Green ahead?
Demark & Japanese candlestick view
Demark & Japanese candlesticks: Sending the same signal!
Trading systems are not a new thing. In the 18th century, Japanese rice traders (the commodity) developed a system to find patterns in human behavior on buying and selling to determine when to step in during a decline and when to sell in a frenzy known as candlestick trading. Trading anything that is volatile creates emotional distress (when losing) and euphoria (when making). This week we learned how easily panic can ensue watching the “stable coin” UST (terra) and Luna, evaporate as confidence of their inherent value went to 0. About $50 billion in market capitalization at their peak, gone. No trading system can or ever will protect you from greater fool investments. I guess, at best, a stop loss might help but not when something goes “bids wanted”. All that said, this week I want to combine the Demark indicators we have been discussing along with Japanese candlestick trading system to give you a sense where we are in the markets, perhaps. I say perhaps because nobody ever really knows.
But first, let’s set the stage a bit more on trading volatile assets and why you need to find a way to measure the human behavior aspect. Assets that are less liquid (less volatile) like real estate or art tend to have a value that moves in a direction for longer periods and buyers/sellers do not making daily decisions on their worth. They give the buyer or seller more time to consider over and undervaluation depending on factors they can forecast such as demographics or interest rates. On the other hand, crypto (no hate please) is a purely emotional asset with massive daily volatility based on fear and greed. Gurus paint a picture of limited supply or the next big thing blockchain as reasons to own BTC. A store of value! Well, I do not know many who buy and sell their home or a car using bitcoin. Why? The value of the home or car is too high for buyer and seller to put that capital into something that moves 5% per day quite often. Obviously now you might even wonder if using stable coins pegged at $1 is the best vehicle for transactions. Until we have a government backed stable coin, I wouldn’t transact in stable coins for more than an amount I am willing to lose 100%. I do not see a prospectus for even USDT (the trusted stable coin) or phone number to call if the value breaks $1.
Alright, so we cannot use price exhaustion trading systems accurately for: 1) greater fool investments or 2) less liquid assets. The former has too much inherent risk of 0 and the latter tends to trend more while transactions are typically based on well understood pricing dynamics. You know you can or cannot afford a home a 5% interest versus 3% based on your income. The value of homes is likely to be negatively affected by rising interest rates, something the buyer, seller and broker are well aware. Timing real estate purchases and sales also has the odd characteristic of selling your home typically is replaced by buying another (unless you are a rent arbitrageur). Ok, so we beat the dead horse. How can we take liquid, volatile assets like stocks, bonds, commodities and find a system that puts the risk/reward in our favor when deciding to buy and sell? Let’s discuss now Demark and Candlestick trading.