Trading Bitcoin is as much of a skill as it is an art. Even though we have a large arsenal of charts and indicators to guide us along the way, every investor that chooses to buy Bitcoin for trading purposes, knows the risks that come with it.
In this article, we will help you understand market trends and discover patterns that could help you make better predictions. We do this with the help of market sentiment analysis - a research method that helps traders look into the attitude of the markets and understand its level of demand.
Whale Alert
Why you need to understand market sentiment
Market sentiment looks into all the views, ideas and thoughts of the public to understand the level of demand in the market.
By doing so, amateur and experienced investors can better understand the following:
What kind of market cycle we are in or currently approaching - for example, if all investors are ecstatic about Bitcoin and buying it up in loads, we may be approaching a bear market.
Whether your thoughts are logical or based on emotions - for example, you may justify whether market FUD is really worth your attention or not.
Think ahead and make better decisions - Trading, whether we talk about short, mid or long-term, is heavily affected by the sentiment of the market. Therefore, knowing what the public thinks can help you go into trades in a more confident manner.
Discover up and coming trends - By looking at social channels, you can understand if trends are building up and how these could affect the performance of Bitcoin or any other cryptocurrency.
Gain insights through repeating patterns - For example, you may notice that a price drop in Bitcoin occuring after every positive Bitcoin mention on popular media channels.
How to discover these patterns and trends
To discover and gain insights from patterns and trends, you will need to look into different areas that point out where a coin’s price is headed. More specifically:
Explore all social media channels where the Bitcoin crowd hangs out at, and try to understand what they are feeling with regards to the coin and the market. Place emphasis on Twitter, as this is the channel with the most effect on market sentiment. Tools like LunarCrush help you automate this process and track the number of mentions as an indicator.
Remain up to date with media publications and industry-related blogs, and try to cross check all the information you come across with reliable sources. Publications like Coindesk or Cointelegraph are a great place to start but you should further delve deeper into newsletters of established crypto authors.
Explore upcoming Bitcoin events using CoinMarketCal and, once again, try to verify this information by reading through the comments made on the source post.
Check the sentiment tools found on CoinMarketCap. This includes the fear-and-greed index, as well as all the other indicators that could give you a better idea of this.
Check the hype of Bitcoin on regular time intervals by using a keyword tool like Google Trends. Usually, the price changes to positive shortly after the interest spikes, and drops equally fast shortly after interest starts to decrease.
Adding to the above, it might be a good idea to set alerts for certain Twitter channels. For example, you can get a really good idea of the market sentiment when following what large accounts are doing with their coins. Whale Alert is such a channel. The account is informing the public of any large transactions that are happening in real time and has often been a catalytic factor to help traders sell their coins shortly before a large price drop occurs.
A note of caution for new traders
Even though a sentiment analysis can be very useful when trading and making price predictions, it is just one of the many research methods you can use to become a better trader. Ideally, you’d want to include more analysis methods to your arsenal, in order to make even more detailed estimations of a coin’s future price. More specifically:
You can use Technical Analysis to discover short term price trends based on candle chart patterns and price indicators. This is very useful for those that want to trade with leverage or improve their swing trading skills
You can use Fundamental Analysis to complement the analysis of market sentiment, in order to understand if the public opinion is justified or not. This method is especially useful for people who buy Bitcoin to HODL it.
The more methods you use to justify the information you discover, the better your results will be along the way. However, even the best traders in the crypto world tend to be wrong more than 50% of the time, so don’t get disappointed if not all your trades work out as expected. Bitcoin and the cryptocurrency markets as a whole are still in their infancy and still have a lot of room for growth.
Wrapping up
You should now have a better idea of what it takes to uncover trends and patterns, and use them to your advantage. In short, to perform a sentiment analysis, you should:
Explore and track social media channels where cryptocurrency audiences can be found.
Follow the latest news from trusted publications and industry-relevant blogs
Use all the available software tools to understand the current market demand and, in turn, the hype of the markets.
While this is just a brief introduction on sentiment analysis, you should consider continuing your research and learning as much as possible with regards to this technique. In time, and with more experience, you will be able to make better investment decisions and increase the value of your portfolio.
That being said, keep in mind that nothing in this article constitute financial advice and should be taken as such. Everything we share above is meant to act as educational material and aims to improve your knowledge of trading the cryptocurrency investment markets. Therefore, make sure that you are aware of all the risks involved in this process.
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