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(Hey everyone, this is the SECOND half of the Finale, you can find the first half here)
The Dollar EndgameTrue monetary collapses are hard to grasp for many in the West who have not experienced extreme inflation. The ever increasing money printing seems strange, alien even. Why must money supply grow exponentially? Why did the Reichsbank continue printing even as hyperinflation took hold in Germany?
What is not understood well are the hidden feedback loops that dwell under the surface of the economy.
The Dragon of Inflation, once awoken, is near impossible to tame.
It all begins with a country walking itself into a situation of severe fiscal mismanagement- this could be the Roman Empire of the early 300s, or the German Empire in 1916, or America in the 1980s- 2020s.
The State, fighting a war, promoting a welfare state, or combating an economic downturn, loads itself with debt burdens too heavy for it to bear.
This might even create temporary illusions of wealth and prosperity. The immediate results are not felt. But the trap is laid.
Over the next few years and even decades, the debt continues to grow. The government programs and spending set up during an emergency are almost impossible to shut down. Politicians are distracted with the issues of the day, and concerns about a borrowing binge take the backseat.
The debt loads begin to reach a critical mass, almost always just as a political upheaval unfolds. Murphy’s Law comes into effect.
Next comes a crisis.
This could be Visigoth tribesmen attacking the border posts in the North, making incursions into Roman lands. Or it could be the Assassination of Archduke Franz Ferdinand in Sarajevo, kicking off a chain of events causing the onset of World War 1.
Or it could be a global pandemic, shutting down 30% of GDP overnight.
Politicians respond as they always had- mass government mobilization, both in the real and financial sense, to address the issue. Promising that their solutions will remedy the problem, a push begins for massive government spending to “solve” economic woes.
They go to fundraise debt to finance the Treasury. But this time is different.
Very few, if any, investors bid. Now they are faced with a difficult question- how to make up for the deficit between the Treasury’s income and its massive projected expenditure. Who’s going to buy the bonds?
With few or no legitimate buyers for their debt, they turn to their only other option- the printing press. Whatever the manner, new money is created and enters the supply.
This time is different. Due to the flood of new liquidity entering the system, widespread inflation occurs. Confounded, the politicians blame everyone and everything BUT the printing as the cause.
Bonds begin to sell off, which causes interest rates to rise. With rates suppressed so low for so long, trillions of dollars of leverage has built up in the system.
No one wants to hold fixed income instruments yielding 1% when inflation is soaring above 8%. It's a guaranteed losing trade. As more and more investors run for the exits in the bond markets, liquidity dries up and volatility spikes.
The MOVE index, a measure of bond market volatility, begins climbing to levels not seen since the 2008 Financial Crisis.
Sovereign bond market liquidity begins to evaporate. Weak links in the system, overleveraged several times on government debt, such as the UK’s pension funds, begin to implode.
The banks and Treasury itself will not survive true deflation- in the US, Yellen is already getting so antsy that she just asked major banks if Treasury should buy back their bonds to “ensure liquidity”!
As yields rise, government borrowing costs spike and their ability to roll their debt becomes extremely impaired. Overleveraged speculators in housing, equity and bond markets begin to liquidate positions and a full blown deleveraging event emerges.
True deflation in a macro environment as indebted as ours would mean rates soaring well above 15-20%, and a collapse in money market funds, equities, bonds, and worst of all, a certain Treasury default as federal tax receipts decline and deficits rise.
A run on the banks would ensue. Without the Fed printing, the major banks, (which have a 0% capital reserve requirement since 3/15/20), would quickly be drained. Insolvency is not the issue here- liquidity is; and without cash reserves a freezing of the interbank credit and repo markets would quickly ensue.
For those who don’t think this is possible, Tim Geitner, NY Fed President during the 2008 Crisis, stated that in the aftermath of Lehman Brothers’ bankruptcy, we were “We were a few days away from the ATMs not working” (start video at 46:07).
As inflation rips higher, the $24T Treasury market, and the $15.5T Corporate bond markets selloff hard. Soon they enter freefall as forced liquidations wipe leverage out of the system. Similar to 2008, credit markets begin to freeze up. Thousands of “zombie corporations”, firms held together only with razor thin margins and huge amounts of near zero yielding debt, begin to default. One study by a Deutsche analyst puts the figure at 25% of companies in the S&P 500.
