Back on the 22nd January, the ICO craze was still going on, Bitconnect crashed by 92% just a few days ago and the Bitcoin price stood at about $10,000. Back then many people still had hopes for a quick recovery of Bitcoin and some, in fact, still hoped for it until a few months ago. On that day, the professional trader Peter Brandt published a short analysis that already predicted that the Bitcoin price would retrace back to under $4000. An on-point prediction. But blasphemous to many at that point. So how did he do it? Brandt just took a look at one single indicator. The Parabolic advance of Bitcoin.
What does the parabolic advance indicate?
To draw the parabolic advance of a chart you have to draw lines that connect the lows of an asset that undergoes a bull run as Peter Brandt did (Tweet above). You will notice that the line will get steeper and steeper. While it is exciting to ride such a bull run you should become increasingly cautious. Because the correction will be severe and rapid.
It is hard to call the right time to take profits. The parabola will be tested several times. However, the price catches on often. Therefore, it is hard to predict the break of the parabolic advance correctly. However, if it breaks it breaks fastly and severely. This is why it is hard to trade in these situations. You can miss out on big profits by calling the break too early. However, by calling it too late you will see your profits diminished equally in no time.
What Lies Behind the Parabolic Advance?
The parabolic advance indicates a hype. The bull run of 2017 triggered the media to report more and more on Bitcoin and in an increasingly positive tone. This creates the illusion that the asset makes you rich by just investing and holding it. Trigger words like ‘bull run’, ‘getting rich, ‘insane price increases’ etc. caused more and more people to buy into the hype. As more people got onto the train this effect is even more reinforced. In fact, the media attention to Bitcoin reached its second highest peak as the Bitcoin price reached its own peak at $19,783. Only when Bitcoin crashed down to underneath $10,000 was the media attention higher.
Between Q3 and Q4 last year even people who had barely any idea what Bitcoin is bought into it. At some point, this effect had to seize, of course. As people wanted to take profits.
Even Professional Traders have difficulties
As you can tell from Peter Brandt’s tweet. He presumably did not call the break of the parabola right before it happened. However, as we can tell from a previous post he did consider it back in December.
As any professional trader, Peter Brandt considered both possibilities. The continuation of the bull run as well as the correction. To predict our current situation, Peter Brandt simply applied a rule that he gained from experiencing previous situations: The break of the parabola leads to a >80% retracement of the price.
We can take away two lessons from this:
- We should base our trading behavior on rules. Instead of panicking whenever the price retraces, take a partial profit of your investment when your investment reaches previously set targets.
- Consider all possible events and have a plan for all of them. Assign probabilities to these events based on your analysis.