These bearish views include those of the creator of Bollinger, John Bollinger, who advises traders to use trailing stops because signs of “tops” are forming.
However, it is worth noting that Bollinger Bands and the indicators of fear and greed are backward looking indicators. Therefore, as long as a weekly increase of 30% (such as the most recent time), these prices will usually appear overbought levels.
As cryptocurrency analyst TechDev_52 rightly questioned, we have no way of knowing whether we are entering a large-scale potential correction or continue to rebound.
Now you know why they call it a bear “trap”. It’s so damn convincing.
How to recognize the “trap” from the “peak”? One is round and the other is pointed.
— TechDev (@TechDev_52) May 16, 2021
For example, the popular YouTuber and trader Nebraskangooner indicated that the recent $56,000 peak may be the upper limit of the bullish channel that has guided Bitcoin since late July.
OBV cheered up, but it hasn’t fully erupted yet.
Hit the top of the channel.
— NebraskanGooner (@nebraskangooner) October 6, 2021
“Greedy” mode can last for weeks or months
Going back to the fear and greed indicators, here are some examples that can maintain overbought levels for more than three to four weeks.
Note how the Bitcoin Fear and Greed indicator remained above 65 between January 29 and February 26, indicating that traders are overconfident.
This indicator uses trading volume, futures open interest, social indicators and search data to calculate the level of market hype.
Therefore, after the warning signal appears, it will take four weeks for the price of Bitcoin to undergo a major adjustment. Those who sold in the first few days after the indicator flashed missed the subsequent 70% rally.
A similar pattern occurred between July 23 and August 25, while Bitcoin prices continued to rise. Yes, the correction will always come at some point, but in a few weeks or months?
Bollinger Bands, a good short-term indicator
John Bollinger is an experienced and respected trader, but his indicator is a moving average plus some deviations based on current volatility. In short, considering that Bitcoin usually has a daily volatility of 4.5%, a weekly 30% volatility will exceed this range in most cases.
Of course, when Bitcoin breaks the upper limit of the Bollinger Bands, there will often be a slight correction, but this is related to the absolute zero price in the next two to four weeks.
Fund interest rates remain neutral
Finally, the financing rate, the fees charged by derivatives exchanges, should be analyzed to balance the risks between long positions (buyers) and short positions (sellers) because they have different leverage. Sure enough, when a buying frenzy occurs, the indicator will rise.
The current average rate of 0.04% per 8 hours, or 0.8% per week, is nothing unusual. For example, as early as December 2020, it stayed above 1.5% per week for a whole month, and then stayed again in February 2021.
Similar to the fear and greed indicator, this indicator shows that buyers have become overconfident because it exceeds 0.10% every 8 hours, but not necessarily an alarming level.
As long as buyers are confident that the rebound will continue, paying a weekly fee of 1.5% or even 3% will not force them to close their leveraged long positions. For example, if the shortage of Bitcoin supply on the exchange caused the recent rise to $56,000 following the accumulation of holders, there may be room for $80,000 or more.
However, if some bearish events occur in the near future, a crash can be expected, such as Exchange Traded Fund The request was rejected or some severe US ban on stablecoins. In this case, Bitcoin will not break all-time highs, and those backward-looking indicators will eventually “work”.
The views and opinions expressed here only represent author It does not necessarily reflect the views of Cointelegraph. Every investment and transaction involves risks. When making a decision, you should conduct your own research.