We continue to publish notes that are definitely useful for beginners as well as being of practical interest to experienced traders. Today we will look at an example where a very powerful signal, according to technical analysis, turns out to be false.
3 days ago we saw a “golden cross” pattern on the bitcoin chart. It represents the intersection of the short-term and long-term moving averages. Typically, the 50-day MA is used as the short-term average and the 200-day MA is used as the long-term average. If the short-term MA crosses the long-term MA from below to above, it is a buy signal. And if it crosses downwards from above, it is a sell signal.
Why do we call this pattern a very powerful one? The fact is that it appears on the chart very rarely. Sometimes not more than once a year. Naturally, a lot of attention is focused on this pattern, including the large funds. For many of them such a MA crossing may be a signal to enter or leave a long-term position.
But this time something has gone wrong. If someone went short at the close of the day, when the “golden cross” was formed, he sold BTC at the lowest price. The next night, BTC reversed and began to rise quickly.
Why did this happen?
Yes, we are describing what happened “retrospectively”. But even 3 days ago it could have been assumed that the price would bounce back rather than continue to fall.
– As always, when we talk about the analysis, it is worth seeing the whole picture. And it shows that the price was close to the strongest support, which it has already jumped-up 3 times.
– Moreover, this support line is at the level of last year’s closing. That means that all the assets rose in price this year, and bitcoin returned to the level from which it started the year. And this in a situation where inflation is increasingly worrying investors. And bitcoin is virtually the only asset that cannot be mined, produced or printed additionally
– And most importantly. Many traders who sold BTC on the “golden cross” signal did not think of the logical fallacy. Bitcoin trades 7 days a week. This means that the “golden cross” pattern for the 7-day chart will be different from the 5-day chart. Therefore, we can not speak about the strength of the pattern in this case.
Interesting? Yes! That is why we deal with trading, since it always gives us an opportunity to use our mind to its full capacity. And to find those logical connections.
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