BTC – An exercise in recognizing trend reversals in Bitcoin
Updated
Hi guys, welcome back for the big crypto show – today’s edition.
In this post, I want to focus a bit more on how you can be attentive to potential trend reversals, via a method I’ve been using in some of my previous posts: the Heikin Ashi candle sticks, and more specifically looking at the Doji / Spinning top indicators.
FYI: A doji candle is a commonly found pattern in a candle stick chart, characterised by being small in length - meaning a small trading range - and with an open - and close price that are virtually equal.
FYI2: A spinning top is another Japanese candle stick pattern with a short body found in the middle of two long wicks.
FYI3: Heikin Ashi candles can be found in Trading view under the candle stick section and by clicking the 4rd option; these work somewhat differently than regular candle sticks.
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A previous post that is another good example of this is the one on ADX or the one on Cardano.
First off, always best to start by drawing your overall trend lines, as well as your Fibonacci retracement levels.
This way, you will also likely notice that these doji candles have a tendency to occur near resistance and support areas. This is quite logical, as we typically find a support somewhere so that we can lift off again from that point. However, even though likely straightforward now I mentioned it, it is a reflection that is not made quite often.
For example, have a look at “1” on November 13th, near the red support line, we see a red spinning top popping up, signalling a POTENTIAL trend reversal. Two candle sticks later, the trend reversal is confirmed by a break-out of a previous resistance level (cf. Candle stick “C” breaking through the light blue horizontal resistance line).
Now, the somewhat tricky thing here is that these dojis and spinning tops can generally mean two things: i) a pending trend reversal; ii) pure indecisiveness on where price should go next.
To illustrate this, I highlighted some dojis that tell us there is a trend reversal (and remember that confirming a reversal via a break-out is crucial in that regard), and I highlighted some that merely show temporary indecisiveness before price continues in a given direction.
Numbers 2 & 4 are clear examples of trend reversal indicators near a resistance (in case of number 2) or support (in case of number 4, where the preceding candle actually touched the longer term support line).
Number 3 is a good example of sheer indecisiveness & nothing more.
Now the big question is of course: what’s happening in number 5!?!?!?! We have just broken the red line as resistance & are likely going to have it act as a support in the short term. Moreover, the spinning top actually formed right on the Fibonacci 50% retracement level, which also acts as support.
If you paid close attention to what I said here above, you know that dojis either will mean a trend reversal, and then we will have to wait for a break-out confirmation (and if that happens, best to get out in time), otherwise, it might simply be short term indecisiveness before continuing the move. Given the recent strong upward move of Bitcoin, the latter is definitely not an option to be left aside.
Finally, if we look at RSI: the upward momentum got curved down a little bit. MACD on the contrary is still moving upward. As such, we are getting mixed signals, on the daily chart at least ;)
Note that this post is not intended as a full price analysis of Bitcoin. It mostly aims to provide you an additional tool to apply in the future! Moreover, it is by no means intended as formal investment advice.
In this post, I want to focus a bit more on how you can be attentive to potential trend reversals, via a method I’ve been using in some of my previous posts: the Heikin Ashi candle sticks, and more specifically looking at the Doji / Spinning top indicators.
FYI: A doji candle is a commonly found pattern in a candle stick chart, characterised by being small in length - meaning a small trading range - and with an open - and close price that are virtually equal.
FYI2: A spinning top is another Japanese candle stick pattern with a short body found in the middle of two long wicks.
FYI3: Heikin Ashi candles can be found in Trading view under the candle stick section and by clicking the 4rd option; these work somewhat differently than regular candle sticks.
--------
A previous post that is another good example of this is the one on ADX or the one on Cardano.
First off, always best to start by drawing your overall trend lines, as well as your Fibonacci retracement levels.
This way, you will also likely notice that these doji candles have a tendency to occur near resistance and support areas. This is quite logical, as we typically find a support somewhere so that we can lift off again from that point. However, even though likely straightforward now I mentioned it, it is a reflection that is not made quite often.
For example, have a look at “1” on November 13th, near the red support line, we see a red spinning top popping up, signalling a POTENTIAL trend reversal. Two candle sticks later, the trend reversal is confirmed by a break-out of a previous resistance level (cf. Candle stick “C” breaking through the light blue horizontal resistance line).
Now, the somewhat tricky thing here is that these dojis and spinning tops can generally mean two things: i) a pending trend reversal; ii) pure indecisiveness on where price should go next.
To illustrate this, I highlighted some dojis that tell us there is a trend reversal (and remember that confirming a reversal via a break-out is crucial in that regard), and I highlighted some that merely show temporary indecisiveness before price continues in a given direction.
Numbers 2 & 4 are clear examples of trend reversal indicators near a resistance (in case of number 2) or support (in case of number 4, where the preceding candle actually touched the longer term support line).
Number 3 is a good example of sheer indecisiveness & nothing more.
Now the big question is of course: what’s happening in number 5!?!?!?! We have just broken the red line as resistance & are likely going to have it act as a support in the short term. Moreover, the spinning top actually formed right on the Fibonacci 50% retracement level, which also acts as support.
If you paid close attention to what I said here above, you know that dojis either will mean a trend reversal, and then we will have to wait for a break-out confirmation (and if that happens, best to get out in time), otherwise, it might simply be short term indecisiveness before continuing the move. Given the recent strong upward move of Bitcoin, the latter is definitely not an option to be left aside.
Finally, if we look at RSI: the upward momentum got curved down a little bit. MACD on the contrary is still moving upward. As such, we are getting mixed signals, on the daily chart at least ;)
Note that this post is not intended as a full price analysis of Bitcoin. It mostly aims to provide you an additional tool to apply in the future! Moreover, it is by no means intended as formal investment advice.
Note
So... what does the first new candle tell us? ;-)Note
Guys, just want to point out two things:1) you could have called the bottom again after the analysis above, simply by looking at the forming of the next doji (in "3").
2) You can see how the dojis told us there was a trend reversal pending in "1" and in "2"
3) we are only seeing nice green candles for the moment, so no doji yet ;-) that is good news, but stay attentive!
(note again that we are talking Heikin Ashi candle sticks, not regular candle sticks)!
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