Chart Analysis and Trend Predictions: Fact or Fiction?
Updated: Jun 7
Since I started posting Trend Analysis newsletters on social media platforms such as Reddit, Facebook and Twitter, I have had mixed reactions. A great many Redditors are vehemently opposed to interpreting charts and believe the whole process to be akin to reading tarot cards or tea leaves. They claim that in hindsight it is easy to make a chart match a theory such as Wyckoff Accumulation, but you cannot use the same theories to actually predict future prices. On the other end of the spectrum I have had people praise my analyses and thank me for helping them understand interpretive methodologies and theories. Most recently I have received several inquiries on how to create an accurate model for trading analysis. This conglomeration of reactions immediately brought to mind a quote in Bad Religion's song "No Direction" (Bad Religion songs are like chart analysis for fundamental human behaviors and actions-they are templates that relate to every human instinct):
"A Righteous student came and asked me to reflect
He judged my lifestyle was politically incorrect
I don't believe in self important folks who preach
No Bad Religion song can make your life complete
Prepare for rejection
You'll get no direction from me"
These opposing phenomena naturally led me to ponder: "What am I seeing and/or believing that many others don't?" and "What are we really interpreting with chart and trend analyses?". These questions led me down a rabbit hole of self reflection regarding my history of stocks and crypto trading. I believe these questions are best answered simultaneously.
Our goal when interpreting charts is simple: We want to predict the prices/trends in the future so that we can make profitable trades. However, drawing a bunch of lines on charts according to other analyses you've seen is the equivalent of pissing in the wind and deciding whether to buy or sell based on if your pants get wet. The problem? Nobody can predict the future. But we can predict how people will react given certain situations.
As a geophysicist in the oil industry I often interpreted well logs. Instruments are sent down deep well holes to determine parameters such as density, porosity and permeability of subsurface rock formations. The problem is, no downhole instrument can actually measure those properties. Density is determined by emitting gamma rays into rocks and measuring how many are absorbed and one method to determine porosity is to emit neutrons to be absorbed by Hydrogen atoms, so as to determine how much Hydrogen is present in the formation. Hydrogen is a component of a liquid or gas within the formation, so it is must reside in a pore space. In these instances we are measuring properties that are related to and correlate with the actual property whose values we wish to resolve.
Chart and trend analysis has the same dilemma as interpreting downhole rock formations and we use the same solution. We aren't directly predicting what the price will be in the near or far off future; we are trying to predict people's actions and reactions in the near or far off future. Interpreting charts is more behavior analysis than anything else, and people tend to have similar reactions to similar events. For instance, if someone attacks you, you will have a "fight or flight" reaction. Which reaction occurs is determined by your past decisions and outcomes, also known as learned behavior. Market trends follow similar patterns of cause and effect and can be considered "learned behavior" as well.
Most well known chart analysis techniques hide behind the guise of mathematics, but secretly reside in the realm of psychology. In the 1700s, candlestick charts were invented in Japan by a man who found that "While there was a link between price and supply and demand of rice, the markets were strongly influenced by the emotions of traders." (Source). Wyckoff accumulation theory posits that "One must study individual stock charts with the purpose of judging the behavior of the stock and the motives of those large operators who dominate it." (Source). The Elliott Wave Principle is known to have been based off crowd and investor socio-psychology, predicting "shifts between optimistic and pessimistic extremes in natural sequences. These mood swings create patterns evidenced by market price movements" (Source). Not only are these well known methods founded by psychological principles, but their popularity increases their effectiveness by generating investor trading practices based on their ideas.
Sir Baller's Pattern Trading Principles:
1) Real world events and past trend patterns effect retail traders' buying and selling habits. Cryptocurrency and stock prices are a result of supply and demand, so they are directly related to and correlate with these aforementioned buying and selling habits. We cannot predict every event that will occur, but we can predict that if Bitcoin dips a certain percentage or drops below specific indicators like the 21 week ema, it leads to mass selling by humans and bots. We can also predict bitcoin halving to result in increased BTC prices, which leads to FOMO and a long bull run. I frequently refer to the Crypto Greed and Fear Index when considering making a move.
2) The most effective pattern trading is a result of doing the OPPOSITE of whatever the majority of other traders are doing within a specific time frame. When the majority of traders are selling and we are in a big dip, you want to buy and you want to sell when most traders are buying. However, it is important that you don't sell immediately when most traders start buying. Whales control the media and generate the "group-think" trading we often see today. Pay close attention to the media and when 90% of the outlets agree on the same thing, be ready to do the OPPOSITE of what they are telling you.
3) You will never sell at the exact peak or buy at the exact bottom, so do not hold off on buying or selling when an obvious opportunity presents itself.
Anyone who has read my posts know that I am a firm believer in tying month end Bitcoin options expiry dates to price targets at the end of the month. The premise is that market makers are selling the majority of the options contracts, so they wish to target a price that makes themselves the maximum profit. There are many whales out there with opposing short term price goals, so this target does not always hold true. However, it is a real world event that can greatly influence what prices will be on specific dates. The more events that we can tie to whale interests, the more likely we will be able to accurately predict future prices.
In addition to real world events, whales have tremendous influence over crypto prices. It is well known that many collude to create dips and then buy back in at lower prices. When they create the dips, the media (who are under the whales' control) inevitably releases negative press to crash the price further. The fear resulting from the media and extreme downward volatility results in a chain reaction of retail selling. This is exactly when you want to buy! When the whales buy back in it usually isn't long until the media turns positive on crypto and retail investors are buying back in at higher prices than the whales did. When the price is significantly higher than the whales bought in for, it is time to take profits! Once enough retail investors push the price skyward, the whales sell to create another dip. This idea is not a secret-it's blatantly apparent to anyone watching market trends and the routine is almost like clockwork. The whales are using psychology to milk retail investors out of their money; we need to ride the same wave as them and attempt to not be caught in the retail investor undercurrent.
This topic can be debated endlessly, but I will conclude my argument by stating that I personally believe in the imperfect "science" of chart and trend analyses. However, I consider our analysis to equate to probabilities resulting from psychology and human behavior rather than that of mathematics. We are not going to be correct 100% of the time, but if you are able to be right half the time, buying low and selling high, you will generate more profits than an individual simply holding their crypto assets. When you are incorrect with your trend assumptions, you may have to be patient and hold, but prices will turn around-they always do. Generally, we are all investing in crypto because we are long term Bulls.