Can Technical Analysis Be Used to Analyze Cryptocurrencies? (Bitcoin, Litecoin, Peercoin, et. al)

Novelty bitcoin image

Pile of novelty Bitcoins

 

With the swift and steady rise of cryptocurrencies, most notably Bitcoin, it is little wonder that the media and professional investors are taking note. The media has aggressively increased its coverage on Bitcoin during and since November 2013 when the price of Bitcoin rocketed nearly five-fold from $200 to over $1,000. Since November, the price has fluctuated between over $1,100 and roughly $500. Bitcoin can currently be purchased for approximately $800 at the time of this writing, though I always laugh when I read prices quoted at publishing date months, weeks, and even days later (Since they are always so far off the mark from the current trading price). By the time you are reading this in the future, it is highly likely that Bitcoin will be worth well over $800 or far less than $800, which brings me to my next point and question:

 

Can Technical Analysis be applied to analyzing crytocurrencies for decision-making criteria, broad market assessment, and forecasting?

 

To answer this question, we will need to first return to the basic fundamentals of Technical Analysis (pardon the pun). It may not be obvious that Technical Analysis can only be applied to instruments that meet certain requirements, and it may also not be obvious that cryptocurrencies may fall outside of those requirements. In order to analyze crytocurrencies, we will first need to define the basic market requirements for applying Technical Analysis as defined by Dahlquist and Kirkpatrick in their work Technical Analysis, the Complete Resource for Financial Market Technicians.

 

The four types of markets are given as follows:

 

Direct Search – this market requires a buyer and a seller to “seek” each other out. Examples of this type of market include the “Classifieds” section of a newspaper, or the popular online direct search website Craigslist.org.

 

It is possible for digital currency buyers and sellers to employ a “search and seek” method to their transactions whereby they collectively or individually introduce themselves and attempt to negotiate a transaction with other willing participants. This is often done through email or by messages on various cryptocurrency forums, and trust is often based on the reputation (quantified by certain sites or otherwise) of each party.

 

Brokered Market – this type of market is facilitated by brokers who bring buyers and sellers together. The largest example of a brokered market is the real estate market. These brokers usually get a commission for their services.

 

These types of markets exist for cryptocurrencies, most notably the site www.localbitcoins.com, based out of Finland, offers a direct search market for those that wish to buy and sell digital currency both online and in person. The site can match your location by your IP address and shows you all local users who are either buying or selling Bitcoins for cash. For online transactions, currency is stored in an Escrow account until payment has settled, and for this reason the vendor is considered a brokered market bringing two or more parties together to facilitate a transaction.

 

Dealer Market - the dealer market is characterized by dealers who offer bid prices to potential sellers and ask prices to potential buyers of their wares. The dealer market differs from a brokered market because the dealer is actively buying goods himself/herself. Examples of a dealer market include pawn shops and the Nasdaq.

 

Dealer markets also exist for cryptocurrencies, most notably exchanges such as BTC-e (https://btc-e.com/) and Bitstamp (https://www.bitstamp.net/). In these exchanges, the vendor assumes the liability for a certain number of coins and offers to buy and sell them out of their inventory at a bid/ask spread based on users’ orders and market flow.

 

Auction Market – the most freely traded of all markets, the auction market is characterized by a central meeting place in which buyers and sellers simultaneously interact with each other. The meeting place can be physical or over the Internet. Not surprisingly, the NYSE offers both. It is the ultimate auction market. Ebay is another example of an online-only auction market.

 

The Auction Market would likely be a first for Bitcoin and other Cryptocurrencies, having no known prior auctions for the currency. However, with the Fed ready to sell it’s haul of seized Bitcoins from former underground wares site Silk Road, we could see a first-ever Bitcoin auction in the very near future.

 

Market Requirements

 

Markets must meet certain characteristic requirements before technical analysis can be applied. In order to apply technical analysis one needs previously recorded price data. Data on volume, the number of transactions that took place on a given day or at a given price, is helpful but not required. Below are the characteristics that are required to apply technical analysis, according to Dahlquist and Kirkpatrick:[1]

 

Easy access – low barriers to entry and exit that allow people to come and go freely

 

Currently, all one needs to buy a Bitcoin is a bank account with ample funds and access to the internet to access digital coinwallets such as Coinbase.

 

Fungibility –any “good” or investment must have identical “counterparts” that are always equal in price and what they represent. One share of Wal-Mart is identical to the millions of other shares of Wal-Mart, for example.

