Cryptocurrency Market Index
Crypto-ML’s Market Index uses machine learning and big data to provide quantify the cryptocurrency market, helping you identify large-trend reversals. It pulls in technical, exchange, social, and search data to build a comprehensive picture of the market. This makes it one of the most powerful and important tools available on Crypto-ML.
This post and video will dive into the Market Index and how you can use it in your trading and investing.
Note: The Market Index is part of Crypto-ML’s Free plan. Join here to gain free access.
Market Index Video Walkthrough
How the Market Index Works
The Market Index is designed to help you determine when the larger market trend will reverse. For example, if we are in a bull market, you may want to know when it is about to reverse and start dropping.
With cryptocurrency, these direction changes can be sudden and severe. So taking any action to lessen your positions or capture profit may prove highly valuable in the long run.
Similarly, when the market is at a bottom, it may be an excellent time to start slowly building your positions back.
The end of a bull run tends to have these characteristics:
- Price extending quickly above recent levels.
- Exuberant press coverage.
- Extreme optimism of market participants.
- Mass influx of retail traders.
- Highly speculative and leveraged trading enters the market.
These seemingly positive ingredients tend to signal the end of a bull market and the start of a bear market.
The end of a bear drop tends to have these characteristics:
- Price extending quickly below recent levels.
- Negative press coverage, with titles such as “Bitcoin is finally dead,” “Sell Your Bitcoin and Never Look Back,” and “The End is Here for Crypto.”
- The exit of retail traders from the market. Only long-time holders remain.
- Reduction in speculative, leveraged trading.
As above, these negative ingredients tend to signal the end of a bear market and the start of a bull market.
The Market Index seeks to ingest data points to identify when these extreme situations are forming.
Looking at the example points in the image above, you can see the Market Index would have you selling at extremely high points (1, 2, and 3) and buying at low points (4 and 5).
Data used for the Market Index
The Market Index consumes a large variety of data points to determine its score:
- Exchange data: such as price and volume
- Technical data: such as momentum and moving averages
- Social media data: such as Twitter sentiment and volume of discussion
- Search trend data: such as quantity and type of search queries
- Dominance data: how Bitcoin compares to altcoin market capitalization
These factors come together to paint a picture of just how extreme the market may be.
Limits of the Market Index
In the history of cryptocurrency, there have only been a handful of large trend reversals. In machine learning and statistics, you prefer to have thousands of samples of events you try to predict in the future.
As such, we have limited understanding of when the crypto markets will actually reverse. However, we can look at commonly accepted factors that have led to reversals in numerous other financial markets and use those as a guide.
That said, please consider the following:
- The Market Index may be above +80 but price will continue to go up.
- Likewise, the Market Index may be below -100 but price will continue down, possibly to zero.
- The trend may reverse without first crossing +80 or -100.
As such, the Market Index should be a guide. Begin exercising caution as it crosses over +80. And begin considering entering the market when it crosses below -100. But look for confirmation and always consider your personal strategy and risk tolerance.
Market Index Components
Following is a breakdown of the three components of the Market Index.
Cryptocurrency market status: bull or bear
To keep the indicator simple, it first provides a binary display: we are in either a bull or bear market, defined as:
- A bull market is a sustained period during which prices rise.
- A bear market is a sustained period during which prices fall.
While there is no formal calculation for a bull or bear market, most analysts look at moving averages and reversals exceeding 20% or more (learn more on The Motley Fool).
The Market Index is primarily weighing moving averages but is ever-evolving thanks to machine learning.
As a bit of trivia, this naming convention is derived from the attacking behavior of these animals. Bulls strike up with their horns; bears strike down with their claws.
The Market Index score
Apart from indicating “BULL” or “BEAR,” Crypto-ML provides an index score that typically ranges from -100 to +100 (although can go further in extreme situations).
- A positive score identifies a confirmed bull market.
- A negative score identifies a confirmed bear market.
The more extreme the score, the more likely you are to see a large-scale trend reversal.
The image above shows a score of -12, which is BEAR but not far from zero potentially indicating a reversal is on the way.
The Market trend indicator
In addition to providing a BULL/BEAR indicator and a score, you will also see a note about the 7-day trend. This lets you know how the score is changing over time.
- If a bull market is strengthening, it is realizing a higher bull score and will likely stay bull longer.
- If a bull market is weakening, the score is dropping and we are moving closer to a bear market.
- If a bear market is strengthening, it is realizing a higher (more negative) bear score and will likely stay bear longer.
- If a bear market is weakening, the score is going toward positive and we are moving closer to a bear market.
How the Market Index affects your trading
Generally, it is best to trade with the direction of the overall market. This means following long signals when the market is generally bullish. Likewise, if the dominant market trend is bearish, following short signals would be ideal.
Depending on the signal, you may be looking for breakouts, bounces within a channel, reactions to key support lines, or any number of other variations. Regardless, most signals will behave best if you await a signal for a trade in the direction of the bigger market picture.
What traders look to capitalize on are the swings within a market. Taking advantage of a retracement in a bull market can deliver massive results. This is much more likely to be a favorable trade than, for example, buying dips in a bear market.
The advantages of trading with the market come from three primary reasons:
- No trading system is perfect. But if you trade in the general direction of the market, it is more likely that false flags and random behavior will be to your benefit.
- Quick and sharp moves are hard to react to, even for stop losses. But if you are trading with the market, these moves are more likely to be in your favor. We have in fact seen these ultra-fast, large moves down in the 2018 crypto bear market.
- Large, sustained moves are more likely to be in the direction of your trading bias improving the likelihood of capturing major moves.
Fundamentally, your trading bias should match the overall market direction. Long trades have more risk in bear markets.
The Market Index provides Crypto-ML users a tool to gauge the overall market dynamic. The Crypto-ML signals are continuously evolving and becoming sharper but any trading involves risk. With this index, you’ll now be better able to adjust your trading style based on your risk preference, balancing your personal risk and reward.