The Central Banks respond to the crisis as they always have- coming to the rescue with the money printer, like the Bank of England did when they restarted QE, or how the Bank of Japan began “emergency bond buying operations”.
But this time is massive. They have to print more than ever before as the ENTIRE DEBT BASED FINANCIAL SYSTEM UNWINDS.
QE Infinity begins. Trillions of Treasuries, MBS, Corporate bonds, and Bond ETFs are bought up. The only manner in which to prevent the bubble from imploding is by overwhelming the system with freshly printed cash. Everything is no-limit bid.
The tsunami of new money floods into the system and a face ripping rally begins in every major asset class. This is the beginning of the melt-up phase.
The Federal Reserve, within a few months, goes from owning 30% of the Treasury market, to 70% or more. The Bank of Japan is already at 70% ownership of certain JGB issuances, and some bonds haven’t traded for a record number of days in an active market!
The Central Banks EAT the bond market. The “Lender of Last Resort” becomes “The Lender of Only Resort”.
Another step towards hyperinflation. The Dragon crawls out of his lair.
Now the majority or even entirety of the new bond issuances from the Treasury are bought with printed money. Money supply must increase in tandem with federal deficits, fueling further inflation as more new money floods into the system.
The Fed’s liquidity hose is now directly plugged into the veins of the real economy. The heroin of free money now flows in ever increasing amounts towards Main Street.
The same face-ripping rise seen in equities in 2020 and 2021 is now mirrored in the markets for goods and services.
Prices for Food, gas, housing, computers, cars, healthcare, travel, and more explode higher. This sets off several feedback loops- the first of which is the wage-price spiral. As the prices of everything rise, real disposable income falls.
Massive strikes and turnover ensues. Workers refuse to labor for wages that are not keeping up with their expenses. After much consternation, firms are forced to raise wages or see large scale work stoppages.
These higher wages now mean the firm has higher costs, and thus must charge higher prices for goods. This repeats ad infinitum.
The next feedback loop is monetary velocity- the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy.
The faster the dollar turns over, the more items it can bid for- and thus the more prices rise. Money velocity increasing is a key feature of a currency beginning to inflate away. In nations experiencing hyperinflation like Venezuela, where money velocity was purported to be over 7,000 annually- or more than 20 times a DAY.
As prices rise steadily, people begin to increase their inflation expectations, which leads to them going out and preemptively buying before the goods become even more expensive. This leads to hoarding and shortages as select items get bought out quickly, and whatever is left is marked up even more. ANOTHER feedback loop.
Inflation now soars to 25%. Treasury deficits increase further as the government is forced to spend more to hire and retain workers, and government subsidies are demanded by every corner of the populace as a way to alleviate the price pressures.
The government budget increases. Any hope of worker’s pensions or banks buying the new debt is dashed as the interest rates remain well below the rate of inflation, and real wages continue to fall. They thus must borrow more as the entire system unwinds.
The Hyperinflationary Feedback loop kicks in, with exponentially increasing borrowing from the Treasury matched by new money supply as the Printer whirrs away.
The Dragon begins his fiery assault.
Hyperinflationary Feedback Loop
As the dollar devalues, other central banks continue printing furiously. This phenomenon of being trapped in a debt spiral is not unique to the United States- virtually every major economy is drowning under excessive credit loads, as the average G7 debt load is 135% of GDP.
As the central banks print at different speeds, massive dislocations begin to occur in currency markets. Nations who print faster and with greater debt monetization fall faster than others, but all fiats fall together in unison in real terms.
Global trade becomes extremely difficult. Trade invoices, which usually can take several weeks or even months to settle as the item is shipped across the world, go haywire as currencies move 20% or more against each other in short timeframes. Hedging becomes extremely difficult, as vol premiums rise and illiquidity is widespread.
Amidst the chaos, a group of nations comes together to decide to use a new monetary media- this could be the Special Drawing Right (SDR), a neutral global reserve currency created by the IMF.
It could be a new commodity based money, similar to the old US Dollar pegged to Gold.
