We are witnessing a unique moment on some of the leading cryptos, with a huge contraction of volatility.
The best way to see that is on the weekly timeframe, take a look below at the narrowing of the Bollinger bands on Bitcoin.
You can also read this article from Forbes on the drop in Bitcoin volatility.
What does this volatility contraction mean ?
Basically, volatility contraction means everyone is waiting to see what’s going to happen.
Like in a pressure cooker, steam is building up, ready to explode. And when it does, hang tight because things are going to move fast. But be careful, movement does not necessarily mean upside, price could very well go south.
Anyway we have rarely seen such volatility contraction on Bitcoin and other cryptos. The last few days have seen ranges with minimal price variations, something unseen since quite a while.
What should we be expecting?
Volatility contraction usually precedes strong breakouts and volatility expansion. It designates an asset under Accumulation.
So traders, expect things to get moving in the coming weeks.
And when price does start moving, it could quickly reach the previous highs (or lows) of the preceding significant ranges, and that means within a couple of days/weeks.
So you can probably expect gigantic moves in a matter of days.
Will we see a repeat of the rally that blew everything away in the last quarter of 2017 ? Maybe…
Remember, in the last quarter of 2017 we saw a bull run of spectacular magnitude. Between sept and dec 2017 or early jan 18, these are the gains you could have made:
- BTC: +340%
- ETH: +590%
- LTC: +657%
So we are probably talking potential gains in the hundreds or even thousands of percentage points. That is just huge, however we need to be methodical and careful.
So, how can we profit from this volatility?
Well first of all, you have to be very careful because these moves could mean big profits but also huge losses if if you are not careful.
My main advice here is to absolutely avoid leverage, by all means forget leverage on cryptos, volatility is just too crazy, you can get wiped out in a matter of seconds. As always, trade money you can absolutely afford to loose.
Then we need to define a trading strategy. Where could we find that ?
Well, Mark Minervini, in his famous book « Trade Like A Stock Market Wizard », explains how he trades the Volatility Contraction Pattern (VCP).
Minervini advocates an entry at what he calls the Point of Least Resistance, where demand starts to exceed the thin supply at hand. Evidence that supply has stopped coming to the market is decreasing volume.
Then look for spikes in price accompanied by heavy volume, indicating institutional or significant buyers. You are also looking for low volume pullbacks.
But as we said, we don’t know which direction price is going to go. My bias is bullish, but it doesn’t have to be everyone’s opinion.
So what I recommend is to do the following:
- Use alerts on your trading platform (or on Tradingview) to monitor the upcoming breakouts
- If things start moving in the direction of your bias, enter a position using a small portion of your capital only (this is cryptos…)
- Forget leverage, by all means
- If your platform allows for it, place a protective stop below the low of the preceding low volatility range
Now all we have to do is choose the cryptos we are going to monitor.
What are the cryptos that could be exploding?
We need a list of coins to monitor. However, this volatility is evident on quite a number of cryptos.
So which coins are we going to choose in the long list of available ones?
Mainly, since our bias is bullish, we are going to look for cryptos on a long term Bullish uptrend.
To assess that, we will filter on cryptos with price above their 100 period moving average on the weekly chart, or with evidence of a Long term uptrend (through trendlines) for the more recent coins without sufficient price history.
So here’s our shortlist of three coins that are both in volatility contraction and with an underlying bullish uptrend, we believe they could be exploding.
Some other cryptos might turn bullish long term, but according to us they aren’t quite there yet.
If you have any other ideas, or cryptos you are following which are about to burst, please share your comments in the box below.
Safe trading to all.