This Trading Glossary defines and explains some of the common terms used in Bitcoin price analysis and market speak.
Prime Minister Shinso Abe of Japan formulated a national recovery plan to pull Japan out of 2 decades of crushing deflation. The plan pivots around boosting Japan’s export economy to it’s former glory, thereby introducing more money into the domestic economy, which would encourage spending and reinflate prices.
The cornerstone of “Abe”-nomics is a historically unprecedented quantitaive easing program which will introduce 2.7Trn of freshly printed Yen into the domestic economy over 3 years. The hoped-for outcome is more money, same amount of things = Inflation. Via government intervention in the market place, the price of things is kept stable, thereby causing the Yen to devalue. A cheaper Yen makes exports more attractive, thereby boosting domestic production which in turn stimulates the labour market and income which presents a path to economic recovery.
However, given the presence of strong regional competition (China, Korea, etc) for the export market, Japan’s exports are not increasing as rapidly as anticipated. A simultaneous global economic slump doesn’t help. As a result domestic inflation is not ticking up and Japan risks ending up with a debilitated economy and a worthless Yen.
A bond is a loan agreement between a borrower and an investor. Bonds are issued as certificates that guarantee investors their money back after a specific period in exchange for a small interest – paid by the issuer of the bond.
So for example an investor might buy a US Treasury 2 year bond which guarantees the investor their $100 back after 2 years as well as interest of 4% after 2 years. However, the interest payment is not guaranteed and floats on the open market where supply and demand drives the interest payable on the bond (called the bond yield) up and down. Bonds are, therefore, traded like any other financial instrument. Many central bank purchase bonds as part of their foreign reserve holdings.
An hourly candle’s body shows the level at which price opened at the start of the hour as well as the level at which price closed at the end of the hour. If the closing price is higher than the opening price then the candle body yellow (in the example on the right). If price ended the hour lower than the opening price then the candle body is colored red.
The candle wick shows the highest and lowest price levels that trade achieved during the hour. A 5-minute timeframe chart represents price as candles of 5-minute duration each.
Contract for Difference
A Contract for Difference is a commonly used financial instrument whereby a brokerage offers traders a one-click electronic mechanism to make bets on the price movement of an underlying security. So, for example, most retail forex and commodity traders are buying and selling via Contracts for Difference. Some Bitcoin trading facilities, e.g. OKCoin’s Bitcoin Futures contracts and BitFinex Margin trading are CFDs. When a trader opens a Bitcoin buy position via CFD they don’t physically purchase any Bitcoins but are merely engaged in a USD-payout bet that the Bitcoin price will rise. The “paper gold” market refers to the Gold CFD market.
When there is a statistical match between the movements of two market instruments then they are said to be positively correlated. If there is an inverse relationship between their price movements then they are said to be negatively correlated. For example, the price of Gold and the level of the S&P500 stock index had for many years displayed inverse correlation as investors habitually moved their money to the high risk high yield stock market and at other times moved it to the safe haven of Gold.
Divergence between price and indicator levels occurs when price makes a new high or low that is not confirmed by a new high or low in the indicator. Such divergence typically signals trend reversal, although during strong trends divergence signals often compound several times before reversal occurs. Divergence typically occurs between price and the MACD indicator or price and the RSI indicator.
also called: Hidden Divergence
When an indicator shows an extreme level (i.e. a new high or low) that is not confirmed by price making an equivalent new high or low, the disparity is refered to as Reverse Divergence. This signal needs to be interpreted in context, as it has different implications depending on the price action that preceeds it. Whereas regular divergence signals potential reversal, reverse divergence often signals trend continuation.
The extent to which a trading or investment position has gone into loss. If an investor bought 1 bitcoin at $1000 and the Bitcoin price declines to $300, then the investor’s drawdown on that 1 BTC investment is $700. Traders using a margin account facility have to keep a close eye on their drawdown because the effect of leverage means that amplied losses can quickly lead to margin close-out.
