In the last week Bitcoin (BTC) price flirted at the $ 20,000 mark, causing some traders to lose their patience. In the eyes of some of them, the lack of uptrend is problematic, especially given that BTC tested the $ 16,200 level about a week ago.
Seasoned traders know that there are key indicators that act as tell-tale signs of a trend reversal. These are the volumes, the futures premium and the positions of the main traders on the main exchanges.
A handful of negative indicators won’t precede every decline, but most of the time there are signs of weakness. Each trader has its own system and some only trade when three or more bearish conditions are met. However, there are no set rules for knowing when to buy or sell.
Futures contracts may not be traded for less than cash
Some websites contain trading indicators that claim to show the long to short ratio for various assets. In reality, however, they are only comparing the bid volume and the stacked bids.
Others refer to the leaderboard data to monitor accounts that have not been banned from ranking. However, this is not correct.
A better method is to monitor the perpetual futures financing rate (reverse swap).
The open interest of buyers and sellers of open-ended contracts is always taken into account in every futures contract. There is simply no way of imbalance as every trade requires a buyer (long) and a seller (short).
The funding rates ensure that there are no currency risk imbalances. When the (short sellers) are demanding the most leverage, the funding rate becomes negative. Hence, these traders are the ones who pay the fees.
Sudden swings into negative territory indicate a strong willingness to keep short positions open. Ideally, investors monitor multiple exchanges at the same time to avoid possible anomalies.
The funding rate can be biased as it is the preferred tool for retailers and is therefore subject to excessive leverage. Professional traders tend to dominate longer-term futures contracts with fixed expiration dates.
By measuring how much more expensive futures are compared to the regular spot market, a trader can gauge their optimism.
Note how fixed calendar futures should typically trade at a premium of 0.5% or more compared to regular cash exchanges. Whenever that premium fades or goes negative, it is an alarming sign. Such a situation, also known as backwardation, indicates a strong downtrend.
Monitoring the volume is key
Good traders not only monitor futures contracts but also keep track of the volume in the spot market. Breaking key levels of resistance at low volumes is somewhat fascinating. Small amounts usually indicate a lack of confidence. Large price fluctuations must therefore be accompanied by a strong trading volume.
Although the recent crowds have been above average, Traders should remain skeptical of significant price fluctuations less than $ 3 billion a day, especially over the past 30 days.
According to the data of the last month, Volume will be an important metric to look out for as traders try to push the price of Bitcoin above the $ 20,000 level.
The long-short ratio of the best traders can anticipate price changes
Another important monitor for metrically savvy investors is the long-short ratio of top traders, which can be found on major cryptocurrency exchanges.
There are often discrepancies between the methods used by the exchanges, so readers should monitor changes rather than absolute numbers.
A sudden move below the long-short ratio of 1.00 would be a worrying sign in the example above.. This is because the historical 30-day data and the current value of 1.23 favor long contracts.
As mentioned above, the relationship between exchanges can differ significantly, but this effect can be neutralized by avoiding direct comparisons.
Unlike Binance, it is common for top OKEx traders to hold levels below 1.00, although this does not necessarily indicate a downward trend. Based on their 30 day data, the numbers below 0.75 should be considered.
There are no set rules or methodology for predicting large declines as some traders need various indicators to go bearish before going short or closing their long positions.
However, monitoring the funding rate, spot volume, and long-short ratio of top traders provides a much clearer view of the market than simply reading general candlestick patterns and oscillators like the Relative Strength Index and the moving average convergence divergence.
This is because the metrics discussed provide a direct indicator of the sentiment of professional traders. Having a clear view of it is crucial as BTC is trying to break out of $ 20,000.
The views and opinions expressed here are solely those of author and do not necessarily reflect the views of Cointelegraph. Every investment and trade movement involves risk. You should do your own research when making a decision.