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Being the single most important technical indicator when it comes to crypto (and financial markets in general); price action will help you build a mental model of the markets state and help your enemies outperform you.
On the surface, PA (Price Action) seems like a simple, intuitive concept that is exactly what it sounds like: a pattern created from the movement of an asset’s price over time.
That is correct…
And at the same time, it is also something much greater.
Composed and influenced by a smorgasbord of ancillary indicators (price, volume, open interest, funding rates, etc.) while being tightly coupled with the fundamental first principles of financial physics (Direction of price over the course of time), Price Action is the purest expression of the underlying psychological substrate in market participants.
It is the foundation that builds and defines trends.
It is the King of all indicators.
In theory, the logic of buying means acquiring from the open markets, thereby reducing its available supply, driving up its scarcity, and, in turn, the price. The inverse applies to selling, whereby more of an asset comes onto the marketplace, making it more accessible to more people and driving prices down.
But it's not quite that simple…
The nuances applicable to price action are mind-bending.
Price can be/is influenced by external factors such as the relative value of a trading pair, the psycho-social profile of the participants involved, the state of the industry, the state of the macroeconomy, as well as, internal elements such as supply policy.
Ultimately, when price goes up, that means there is an influx of demand to own an asset that outweighs the desire to sell it at that given point.
When going up in the short term, that is a signal that capital is flooding in. However, understanding the intentions of that capital is very difficult.
Players can utilize alternative vehicles (such as a short) to create an illusion in the order books to make it seem as though demand is coming in, but in reality, the intention of that demand is to bet on its price falling. Moreover, occasional liquidation events (short squeezes) can cause parabolic price movements by forcing buyers to acquire the assets at market price.
Therefore, short-term price spikes are a weak/unreliable source.
On the other hand, when the price goes up consistently over a prolonged period of time, that is a much stronger signal, which can be interpreted to mean that buyers are allocating their capital with faith in the underlying asset’s prospects in the future.
Here a rule of thumb is liquidity begets liquidity, the longer the amount of time an asset spends growing, the more attractive it becomes to the primitive human mind to assimilate it as being reliable. This can enter a flywheel and bring an asset into permanence (such as the case with Bitcoin).
A non-exhaustive list of buying pressure logic is as follows:
- The corresponding asset to which the value is tied in a trading pair is depreciating, thus creating an economic disbalance.
- Macro-economic factors such as interest rates are going up, allowing people to take on more risk
- Marketing hits critical mass inflection, and a narrative sticks
- Insiders are manipulating the price to get
- Players are hedging their short bets
Ultimately, when the price goes down, the desire to own an asset is weak, and in the absence of new entrants, while existing owners are leaving their positions, it results in devaluation.
As is the case with prices rising, there are two time frames relevant to prices falling: long and short.
Going down in the short term signals that capital is rushing out. However, understanding the intentions of that capital is very difficult.
Market participants that are taking on large positions empty the order books, and automated algorithms of market makers register that movement as a slip, causing the price to go down as they rebalance the spread. Moreover, as new positions are taken out, it is in the interest of the market operators to suppress the price further to dissuade the participants as quickly as possible in an effort to have them leave quickly, in turn harvesting their fees on the trade.
Again, short-term price is a weak/unreliable source.
On the other hand, when prices go down consistently over a prolonged period of time, that is an indicator of some sort of fundamental model/business failure.
A non-exhaustive list of selling pressure logic is as follows:
- the asset is in low/no demand,
- failure of economic/business model
- Existing stakeholder are losing their confidence in the asset (due to competition, incompetence, or any combination/slew of other reasons)
- Insiders are manipulating the price to force out retail and get better entities
- Macro-economic factors are lining up in an unfavorable way
- Players are hedging their long bets
While in traditional markets, there is some degree of accountability to regulation, in Crypto, it’s a free-for-all, creating a chaotic displacement that makes it seem that logic is either inversed or just downright nonexistent.
