Technical analysis has evolved over time as more people have access to computers. Online trading and the power of computers made it possible to look at markets faster and make decisions more easily.
But technical analysis (and really any kind of market analysis) has a strong enemy in market psychology. It is said that executing a plan is more important than the plan itself, because the psychological factor of action concerns us all.
Consider, for example, Bitcoin. It’s not even the end of January yet and the leading cryptocurrency is up 36% YTD.
Sure enough, those who bought into the $16k area are thrilled. But how many dared to buy a market that fell like Bitcoin did in 2022?
The same applies the other way around. In a bullish trend, most are afraid to buy new highs for fear of eventually buying the top.
As such, the plan is to buy the dip – any dip.
Only when the dip finally comes do traders get scared and run away. Planning to buy a dip and actually buying it is another story.
This brings us to today’s story: should you buy Bitcoin after winning that much in less than one trading month? Or is this just another bear market rally?
Bitcoin delivered positive returns after a negative year
History supports the bullish case for Bitcoin. Bitcoin has a short history, as it was born relatively recently compared to other markets.
Nevertheless, a quick look at Bitcoin returns over the past twelve years tells us something interesting. That is, Bitcoin delivered positive annual returns in the first year after negative ones.
In 2014, Bitcoin’s price fell 58% against the dollar. But in the following year it gained 35%.
Also, Bitcoin fell -73% in 2018, another sharp drop. But again, in 2019 it won 95%.
In other words, buying the dip after a negative annual result has worked well so far. Why should this time be different?