8.12.2020 | 11:03
Are you afraid that the price of Bitcoin will drop? These three key metrics help traders detect both upward and downward sentiment in the crypto market.
For the past week, the price of Bitcoin Machine has been flirting with the $20,000 mark, which has led some traders to lose patience. In the eyes of some of them, the lack of upward momentum is problematic, especially considering that BTC tested the USD 16,200 level about a week ago.
Experienced traders know that there are key indicators that serve as telltale signs of a change in trend. These are the volumes, futures premium and positions of major traders on the major exchanges.
A handful of negative indicators will not precede every fall, but most of the time there are some signs of weakness. Every trader has his own system, and some will only act if three or more bearish conditions are met, but there is no established rule for knowing when to buy or sell.
Futures contracts should not be traded below the spot exchanges
Some websites host business indicators that claim to show the ratio of long to short for various assets, but in reality, they are simply comparing the volume of offers and stacked offers.
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Others will refer to the data in the ranking table, so they will monitor the accounts that were not excluded from the ranking, but this is not accurate.
A better method is to monitor the funding rate of perpetual futures (reverse swap).
The open interest of buyers and sellers of perpetual contracts is matched at all times on any futures contract. There is simply no way for an imbalance to occur, as each trade requires a buyer (long) and a seller (short).
Financing rates ensure that there are no currency risk imbalances. When the sellers (short) are the most leveraged, the financing rate becomes negative. Therefore, those traders will be the ones paying the rates.
Weekly funding rates for BTC perpetual futures. Source: Digital Assets Data
Sudden changes to the negative range indicate a strong willingness to keep short positions open. Ideally, traders will monitor a pair of trades simultaneously to avoid possible anomalies.
The funding rate can bring some distortions as it is the preferred instrument of retail traders and as a result is affected by excessive leverage. Professional traders tend to dominate longer term futures contracts with set expiry dates.
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By measuring how much more expensive futures are compared to the regular spot market, a trader can measure his level of optimism.
BTC Futures Premium January 2021. Source: Digital Assets Data
Keep in mind how fixed calendar futures should normally be traded at a premium of 0.5% or more compared to regular spot exchanges. Whenever this premium fades or becomes negative, this is an alarming signal. Such a situation, also known as backwardation, indicates a strong downward trend.
Monitoring volume is key
In addition to monitoring futures contracts, good traders also track volume in the spot market. Breaking significant resistance levels at low volumes is somewhat intriguing. Usually, low volumes indicate a lack of confidence. Therefore, major price changes must be accompanied by solid trading volume.
Aggregate volume of BTC spot trades.
Although recent volumes have been above average, traders should remain skeptical of significant price changes below $3 billion in daily volume, especially considering the last 30 days.
According to last month’s data, volume will be a key metric to consider as traders attempt to push the Bitcoin price through the $20,000 level.
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The relationship between long and short of the best traders can anticipate price changes
Another key monitor for metric-savvy investors is the proportion of long to short of the major traders that can be found on the major cryptomoney exchanges.