When you become a trader it is of paramount importance that you know that market sentiment greatly influences the price of an asset, you must also understand that you, the occasional trader, are at the opposite end of the winning side. The real winners in the market are the institutional traders, exchanges and banks. Having this information and knowing how to use it correctly gives you a much better chance of doing well in trading and being part of the 10% that make a profit in your operations.
This article aims to show a very useful tool for reading market sentiment to know how to position yourself in your trades.
There is a site called vcdepth.io that brings information from the offer book of the major exchanges that trade that pair, giving us an overview of how the market is currently positioned.
[The blue line is the price line and the green and red dots are where most positions are concentrated, when green means there are more buy positions and red more sell positions]
As stated in the introduction of the article, the market is 90% made up of occasional traders (me and you) and 10% made up of institutional traders (banks and exchange). As a result, most buy and sell orders are made by occasional traders who are almost always losing capital.
In the first point of the image above we see that the price was rising and reaching near its top and there was a huge amount of people coming in to buy and then the price fell
At the second point the market was bullish just before the melting of all currencies with most of its trades being buy, this meant that 90% of traders buying lost their equity and delivered to the remaining 10%.
In the third, after the meltdown, note that the market was fully sold and the price still continued to rise and in the fourth selected point we see the same pattern.
Ethereum Classic (ETC)
Note here that at points where people started selling the price went up and when there was a spike in buy orders the price continued to fall.
Purchase orders remained virtually unchanged with the falling market.
Look for patterns in other charts and see that this repeats itself many times.
The reading that could be done at this point would be to apply your setup normally and see where the market was concentrated as a whole, if your setup shows a scenario of possible downfall you would sell with the notion that you would be going against the market (which is usually what institutional traders do).
You can also identify zones where the amount of purchases and sales are very high and define supports and resistances from this site. Note that there is a huge BAT selling concentration when it hits $ 0.2.
One moment I used this strategy was this: Here what I projected was a wave of appreciation given that there was a double bottom at $ 165 and some other aspects of my personal strategy then (I entered $ 170), for symmetry I sought in the past chart points maximums where the graph could hit. I found two points at $ 225 where the price hit and fell twice and a higher point at exactly $ 240 (which marked a fibonacci retracement), I scored those positions because they would be aware that the chart could respect the resistance of the $ 225 behind or else go up to $ 240. From this I pointed out that when I gained 30% equity I would go 80% out of trading to ensure partial profits (don't be greedy and recommend making partial profits to avoid big losses) and from that reading I saw that the market was optimistic while there was a potential fall, I left with the other 20% of capital to see this. When the price fell to $ 194 MANY people were entering the market hoping that this was the bottom and the indicators kept pointing down, I admit that I myself was tempted to come back at that time as my pre-fall analysis was pointing to a bottom around of $ 200 but as I redo the analysis and read the market sentiment again I realized the mistake these people would be making.
Here you have a basic notion of how to read market sentiment to position yourself better in the market, it is always important to remember that you are on the opposite side of trading and in 99% of cases whales are right, they dictate the market, you can also find ways to know how they are positioned in the market and position themselves that way. NEVER rely solely on this to open your positions, this is just another tool to give you confidence and prevent you from losing money. Trust the three pillars of good trading: your analysis, your risk management and your psychological.
Thank you for reading :D