Or it could be a peer-to-peer decentralized cryptocurrency with a hard supply limit and secure payment channels.
Whatever the case- it doesn't really matter. The dollar will begin to lose dominance as the World Reserve Currency as the new one arises.
As the old system begins to die, ironically the dollar soars higher on foreign exchange- as there is a $20T global short position on the USD, in the form of leveraged loans, sovereign debt, corporate bonds, and interbank repo agreements.
All this dollar debt creates dollar DEMAND, and if the US is not printing fast enough or importing enough to push dollars out to satisfy demand, banks and institutions will rush to the Forex market to dump their local currency in exchange for dollars.
This drives DXY up even higher, and then forces more firms to dump local currency to cover dollar debt as the debt becomes more expensive, in a vicious feedback loop. This is called the Dollar Milkshake Theory, posited by Brent Johnson of Santiago Capital.
The global Eurodollar Market IS leverage- and as all leverage works, it must be fed with new dollars or risk bankrupting those who owe the debt. The fundamental issue is that this time, it is not banks, hedge funds, or even insurance giants- this is entire countries like Argentina, Vietnam, and Indonesia.
The Dollar Milkshake
If the Fed does not print to satisfy the demand needed for this Eurodollar market, the Dollar Milkshake will suck almost all global liquidity and capital into the United States, which is a net importer and has largely lost it’s manufacturing base- meanwhile dozens of developing countries and manufacturing firms will go bankrupt and be liquidated, causing a collapse in global supply chains not seen since the Second World War.
This would force inflation to rip above 50% as supply of goods collapses.
Worse yet, what will the Fed do? ALL their choices now make the situation worse.
The Fed's Triple Dilemma
Many pundits will retort- “Even if we have to print the entire unfunded liability of the US, $160T, that’s 8 times current M2 Money Supply. So we’d see 700% inflation over two years and then it would be over!”
This is a grave misunderstanding of the problem; as the Fed expands money supply and finances Treasury spending, inflation rips higher, forcing the AMOUNT THE TREASURY BORROWS, AND THUS THE AMOUNT THE FED PRINTS in the next fiscal quarter to INCREASE. Thus a 100% increase in money supply can cause a 150% increase in inflation, and on again, and again, ad infinitum.
M2 Money Supply increased 41% since March 5th, 2020 and we saw an 18% realized increase in inflation (not CPI, which is manipulated) and a 58% increase in SPY (at the top). This was with the majority of printed money really going into the financial markets, and only stimulus checks and transfer payments flowing into the real economy.
Now Federal Deficits are increasing, and in the next easing cycle, the Fed will be buying the majority of Treasury bonds.
The next $10T they print, therefore, could cause additional inflation requiring another $15T of printing. This could cause another $25T in money printing; this cycle continues forever, like Weimar Germany discovered.
The $200T or so they need to print can easily multiply into the quadrillions by the time we get there.
The Inflation Dragon consumes all in his path.
Federal Net Outlays are currently around 30% of GDP. Of course, the government has tax receipts that it could use to pay for services, but as prices roar higher, the real value of government tax revenue falls. At the end of the Weimar hyperinflation, tax receipts represented less than 1% of all government spending.
This means that without Treasury spending, literally a third of all economic output would cease.
The holders of dollar debt begin dumping them en masse for assets with real world utility and value- even simple things such as food and gas.
People will be forced to ask themselves- what matters more; the amount of Apple shares they hold or their ability to buy food next month? The option will be clear- and as they sell, massive flows of money will move out of the financial economy and into the real.
This begins the final cascade of money into the marketplace which causes the prices of everything to soar higher. The demand for money grows even larger as prices spike, which causes more Treasury spending, which must be financed by new borrowing, which is printed by the Fed. The final doom loop begins, and money supply explodes exponentially.
Monetary velocity rips higher and eventually pushes inflation into the thousands of percent. Goods begin being re-priced by the day, and then by the hour, as the value of the currency becomes meaningless.
A new money, most likely a cryptocurrency such as Bitcoin, gains widespread adoption- becoming the preferred method and eventually the default payment mechanism. The State continues attempting to force the citizens to use their currency- but by now all trust in the money has broken down. The only thing that works is force, but even the police, military and legal system by now have completely lost confidence.
