educated guesses, and the cryptocurrency markets are already volatile, so I always recommend diversification. I would never recommend putting 100% of their portfolio assets into signals trading; instead, I suggest a diversified approach.

I’ve provided more transparency into my personal diversification strategy, which I’ve outlined below. My funds are split into three different portfolios: Long-term holds (55%), medium-term holds (30%), and short-term holds (15%). For some suggestions of what to put into long-term and medium-term holds, take a look at the Portfolio Guidance section in the Cosmic Trading Discord.

Portfolio 1 — Long-term Holds

These are coins that you are going to buy and forget about. You choose these based on factors such as 1) the team behind it, 2) the value proposition they are claiming to offer, 3) the history of execution, 4) the activeness of the community and marketing pushes, and 5) its overall reputation in the market. If you have any questions about where to get started, take a look at our #portfolio-guidance section, which has a list of recommended coins for you to examine along with the risk factors associated in each.

Portfolio 2 — Medium-term Holds

These are coins that you think have more financial potential, meaning you put more weight on the fact that they have bigger potential to skyrocket in value over the long term, rather than on the other 5 values I listed in the long-term holds. These can be hype-train coins, such as what we’ve recently seen with XRB (several of us bought when it was only on small exchanges and completely dumped it when it hit Binance, if you look at coinmarketcap charts you’ll know when it hit Binance because you just can’t miss the spike visualization unless you’re legally blind).

Portfolio 3 — Day Trading

This portfolio is more focused on the AMOUNT you are using, rather than the coins you have. Because these coins are going to change on a daily or weekly basis. With this portfolio, you can take advantage of our #free-signals and premium signals. These are coins that you are going to trade to growth your wealth actively. Catching the right calls can net you a lot of return in a matter of days, or even hours. We are talking about 10% — 2x (you can look at our #trade-results section to see what the returns look like). As you build this portfolio out and earn more $$, redistribute some of your earnings into Portfolio 1 and 2.

Conclusion

Due to the arguably subjective interpretation of trade patterns for price forecasts, TA is arguably more an art than a science, despite a numerically focused methodology. While signals from trading groups rely on research focused on news/events/technical analysis to optimize the reliability of the predictions, it is only a tool that can take advantage of information available at the current time; therefore, always diversify your portfolio to mitigate risk and it is never recommended to go all-in on one signal.


Editor’s Note: Two images from the original post were not included because they did not include attribution or copyright information.