Elliott Wave Principle
The most rational explanation of market behavior, is arguably, Ralph Elliott‘s Wave Principle. Based on his discovery that Fibonacci ratios pervade market charts, Ralph Elliott postulated the Wave Principle in the 1930s. The Elliott Wave Principle holds markets advance in five waves of price action and then decline in three waves before starting the next cycle of five waves of advance. Price waves are related to adjacent waves by the Fibonacci ratios .382, .5 or .618. Furthermore, a market instrument, such as the Gold price or the Bitcoin price, is (from the Wave Principle perspective) a group-psychological entity in which market participants herd and scatter according to their collective hopes and fears in the market.
Mathematician Leonardo Fibonacci was born circa 1170 in Pisa, Italy. Following a trip to Egypt, Fibonacci introduced to Europe the Hindu-Arabic decimal system of numbers. He proposed a sequence of numbers, now called the Fibonacci series, in which each number is obtained by adding together the two numbers preceding it in the sequence:
1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc to infinity
As it turns out the sequence represents the underlying principle of growth in nature and the universe. The ratio of successive numbers in the sequence to one another tends to a specific number, called phi (0.618):
3/5 = 0.6
5/8 = 0.625
8/13 = 0.615
89/144 = 0.618
The companion ratio to phi is .382 which is obtained by subtracting .618 from 1.
The Bitcoin price chart (like all market instruments) manifests waves of price movement. Successive waves are related by phi and waves at varying degrees are internally proportioned according to .618 and .382 (as well as other minor Fibonacci ratios)
An indicator is a dynamic plot on the price chart of some formula applied to price (or other indicators). Traders and analysts use indicators to assess the condition of the market. There are hundreds of indicators but the list below indicates the “classical” prototypes upon which all other indicators are built.
The simplest of indicators and the foundation of analysis. A moving average calculates the average price over a given period and plots it on the price chart. The behaviour of moving averages in relation to price provides the trader/analyst lagging indications about the likelihood that price will continue in a particular direction or that it will change.
Moving Average Compression and Decompression
The MACD indicator measures the momentum of trend. A strong surges in price causes the MACD indicator to increase in positive value and large downward price movements cause MACD to increase in negative value. Small price movements (low volatility) cause MACD to revert to zero. Typically, when MACD is flat-lining at zero, the indicator is interpreted to be signalling an imminent price breakout (increase in volatility).
Relative Strength Indicator
RSI calculates the number of units of advance vs the number of units of decline (during a given period) as a cumulative percentage. A period of 14 units is default – an arbitrary but commonly used period. A simplified example is: if, during the last 14 price candles, there had been 7 candles of advance and 7 candles of decline then RSI would equal 50%. RSI allows us to assess the strength of trend and whether it is relatively over-bought (RSI near 100%) or over-sold (RSI near 0%).
The stochastic is a directional oscillator. As opposed to reverting to zero, the stochastic oscillator swings between 0 and 100 depending on the directional bias of trend. The way that the stochastic oscillator is calculated means that it is independent of trend velocity: both strong and weak trends cause the same movement in the oscillator. This is the opposite of MACD which is specifically sensitive to the velocity (or momentum) of trend. The stochastic allows us to easily identify over-bought and over-sold conditions, and significantly, the moment of change from advance to decline (and vice versa).
Inflation and Deflation
Let’s use as an example, a local economy such as a small town where locally produced goods are bought and sold amongst the town’s people. In the simplest terms the small local economy contains “things” and money and the “things” are denominated in money, i.e. have a price. After a year of slumped local production there will be fewer “things” in the economy. The town’s people (consumers) will still want to buy the same things as before but with fewer things available and, assuming an unchanged money base, the result will be that they will pay higher prices for the things they want. Same Money, Less things = Inflation (Higher prices)
Assuming stable production from year to year, if more money were to enter the local economy (e.g. a new factory pays higher wages or a new resort brings wealthy spenders through town) then the equation More money, same amount of things is equivalent to Same money, less things = Inflation. The amount of things has decreased relative to the amount of money and prices will adjust upward because consumers lose bargaining power.