The Simulacrum breaks down as the masses begin to realize that the entire financial system, and the very currency that underpins it is a lie- an illusion, propped up via complex derivatives, unsustainable debt loads, and easy money financed by the Central Banks.
Similar to Weimar Germany, confidence in the currency finally collapses as the public awakens to a long forgotten truth-
There is no supply cap on fiat currency.
When asked in 1982 what was the one word that could be used to define the Dollar, Fed Chairman Paul Volcker responded with one word-
All fiat money systems, unmoored from the tethers of hard money, are now adrift in a sea of illusion, of make-believe. The only fundamental props to support it are the trust and network effects of the participants.
These are powerful forces, no doubt- and have made it so no fiat currency dies without severe pain inflicted on the masses, most of which are uneducated about the true nature of economics and money.
But the Ships of State have wandered into a maelstrom from which there is no return. Currently, total worldwide debt stands at a gargantuan $300 Trillion, equivalent to 356% of global GDP.
This means that even at low interest rates, interest expense will be higher than GDP- we can never grow our way out of this trap, as many economists hope.
Fiat systems demand ever increasing debt, and ever increasing money printing, until the illusion breaks and the flood of liquidity is finally released into the real economy. Financial and Real economies merge in one final crescendo that dooms the currency to die, as all fiats must.
Day by day, hour by hour, the interest accrues.
The Debt grows larger.
And the Dollar Endgame Approaches.
Nothing on this Post constitutes investment advice, performance data or any recommendation that any security, portfolio of securities, investment product, transaction or investment strategy is suitable for any specific person. From reading my Post I cannot assess anything about your personal circumstances, your finances, or your goals and objectives, all of which are unique to you, so any opinions or information contained on this Post are just that – an opinion or information. Please consult a financial professional if you seek advice.
*If you would like to learn more, check out my recommended reading list here. This is a dummy google account, so feel free to share with friends- none of my personal information is attached. You can also check out a Google docs version of my Endgame Series here.
I cleared this message with the mods;
IF YOU WOULD LIKE to support me, you can do so my checking out the e-book version of the Dollar Endgame on my twitter profile: https://twitter.com/peruvian_bull/status/1597279560839868417
The paperback version is a work in progress. It's coming.
THERE IS NO PRESSURE TO DO SO. THIS IS NOT A MONEY GRAB- the entire series is FREE! The reddit posts start HERE: https://www.reddit.com/Superstonk/comments/o4vzau/hyperinflation_is_coming_the_dollar_endgame_part/
and there is a Google Doc version of the ENTIRE SERIES here: https://docs.google.com/document/d/1552Gu7F2cJV5Bgw93ZGgCONXeenPdjKBbhbUs6shg6s/edit?usp=sharing
Thank you ALL, and POWER TO THE PLAYERS. GME FOREVER
You can follow my Twitter at Peruvian Bull. This is my only account, and I will not ask for financial or personal information. All others are scammers/impersonators.
submitted by random_indian_guy to udemyfreecourses [link] [comments]
I will be covering a lot of topics in this post in no particular order. It is meant as a follow-up/sequel to my previous post where I discussed the importance of understanding the Market Cycle and Trend Analysis. If your primary objective with cryptocurrency is to make money, then continue reading. If you are here for the technology or too busy to actively manage positions, then do your regular DCA and close Reddit.submitted by Cranky_Crypto to CryptoCurrency [link] [comments]
TLDR: Cryptocurrency has become another speculation vehicle for institutions around the world. This is why it is more important than ever to learn how to read a price chart. Yes, most of Technical Analysis (TA) is hindsight 20/20. The real value in studying TA is learning how to identify signals/patterns in real-time. This way you can react in the present. You won't have anywhere near 75% accuracy, but you will most certainly avoid blowing up your account. That's a win. Your financial decisions will be grounded in reason. That is far from gambling and, therefore, also a win.
