Last week The price of Bitcoin (BTC) flirts with the $ 20,000 mark, causing some traders to lose patience. In the eyes of some of them, the lack of bullish momentum is problematic, especially considering that BTC tested the USD 16,200 level about a week ago.
Experienced traders know that there are key indicators that serve as telltale signs of a trend break. These are the volumes, the futures premium and the positions of the major traders on the major exchanges.
A handful of negative indicators don’t precede every dip, but there are usually some signs of weakness. Each trader has their own system and some will only trade if three or more bearish conditions are met, but there is no hard and fast rule as to when to buy or sell.
Futures contracts may not be traded on the spot exchanges
Some websites include trading indicators that claim to show the ratio of long to short for different assets, but in reality they just compare the volume of bids and stacked bids.
Others will refer to the leaderboard data, so they will be following accounts that are not excluded from the rankings, but this is not correct.
A better method is to track the perpetual financing percentage of futures (reverse swap).
The outstanding interest of buyers and sellers of perpetual contracts is matched at all times in each futures contract. There is simply no way to create an imbalance, as every transaction requires a buyer (long) and a seller (short).
The funding rates ensure that there are no currency risk imbalances. When the (short) sellers are the ones who demand the most leverage, the financing rate becomes negative. Hence, those traders will be the ones who pay the fees.
Sudden swings into the negative range indicate a strong willingness to keep short positions open. Ideally, investors will monitor a number of exchanges simultaneously to avoid possible anomalies.
The funding rate may cause some distortions as it is the preferred tool of retailers and as a result is affected by 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.
Keep in mind that fixed calendar futures should normally trade at a premium of 0.5% or more compared to regular spot exchanges. When this premium fades or goes negative, it is an alarming sign. Such a situation, also called backwardation, indicates a strong downward trend.
Monitoring volume is key
In addition to tracking futures contracts, good traders also keep track of volume in the spot market. Breaking major resistance levels at low volumes is somewhat intriguing. Low volumes usually indicate a lack of confidence. Therefore, large price fluctuations must be accompanied by a strong trading volume.
Although recent volumes have been above average, Traders should remain skeptical of significant price swings of less than $ 3 billion in daily volume, especially given the past 30 days.
According to data from the past month, Volume will be a critical metric to watch out for as traders seek to push Bitcoin’s price through the USD 20,000 level.
The long / short ratio of the best traders can anticipate price changes
Another important monitor from metric-savvy investors is the long-to-short ratio of top traders that can be found on major cryptocurrency exchanges.
There are often discrepancies between the methodology of exchanges, so readers should keep an eye out for changes rather than absolute numbers.
A sudden move below the 1.00 long-short ratio would be a worrying sign in the example above.. This is because the 30-day historical data and the current figure of 1.23 favor long contracts.
As mentioned above, the relationship can differ significantly between exchanges, but this effect can be neutralized by avoiding direct comparisons.
Unlike Binance, it is common for the top OKEx traders to keep levels below 1.00, although this doesn’t necessarily indicate a downtrend. Based on their 30-day data, the numbers below 0.75 should be considered concerning.
There is no hard and fast rule or method for predicting large falls as some traders need several indicators to turn bearish before entering short positions or closing their long positions.
That said, monitoring top traders’ funding rate, spot volumes and long-to-short ratio provides a much clearer picture of the market than just reading common candlestick patterns and oscillators like the Relative Strength Index and the moving mean convergence divergence.
This is because the metrics discussed are a direct indicator of professional trader sentiment, and getting a clear picture of this is crucial as BTC is trying to break out of USD 20,000.
The views and opinions expressed here are solely those of the Author and do not necessarily reflect Cointelegraph’s opinion. Every investment and commercial movement involves risk. You should do your own research when making a decision.