Technical analysis 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 easier.
But technical analysis (and any kind of market analysis, as a matter of fact) 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 trading comes to all of us.
Think of Bitcoin, for example. It is not even the end of January and the leading cryptocurrency is up 36% YTD.
Sure enough, those that bought into the $16k area are thrilled with joy. But how many ventured into buying a market falling as Bitcoin did in 2022?
The same is valid the other way around. In a bullish trend, most are afraid to buy new highs for fear of ending up buying the top.
As such, the plan is to buy the dip – any dip.
Only when the dip eventually comes, traders get scared and run away. Planning to buy a dip and actually buying it is a different story.
This brings us to today’s story – should you buy Bitcoin after gaining so 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 in the last twelve years tells us something interesting. That is, Bitcoin delivered positive annual returns in the first year after negative ones.
In 2014, the Bitcoin price dropped 58% against the dollar. But in the year to follow, it gained 35%.
Also, in 2018, Bitcoin fell by -73%, another sharp decline. But yet again, in 2019, it gained 95%.
In other words, buying the dip after a negative annual performance has worked well so far. Why should this time be different?