Why should I listen to you? Some of the recent 'Analysis' posts in this sub are discussing: 1) Hypothetical gains if certain coins return to ATH 2) Why the weekly RSI being at all-time lows means it is a good time to buy 3) Creating an algo to find coins with 20x potential 4) Abnormal volume signaling a bottom is in (when in fact it was just people exploiting no-fee trading on Binance)
No offence to any of those authors, but investing/trading in the markets is not that oversimplified. It involves much more study, analysis, understanding, and experience. That means learning to think for yourself and not following some social media furu/influencer who makes decisions for you. Everybody needs to take responsibility for their own financial outcomes. I learned this the hard way and hope that others avoid making the same mistakes I did in the past.
I come from the school of thought that not all Technical Analysis is created equally. The most important concepts are related to price action, market psychology, and supply/demand. Everything else is open to interpretation and a matter of opinion. Below is a Canadian income tax stock slip for one of my trading accounts. It shows that I cycled nearly 1 million shares with a dollar value of $55m. Am I a whale? Certainly not. Do I put my money where my mouth is? I try my best to.
T5008 Statement of Securities Transactions
Institutions Move Markets Whether you like it or not, Crypto is being actively traded by institutions whose sole purpose is to extract money from the markets. That means firms, hedge funds, prop desks, market makers, and algos from all around the world are hitting the bid and ask 24 hours a day. Why does that matter? Well, because Bitcoin is viewed as just another tradable instrument at the risky end of the spectrum (high beta). Speculators are making money from price movements in both directions. And they are employing the same techniques used to trade stocks, forex, and commodities for the last century. Here are some recent events which demonstrate how institutions are driving moves in both Stocks and Crypto.
$SPY - Technical patterns with fundamental narrative
A. Price breached over Feb double top for the first higher-high of 2022 B. Pullback pattern failure: stops taken out overnight on April 6 gap (trap!) C. May 4/5 FOMC FOMO Fakeout: Market rallied into Close then gapped down next morning. Fooled many to go long with a false sense of security (institutions dumped onto retail) D. Afternoon of June 9: Market sells off before next morning's CPI print. 'Smart money' was getting out after technical support broke (8-day consolidation base) E. Inflation comes in hot at 8.6% and leads to multi-day sell-off, complete with professional gaps
$BTC - Mirroring stocks above via technical/fundamental drivers
Learn How to Ride the Tide with the Whales 'Whales' profit from buying low and selling high (or shorting high and covering lower). It helps to view the market through the same lens of the actors who drive it, no? Most people who believe TA is 'astrology for men' have never traded a day in their life. They liken trading to gambling: random bets with random outcomes. So explain to me how firms on Wall Street have been in business for decades.
If you believe that the billions of dollars that flow in/out of global markets daily are driven by 'hunches', then I have a bridge to sell you. To think that institutions blindly decide when to initiate their buy/sell programs is ridiculous. Wall Street prefers that retail brush off TA as witchcraft in order to fleece Main Street in both directions. That's how they are profitable year after year, in all market environments.
So why does it matter that institutions use TA when deciding to trade/invest in a particular asset? Because that herd mentality is what causes markets to enter uptrends and downtrends. When the big players are in agreement on direction, that leads to fluidity. Clean price action forms patterns. Patterns are predictable. And the market loves consistency. This concept applies to Bitcoin, wheat, stocks, bonds, gold, alt coins, pork bellies--anything that is exchanged on an open market can be charted. Where there's a trend, there's a Market Cycle; the Psychology Cheat Sheet is indeed universal.
Emotional stages of a Market Cycle
Somebody once said that candlesticks and volume are the footprints of money. The bigger the volume, the larger the shoes. If you plan to involve yourself in a market, it only makes sense to understand what the shepherds--who guide the flock--are doing. And I don't mean Ecuador buying 80 Bitcoin the other day. That's less volume than the prior 1-minute candle on Binance!. I mean the institutional money that created the bottom wick at $17.6k a few weeks ago. The same institutions who defended price at $18.6k to put the brakes on the intermediate downtrend.
Fundamentals are the Real Fugazi How many times have you turned on CNBC to hear talking heads opine about which assets to buy vs. sell. They are either late to the party or flat out wrong in their predictions. Putting buy ratings at the top of market cycles, screaming discount during sell-offs, and finally downgrading at the bottom. It's comical but should be criminal.
