![The most popular way investors look at charts and it's flaw [SERIOUS]](https://b.thumbs.redditmedia.com/dZKVaCJzfBq4bluEQL_J_sT62XPlm8MaQyxEzOmXtEk.jpg "The most popular way investors look at charts and it's flaw [SERIOUS]") | Today I want to show you some insights about the most popular indicator people love to look at - The moving average. I will explain summarized & simplified how many investors even institutions use it and how I personally use it and think it has flaws. No matter if it's the stock market or crypto the moving average is the most common and most used indicator when people look at the chart to identify any trend, entry or exit point. BTC chart without it : Moving Average applied to the daily chart ( 200DMA ) :This indicator represents the average price of the last 200 Days. As you can see, BTC has been traded quite important around it. You can see once it was broken it got out of the long stuck 20k range from late 2022 and finally trended upwards from the FTX 15k lows. Whenever the price has dipped and touched it / got close to it, it bounced! And over the last weeks, once it was broken, it looks like it's "rejecting" from it everytime it's touching now. Reality is, a lot of investors out there put positions around this popular indicator and they see it as a "trend". Some even argue that the 200MDA is actually a "bear market" indicator that once an asset breaks below it and stays below it, it usually continues to trend lower. And again, suprisingly, BTC also reacted again to it in late 2021 / early 2022 :First it consolidated around it, clearly showing uncertainy in the market but also again, strong support of investors using it as a "buying opportunity". Well, until it broke. Because once it broke, a sharp sell off followed. And a few months later after BTC recovered from the 33k dip back to 48k it touched it for 2 days but then rejected off it and trended lower for a loooooong time. Few weeks past and LUNA followed, Creditor wash out and so on... And it's not just in the crypto "casino" - it's also in the very "serious" Stock market! Here is it applied to the SPX representing the S&P500, an Index representing the strongest 500 US Companies and known as the "US Economy Indicator". Again, it always reacted with it. Consolidate around it or rejected off it / used it as support. Just a few days ago it's again sitting around it and visibly reacts to it. Almost like it slows down the sell off / trend. Throughout 2022 it was always rejected as people kept calling it the "bear market indicator" Once it was broken, SPX diddn't create new lows and instead started to have a strong upwards momentum for multiple months. But doesn't it represent "past price action"?Yes and no. While it does show the average of the last 200 Days of applied asset, investors still react on a partly daily base on where the indicator is currently at. Remember, majority of money are long term holders frequently buying and they all compete for the best entries. That all sounds like astrology to me! How is that supposed to tell me where prices go?!It doesn't. And that's a huge misunderstanding that many see in technical analysis - a price prediciton model. Some shillfluencer even act like magic wizzards that can tell where price will be next year but reality is, all it does is math & market data applied and visible to everyone who looks into it. Everyone uses it but there is a major flaw - personal OpinionThat was a short summary of the indicator. But let's dig a bit deeper into advanced teritory and let me tell you why I personally am not a big fan of it. It remains an incredible simplified indicator that everyone can use therefore you could see it as a liquidity zone. Clearly a huge amount of investors use it to position themself or even decide their entire portfolio on it. Therefore it's save to say that the indicator always shows where larger liquidity sits - of buyers or sellers. But here comes the flaw - what if I tell you that the entire indicator doesn't include a major driver in the market? VolatilityWe all enjoy our volatile crypto assets. They move up and down heavily just to end up at the same level. Illiquidity and sudden hype / news are a major driver here. The problem : the mentioned "moving average indicator" does not include volatility The indicator is based on the average price of an asset ( mostly closing price ). But once volatility becomes important, the indicator has major flaws and reacts poorly. Example: BTC on the weekend Let's take a look at the last weeks price action on a 1h chart. Same indicator applied it shows the average of the last 200h. Can you see how quite pointless the indicator becomes once volatility is all over the place? This is because these low volume , low interest, low volatility sessions in between have the same impact on the indicator as the +3% in a few minutes or huge sell offs. It just gets worse the closer we get Let's check out the minute chart just for fun. Look how the indicator is almost a flat line through price action that is all over the place. And the craziest part is, since it's based on average, it will never be "fully flat". So summarized, the indicator does not represent any intraday price action and even significant volatile price action such related to very bad or positive news, are ignored. Let's say simplified, you use the indicator to spot a trend on your asset like Bitcoin. It could show you a great uptrend but that -10% Day because of Binance will be ignored. This could technically mean you buy an asset in a dip while the worst news just dropped and you bought right before a long down trend. ConclusionThe Moving Average Indicator should not be disrespected as nonsense since it clearly has a strong impact on the major assets traded. If you like it or not, believe in it or not, many people do and the chart represents that by forming anomalies everytime price reaches it point. However, it remains an indicator that is incredible simplified and therefore has it's flaws. Does it give you a good visualization of a long term trend & how investors react? Yes. Does it show you where prices will be next week,month or year? No. And it never will. Trading indicators remain mathematic tools based on market Data that everyone can use. If everyone has access to it while it predicts the future, everyone will be rich. However reality is, it remains a Tool and the hands that use the tool make the difference. If you personally want to use it to identify strength or even just for fun - nothing wrong about it. If those institutions do it to place their market driving positions, it won't be the worst to do. Hope you enjoy the wall of text & read [link] [comments] |
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