 

One Bitcoin is always one Bitcoin, and can be sub-divided by up to 8 decimal spaces, making the currency easily added, subtracted, and standardized.

 

Sufficient liquidity – this allows transactions to take place freely and continuously so that buying and selling can take place anytime the market is open

 

While liquidity was not always present in cryptocurrency exchanges, especially some of the smaller obscure exchanges, there is sufficient liquidity on the largest global exchanges and transactions occur in real-time often every few seconds with ample volume.

 

Continuous trading – in the sense that the market is open consistently, day after day, as opposed to intermittently or sporadically – for example auction house auctions. (auction items typically lack fungibility as well)

 

The Cryptocurrency marketplace never closes, ever. It is open for business 24/7/365 without failure. In the recent past certain exchanges (most notably Mt.Gox) have been hacked and their servers shut-down temporarily, however in these cases trading has fluidly and easily moved to any of the other numerous exchanges and business vendors that exist.

 

Conclusion

 

Based on the above fundamentals of Technical Analysis and the corresponding cryptocurrency responses to the various requirements, Market Tech Lab concludes that digital currencies such as Bitcoin are suitable to be analyzed by Technical Analysis using normal and traditional methods of study. Some smaller cryptocurrencies may not have sufficient history or liquidity at this time, however may meet these requirements in the future. One thing is clear – Bitcoin and Technical Analysis are a match made in Heaven.

 

Bitcoins and Bitcoin Logo


[1] Dahlquist, Kirkpatrick p.56

Avoiding Common Pitfalls During Your CMT Exams (Levels I, II & III)

We hope all the Chartered Market  Technicians have been preparing diligently prior to the upcoming CMT exams. As a reminder for those taking their exams and those looking on from the sidelines, the upcoming CMT exam dates are October 17th, 18th, and 19th for the Level I & II exams, and October 18th for the Level III exam. There are several important things you should remember prior to your exams, all of which are spelled out in our ‘How to Prepare’ posting with tips that will help you ace your CMT exams. You may also want to visit the posting: 10 Best Ways to Maximize Time and Effort Before the CMT Exams.

 

 

Avoid Pitfalls
           ~ Avoid pitfalls in your exams. ~Avoid pitfalls in the markets.

 

Remember to avoid the common pitfalls that plague most CMT candidates, such as the following:

 

Level 1

 

  • Insufficiently familiarizing oneself with suggested readings
  • Bypassing the MTA Code of Ethics in favor of assigned textbooks

 

Level 2

 

  • Failing to meet the required whole understanding of Technical Analysis
  • Not understanding the construction of multiple indicators
  • Not understanding the interpretation of the indicators
  • Confusing similar terms, most prominently RSI with Relative Strength
  • Failing to review or recall material covered on the Level 1 CMT exam

 

Level 3

 

  • Inability to generate lucid essay responses that support a technical opinion
  • Failing to integrate multiple technical tools into essay responses
  • Failing to replicate the high standards and style of research reports generated by accredited CMT’s
  • Failing to review or recall material covered on the Level 1 and 2 CMT exams

 

Level 3 Detailed Pitfalls

 

For the Level 3 Exam, candidates often do not clearly state an opinion when an opinion is required by the question. In turn, candidates lose points as there is less or no opinion to defend. It should be noted that there is more than one potential interpretation and candidates shall be granted points for a multitude of opinions over multiple questions.

 

Additionally, Level 3 candidates may chose to ignore all aspects of the presented chart and/or indicators as they fail to demonstrate an ability to apply more than one aspect of Technical Analysis. A standard example occurs when candidates frequently ignore other factors presented when explaining Elliott Wave Counts only, leaving out oscillators, support and resistance, and moving averages.

 

The essay responses for Level 3 Candidates should be consistently at the top level of professionalism as expected of a CMT charter holder. It must be determined by the Accreditation Committee of the MTA that a candidate has the ability to professionally create technical opinions in such a way as to elevate the status of the whole CMT program general.

 

Level 3 candidates should also be prepared to analyze and discuss ALL types of charts covered on the Level 3 reading and all prior reading covered in the Level 1 and 2 exams. Candidates who are not familiar with all of the chart types will have a more difficult time gaining points in their responses.