And you wonder why retail traders are notorious for buying high and selling low. Here's an example of how institutions sold Tesla's last earnings despite great numbers. Following the failed breakout in mid-March, that left a lot of trapped longs above $1100. Many were underwater for a couple of weeks hoping for a bounce. When price returned to their break-even, they sold. It's been downtrending ever since.
$TSLA April 21, 2022 Earnings - 'Good' fundamentals used to trap Bulls into becoming exit liquidity
Any news, upgrade, downgrade, or macro event that is worth acting upon by institutions will reflect themselves in the charts. Bullish news? Show me the big green candlestick with above average volume. Bearish news? Then the market better be selling. If the piece of fundamental information didn't drive market participants to buy/sell, then it is utterly meaningless. At the end of the day, ticks on the tape are what matters. This is why I tune out forecasts, models, predictions, ratings, and news in general. Focus on the chart and cut out the middleman. The candlesticks will tell you how the market is reacting, not some guest analyst on a financial podcast.
Just for kicks, here's another one where Bill Ackman (CEO of hedge fund Pershing Square) thought that he could single-handedly halt the downtrend on $NFLX. After dropping 50% from ATH back in January, $350 seemed like a good value, right? It's down another 50% since then. This from a company that was supposed to be a Blue Chip!
Ackman bets big on $NFLX during a downtrend and loses 36% in just 3 months. Took many retail traders down on the sinking ship.
Price Action is King All technical indicators use past price and volume as their inputs. There are countless formulas derived from these two objective measures. Thus, there exists an infinite number of combinations and permutations of indicators, each with a dizzying amount of settings. This is why TA can be subjective and often lagging.
Just because some oscillator has a value of x, or an index is currently at y, it means nothing unless the market acts upon it. A sloping trendline can be drawn numerous ways; Bollinger bands and MACD have many settings. Which moving averages to use? The Ichimoku Cloud covers the chart to the point where its unreadable. Spaghetti lines. Halving dates. Puell Multiples, S2F models. Dominance percentages, Pi-Cycle Bottom Indicators. Do you see where I'm going with this? These indicators are a function of price and volume, not vice versa. No wonder Technical Analysis has gotten such a bad wrap. There is no such thing as a Holy Grail despite how many people claim to have one for sale.
Let's discuss the objective aspects of a chart. Price is registered when real buying/selling occurred. Fact. Volume is how many units were exchanged. Fact. When displayed on a chart in the form of candlesticks, they paint the picture of supply and demand. These two forces are what drives a market. Fact. Again, it makes sense to cut out the middleman and focus on price action: what the market has done and is doing.
Trend Analysis Refresher and Recap So institutions drive the market and their actions can be seen by looking at prior and current candlesticks. Still with me? Good. Go to my last post for a crash course on pivots and trend structure. Everything beyond here won't make sense without a basic understanding of the Market Cycle.
At the end of each impulse/retracement leg there lies an area where price reversed. That inflection point is called a pivot. It takes a lot of buying/selling to halt and reverse price like that. This means institutional money. What do you think happens when price comes back to that area again? Many things are possible, including: 1. People who recently bought/sold are back at break-even 2. Traders get a second chance to add at the same price 3. Bagholders can minimize their loss after being underwater on a wrong bet 4. Price is deemed to be a good value after retracing a certain percentage 5. Anyone who exited too early and missed out are able to FOMO back in 6. Etc. etc.
There are entire book chapters that cover the emotions and psychology behind pivots and trends. I won't get into it here, but it explains the why: the reason that active trends tend to continue and why support/resistance areas are often respected. It's like the market has a collective memory when a prior price is revisited. Professional traders put their faith into these concepts. The more who act, the more likely these patterns come to fruition.
Uptrend: Forces of Demand are greater than forces of Supply
Downtrend: Forces of Supply are greater than forces of Demand
Sideways: At the uppelower bounds of a range, forces of Supply equal forces of Demand and causes price to retrace
Ever notice how the absolute top/bottom is only realized in hindsight? It is an inflection point which ended up being the apex of a trend. This is why it is nearly impossible to buy at the very lows and sell at the very highs. The trend is your friend: please don't fight it.
