For many, trading cryptocurrency can be a challenge, but the process is made easier if one relies on a combination of technical analysis tools and oscillators to provide insight on which path digital assets like Bitcoin (BTC) might take.
Typically, one sees traders employ the relative strength index (RSI), moving average divergence convergence (MACD), Stochastic RSI (Stoch) and a mixture of exponential moving averages (EMAs), Bollinger Bands, volume measurements and so on. This is good and well, and utilizing these tools often provides great results for traders.
The difficulty of relying on these tools increases when Bitcoin’s price action becomes range bound and consolidates for lengthy amounts of time like it has done for the past two weeks. This leads intraday traders to search for other tools that provide insight into Bitcoin’s market structure.
To get some clarity on the less studied metrics retail investors might be unaware of, CryptoX spoke with Christopher Inks of TexasWest Capital — market research and educational firm dedicated to providing accurate market data and digital asset trading courses for novice traders.
CryptoX: Pleasure to meet you Christopher and thanks for taking the time to have a chat. To kick things off tell us what brought you to crypto?
Christopher Inks: The whole reason I do what I do with TexasWest Capital is that I noticed the really bad analysis, pump-n-dumps, and other nonsense being published across various crypto media, major media and on Twitter.
This was especially bad during at the end of 2016 leading into 2017 and still continues to be an issue today. So being able to share good information with new traders is an important thing to me.
CT: Recently there’s been a lot of talk about “funding” amongst pro-traders and some look to the levels of funding on perpetual contracts as a method for determining whether Bitcoin’s spot price will go bearish or bullish on the larger exchanges. To what degree does the level of funding from perpetual contracts impact Bitcoin price action?
CI: I would argue that it has more to do with funding rate extremes than anything else. And even then, it is an indicator of which way the spot market is already heading rather than something that causes the market to change direction.
The funding rate — by itself — is just a mechanism used by the exchange to help their synthetic product (perpetual swaps, in this case) mimic spot price. If it’s negative, then short contract holders pay long contract holders since it means that the previous eight-hour period saw swap contracts trading at a discount to the underlying spot price.
If it’s positive, then long contract holders pay short contract holders for the opposite reason. However, as long as the funding rate is low, there isn’t a lot of encouragement to move traders from long to short or short to long. It’s when the funding rate starts increases strongly that the market participants are more likely to move away from the pain of holding their position.
But even at that point, it’s doing nothing more than keeping the exchange’s synthetic product’s price comparable to the spot price. To this end, traders can potentially use the funding rate to understand which way spot price may be heading and then trade spot on other exchanges accordingly.
CT: What is open interest and to what degree does it dictate Bitcoin’s future price action?
CI: Open Interest is just the number of contracts outstanding, which basically means it is a measure of market activity. If open interest is increasing, then we know that new money is entering the market and, as a result, the prevailing trend should continue. A decline in open interest signals that the trend is likely ending since money is leaving.
CT: What’s you take on the whole Bitcoin as a store-of-value and hedge against volatility narrative that has become the consensus amongst analysts and investors at the moment?
CI: With many fundamental legacy market indicators flashing incoming recession, Bitcoin market participants are pushing the “Bitcoin is digital gold” narrative. But the truth is that we don’t know if it really is yet.
“The Bitcoin market has only been around during a bullish economy, so we don’t know how it will perform during an economic downturn.”
We do know that Bitcoin’s volatility makes it a risky asset and in a risk-off environment that normally means that it shouldn’t interest people. Smart traders and investors will pay keen attention to the Bitcoin market if a recession hits and play the market accordingly. A strong Bitcoin in a recession will go a long way to supporting that digital gold narrative.
CT: From your experience as an educator and 20-year trader, do you think it’s better for traders to exploit intraday moves or swing trade with the macro perspective in mind? Furthermore, do you think intraday traders should use leverage to better capitalize on crypto’s volatility?
CI: I am a firm believer in the swing trade, and this is especially so for new traders. The newer the trader, the longer the time frame they should necessarily be trading. Personally, I trade intra-day and multi-day swings and that’s with 20+ years experience.
By doing this, traders can more effectively utilize leverage as they find more prominent bases from which to long or ceilings from which to short. It also helps with controlling their emotions to a much greater extent than 15 or 30-minute charts.
CT: Previously, you’ve said psychology plays an important role in market movement and the decisions traders make. Can you share a scenario where psychology determined market movement and crypto price action? How do you make this systematic?
CI: Charts are just visual representations of human interaction, and that interaction is based on the movement between fear and greed. So understanding this, traders are in a better position to read the volume and price action to decipher what is truly going on.
If you’re waiting for the news to make a move, then you’re always reacting. But being able to read that volume and price action makes you proactive as you can set positions before the news comes out so you are able to ride the movement rather than dealing with your emotions as you fight to enter after the movement has started.
This interview was conducted in collaboration with Horus Hughes. The interview was edited and condensed.