 

Summary

 

If you will be taking your CMT exam soon, please carefully review the above information. You may also want to review the posts we pointed to at the beginning of our blog posting today, if you are still unsure on the best ways to prepare leading into your exams. Lastly, no matter what level you are taking, we suggest you give yourself at least 5 hours a day to review every day the week prior to your exam. Eat well and stick to a regular sleeping schedule where possible. Finally, take a deep breath and dive in.

 

Registration Extended

The MTA has announced today that registration for the Level I & II exams Exams has been extended for an additional two weeks. For candidates who were either thinking about enrolling or who otherwise missed the registration, the new registration deadline is October 8th, 2013. To register, please visit the CMT Program page on the MTA’s website here.

 

The CMT Exams occur once every six months, typically in late October/early November and late April/early May. Please contact us if you have any questions about the exams, registration, or for assistance as you prepare.

 

Registration Extended

Registration Extended

 

Buckling Down for Exam Day

With a little over one month left to go before exam day, now is an excellent time to take stock. Spring is beginning, many have recently or will soon be celebrating holidays and religious ceremonies, and winter is quickly fading behind us (I guess that would be summer for those of you in the southern hemisphere). Now is the time to get serious!

 

Books on Technical Analysis suggested by the MTA

 

Hopefully you have been able to make some time every week to devote to studying Technical Analysis and covering the assigned reading proposed by the Market Technicians Association. Knowing what you have covered, and what you still have to cover, is an essential part of the preparation process. The number of books and amount of total pages can be daunting. Hopefully you have been using our Reading Plan to guide your studies by topic (rather than book-to-book) – though we know some of you still prefer or find it more convenient to read one book at a time.

 

An excellent way to measure your progress and simultaneously plan for the future is to calculate the number of pages you have read versus the number you have left to read. This way you can alter your reading schedule to fit into your new time frame. For example, if you are behind by 250 pages, and you have 25 days until your review date begins, you know you will need to read on average 10 additional pages each day in order to meet your review date deadline.

 

It is important to leave time to review before the actual exam. You definitely do not want to be finishing up the last page of your assigned reading the night before the exam. A good amount of time to review is two to three weeks, however, if you spend a lot of time reviewing in the final week before your exam you can achieve the same effect in the short-term. For longer-term retention, a firmer grasp and deeper knowledge of the concepts covered, a less hurried and more relaxed review session is highly recommended by Market Tech Lab. However, if you do not have the time for this, all is not lost. You will have an additional opportunity to brush up on concepts covered in the Level 1 exam when you are preparing for your Level 2 exam.

 

Stay curious. Stay technically inclined. Remember, Technical Analysis is a study of probabilities and market history, and many have been in your shoes before you. Keep reading!

 

Chartered Market Technician Level 1 Study Guide – Coming Soon!

Market Tech Lab is pleased to announced that a Level 1 Study Guide for the Chartered Market Technician Exam will be available in time for the Spring 2013 CMT Exams. The level 1 exam will take place on May 5th, 2013. If you would like to express interest in pre-ordering your copy at a discount, or requesting to be notified when our guide becomes available, please email “info” at markettechlab.com or use our contact page to get in touch with us. We are excited to hear from you and welcome suggestions as we complete the guide to suit your needs. We hope it will be a “technical home-run” and vastly improve candidates’ comprehension while reducing overall study time.

 

New CMT Level 1 Study Guide -- Coming soon!

New CMT Level 1 Study Guide — Coming soon!

 

In the meantime, be sure to check out our free resources and Level 1 Practice Exams that are available immediately. As always, thank you for visiting and supporting Market Tech Lab for Market Technicians. Tech on!

Congratulations to the Market Technicians Association

Market Tech Lab would like to congratulate the Market Technicians Association on 40 brilliant years of Technical Analysis! For 40 years, the MTA has provided Technical Analysis promotion, support, and advancement for its members. The MTA will be holding a 40th Anniversary Gala in NYC on April 4-5, 2013 at the Broad Street Ballroom. The event is a black tie optional affair, and will feature cocktails, dinner, and notable technicians present.

 

For a brief history of the MTA, please check out this great link: History of the Market Technicians Association.

 

For an announcement from one of the founding fathers of the MTA, please click here: http://news.mta.org/2013/technical-analysis/mta-40th-anniversary-thoughts-from-a-founding-father-of-the-mta/

 

Mark your calendars – the time to register is now! For registration ($200 to $250), please click here: http://www.mta.org/eweb/dynamicpage.aspx?webcode=shoppingcart-events.

 

We hope to see you there!

 

-The Market Tech Lab Team

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