In the last post I stated that retail has no problem buying during a Stage 2 uptrend. The issue is that they fail to sell during a Stage 4 downtrend. Believe me, the HODL mentality predates Crypto by centuries: Bitcoin just popularized it into a meme. Here are some graphics I dug up which demonstrate this phenomenon in the context of a Market Cycle.
The Market Cycle - Playing the Stages incorrectly due to lack of understanding
Uptrends and downtrends exist because institutions are buying during Stage 2 and selling during Stage 4 (correct areas). The active trend continues until they stop doing this. Remember: institutions move markets. Herd mentality. Our little buy/sell orders have no impact on the price.
Pattern Based Trading By now you probably realized that I am a believer of price action and trends. This simplifies my actions down to 3 general strategies: 1. During a Stage 2: buy the Pullbacks and Breakouts 2. During a Stage 4: sell the Rallies and Breakdowns 3. During Stage 1/3: wait patiently for the range to be broken and get onboard the ensuing trend
Do these patterns work 100% of the time? No! When they do work is the potential profit greater than the amount risked? Yes! These two sentences are the key to successful trading. Let's leave that topic for another day.
Each pattern/setup has many requirements which improve their reliability. For educational purposes, here are a few examples which are relevant. By studying dead charts, you know what to look for and can better identify the price action in real-time.
The Breakout Failure - Typically signals the end of a Stage 3 Distribution Phase and Beginning of Stage 4 Downtrend. Also known as the Wyckoff Upthrust or Wyckoff Spring. What: Price breaches a prior high and then fails Why: Sucks in longs and creates trapped traders. This fuels selling momentum on the way down; panic leading to fear, leading to more panic and fear. Herd mentality.
Textbook Breakout Failure
Bitcoin False Breakout - Week of November 8, 2021. Origin of current Stage 4 downtrend
S&P 500 False Breakout - January 4th, 2022. Origin of current Stage 4 downtrend
The Consolidation Breakout/Breakdown - Typically a continuation pattern in an active Stage 2 or Stage 4 What: Price consolidates sideways after a directional move. Once flooceiling of the range is breached, trend resumes Why: Thin volume as institutions are not interested in dead action. Once stops are taken out at the bottom/top of base, then money pours in/out to ignite the move
Textbook Base Breakout
Bitcoin Base Breakout 5-min Chart - July 7, 2022
Bitcoin Base Breakdown 60-min Chart - June 17, 2022
When Will Crypto Bottom If you made it this far then I still have your attention. You are probably wondering when I think $BTC will bottom. The answer to that is: I don't know and won't pretend to know. My job is to react and not predict. To wait for confirmation by analyzing new information that the market provides after each candlestick dies and a new one is born.
That being said, price action will give clues as to when a bottom has been put in. I believe that it will occur either one of two ways:
#1. Long drawn out Stage 1 Accumulation phase like we saw in 2019
Textbook Transitional A - Stage 1 into Stage 2 (numbers show potential entry points)
2019 Bottom - With potential entries at 1, 2, 3
#2. Sudden Climactic Reversal like we saw in March 2020 (alongside Stocks)
Vertical Doomsday drop which culminates in capitulation volume. Makes a higher low (HL) and eventually leads to a new uptrend (HH and HL). Stage 4 directly into a Stage 2; enter on any pullback.
Closing Thoughts Thank you for reading this far. I hope you enjoyed the post. Crypto is a hobby for me; something to follow when markets are closed on weekends. I have nothing to sell--just trying to share some info/experience with others who are risking their capital to earn a return. The rest is up to you.
Everyone looks like a genius during a Bull Market. Only when the tide goes out do you discover who's been swimming naked. -Warren Buffet
Additional Reading Many have been asking for TA book recommendations. Here are a few that cover all the concepts from the Classical theories (no promo): -Technical Analysis of the Financial Markets, John J. Murphy -Trading Tools and Tactics: Reading the Mind of the Market, Greg Capra -The Art and Science of Technical Analysis, Adam Grimes
Disclaimer: Not financial advice. Do your own due diligence. Only invest with money you can afford to lose. Sold majority $ETH 3863 and $ADA $2.68 at end of 2021 (Stage 3 top). $BTC $39K final exit April 24, 2022 before base breakdown. Crypto account is 100% cash since May.
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