In an opposite scenario (to our towns example given in “Inflation”) where a year of over-production results in the local market being flooded with things, consumers have bargaining power to pay less for the abundant things. Same money, more things = Deflation
Similarly, if the money supply were to shrink due to a large employer shutting business, then the equation Less money, same amount of things is equivalent to same money, more things = Deflation. People have less money to spend on the available goods, so sellers have to adjust prices downward to entice buyers.
An interesting scenario arises when credit (which is also spendable money) is added to the local economy by a lender such as a bank. Initially, this causes inflation (rising prices) because More money, same things = Inflation. In the event where the lender disappears (closure, bankruptcy, etc) suddenly the money base shrinks (no more credit) and the effect is less money, same things = Deflation
This is exactly what happened during the “Credit Crunch” of 2008 and precisely the reason why the
Fed stepped in with QE plans: they were reintroducing the lost money (credit) that had abruptly been removed from the economy by failed banks and lenders. Their inflationary QE action prevented a deflationary spiral. However, they had merely treated the symptoms of a systemic disease instead of addressing the causes of the illness, namely debt economy. Systemic debt has increased manifold since 2008 and some argue that the Fed’s life-support had merely delayed the inevitable by “kicking the can down the road”.
A financial instrument is vehicle for buying and selling an underlying asset. So for example, physical gold is an asset but “paper gold” (Gold CFDs) allow the trading of the price of gold without any physical gold ever exchanging hands. A bond is a financial instrument that securitizes a loan. A EUR/USD trade via a retail forex platform allows the trader to speculate on the price of the Euro without buying or selling actual currency via an exchange. CFD’s based on the Bitcoin price index are tradable financial instruments, as opposed direct buying and selling of bitcoins via the exchange.
Some brokers privide their customers with the facility of a margin account. Funds in a margin account are used as collateral (deposit) against which the customer can borrow much larger amounts of trading capital – either from liquidity provders (lenders) or directly from the broker.
Leverage is the ratio whereby a margin account holder can upscale their trading capital. A leverage of 2:1 means that for every $1 in the margin account, the customer can borrow $2. The effect of leverage is that profits and losses are amplified.
When drawdown on a losing position has reduced available margin to a certain percentage then the trader will receive a margin call, warning him or her to take action. Should the position go into further loss then a margin close-out may happen
Margin close-out is the forced closure (by the broker) of a leveraged position where the trading losses have reduced available margin (collateral) below a certain percentage. The outcome of a margin close-out is usually an empty margin account.
The term “market” is used with many different meanings. In its primary meaning the market is the collective of all buyers and sellers for a specific set of products or services. So, people refer to the “bond market” or the online retail market. When examining the Bitcoin market we can see many aspects, such as payment processors, development, exchange and an off-the-counter market. The ordinary retail trade and investment market for Bitcoin is centered around the Bitcoin exchanges where buyers and seller bid the price up and down. These buyers and sellers engaged around the popular centrailed echanges are refer to as the Bitcoin retail trade market.
More specific than social mood, Sentiment is more variable and pointed. Market participants can for example harbor negative sentiment toward a company like Google for breaching privacy laws, or positive Sentiment toward a Bitcoin because of it’s speculative performance and perceived value.
Social psychology identifies the phenomenon whereby groups can harbor collective sentiments. For example during times of social unrest in a particular country, the social mood can be described as negative toward the government. Positive social mood witnesses co-operation, general satisfaction with government and society, resulting in productivity and prosperity.
Market participants, similarly, display social mood and some market analysts believe there is a correlation between social mood and trend.
A retracement is wave of price action that moves against the direction of the larger trend.
The units of time over which price changes are measured. A weekly timeframe chart will show price changes on an week-to-week basis, whereas a 5-minute chart shows price changes in 5-minute intervals.