When you sell, price goes up.
When you buy, price goes down.
Why?
Three general reasons, each with its own multitude of constituting factors;
1) PVP nature
2) Market Maturity,
3) Organic or Not Organic
Price Action is widely recognized by sophisticated market operators to be very influential, thus making it the perfect tool for manipulation. PA is highly susceptible to be used as a weapon against unprofessional/novice market participants.
As a highly Player-Versus-Player industry, all financial markets are full of cold-blooded actors with very unfriendly intentions. If somebody has an edge over somebody else, they will take it. Your loss is quite literally somebody else’s gain.
Nowhere is this more prevalent than in crypto (especially memecoins).
A very effective way to frame one's thinking of a PVP environment is through the lens of a zero-sum game.
In zero-sum games, where winners take all, and losers are left with their pants off, risk management becomes the most important element of conversation. As human nature and societal conditioning will show us, people (the human animals) are not inclined to manage risk.
Professional actors that have been conditioned by the brutal nature of financial markets will take advantage of this to extract resources from the untrained. In crypto, this usually takes the form of emotional manipulation on social media. The echo chambers of Twitter/X are overwhelmed with botnets and pseudonymous alt accounts that will jump from conversation to conversation, relentlessly promoting their trashcans by demoralizing those who stand against them or creating a false sense of security by praying on the human need to belong and building narratives of community belief.
Never forget that the MOST valuable thing that ALL humans are looking to spend their money on is HOPE.
The Maturity of a Market is a very important factor to take into consideration when assessing PA.
Young, aggressive, open markets, especially those of memecoins, are less likely to be dependent or expressive of genuine PA. Primarily because here each individual dollar is more impactful. Malicious intentions aside, because there are smaller groups of participants, which in turn means smaller pools of liquidity, the amount of influence these actors have on the markets is much more profound.
In markets that have stood the test of time the amount of participants and the pools of capital involved are much larger; meaning that the impacts of buys and sells here are much less profound.
This feeds into the point on the degree to which a market is organic (or not).
Price action is actually a phenomenal tool to use when assessing whether a market is organic.
Here, unlike the previous section, short-term reaction is the indicator.
Organic markets will be more fluid in their response to actions. If buying pressure comes in to drive the drive up, it will accordingly ascend to match that point, and if a lot of selling comes in, it will descend to that level.
On the other hand, if a market acts inversely, it is safe to assume these markets are subjected to insider intentions and are not organic.
Food for thought:
Are any markets on this planet organic? If so, for how long?
There are infinite combinations of price patterns. Among the most popular ones are Head and Shoulders, Cup and Handles, Adam and Eves, Double Tops, Triple Bottoms, Dead Cat Bounces, Ascending Triangles, Bullish/bearish Pennants, Elliot Waves, Wedges, and a multitude of others. But for the more technically inclined day traders and gambling savants, there is an absolute treasure trove of things, such as Three White Soldiers, Shooting Stars, Dragonfly Dojis, Diamonds, Cloud Covers, and so many more things that can have any normal person’s head spinning.
Ultimately, there is no universally correct way to interpret price action; different traders, different markets, and incentives, among other ever-evolving factors, will result in discrepancies, especially since many of these patterns have become “standardized”/common knowledge and are now much less reliable than they were before.
Plus, markets are full of noise that disrupts signals and makes it much more difficult to understand how to act.
Like all other indicators, price action shows what has happened, not what is happening. Even though it is probably the strongest of the bunch, PA is only one small piece of the bigger picture.
Even though PA is king, the game is much more complex than a single player.
Every king has a queen,
Every king has an army,
Every king has his domain.
If you want to win… don't rely on the king to take you there, but don't ignore him.
Besides, the timeless wisdom of the markets has taught us that price and value are not always the same thing, and when the price is below the value, there are tremendous opportunities for those willing to wait.
Bless you,
and good luck 💫
Andrey Didovskiy
