On Algo Bots and Why We're Likely to see another Dip below $6kDuring this last draw down in Bitcoin markets from $10k to $5.8k I learned a lot about algorithmic trading bots ("algo bots"). These bots often are used by "whales" given that a profitable algo bot will allow you to make a lot of money and accumulate a lot of cryptocurrency that can be used to influence price action. This puts the ordinary trader at a huge disadvantage UNLESS they understand how these bots work and what market dynamics favor the bots and which ones do not.
The primary market dynamic that favors trading bots is low volume. In low volume condiions these bots effectively can dictate price by "entraining" buyers or sellers and other bots. For example, the idea of a "sell wall" or "buy wall", that is, a large cluster of orders that one can see in the order book or on the order book graph, will influence other buyers and sellers as you will either be "entrained" or you will "get out of the way." Both of these scenarios present problems as the optimal outcome may not be clear if you're under pressure to make a decision that hasn't been planned out according to an overall understanding of market conditions. Not understanding fundamental market dynamics is a key reason technical analysis fails. Charts won't actually tell you exactly what is happening in a market with data. It is usually suggesting a direction and often only telling you something important after it's too late (see for example how bad MACD is at prediction).
But I'll talk more about the mechanism of how algo bots work later. If you want to read my streamed commentary you can see a recent piece that I published about a greater than 50% probability of another decline where I slowly built my (admittedly still weak) understanding of how these bots influence price action. And if you're skeptical about what I'm describing then I'm open to constructive feedback or corrections. But I'm going to cut to the chase while skipping over some of the technical aspects.
In the current market we're looking at what appears to be a strong recovery from a 31% decline from $8400 to $5800 (on GDAX) and a retrace of 58.3% of that price movement.
Given the first wave of price movement off of the ATH took 26 days to hit a reversal and the second wave took 15 days, the current reversal will likely be very soon, as we are about 5 days past the last reversal (Feb. 2) today, near the end of the day Feb. 6/start of Feb. 7.
In order to signal a reversal this bullish move needs to hit $8k (low of the previous wave on GDAX prior to reversal) and ideally it goes above $8.4k which was the high point of the current draw down to fully signal a potential (but improbable) move higher.
The fundamental reason for momentum (i.e. a pump) is that buyers as an aggregate can see when there will be sufficient momentum for a price movement and they are "entrained" so as not to be left behind. This is basic pack/herd behavior as I would surmise is understood by evolutionary game theory ( not going to get into that ). Those who choose to stick with the herd have higher probability of survival/success. Venturing away from the herd makes you more likely to become a victim of your "individuality".
Clearly, the market is positioning for selling more than buying. This kind of signaling plays a role in warning buyers to enter the market with caution (at least for longer duration trades). For example, if someone is quite eager to sell you a car at a great price, you might think, what's wrong with this car? And in this instance, we should think, what's wrong with this market? Clearly, there is fear. And then there is also now a conditioned expectation that another huge sell off could happen at anytime. This makes for enough weak hands for more volatility.
The ONLY way this could be reversed is if some HUGE buyers enter the market. So let's say a bunch of millionaires all collude to go and buy Bitcoin so the price goes up.
