Roderick Melvin

Understanding why a crypto price chart moves the way it does. 🤔 Prices are controlled by the derivative exchanges. Accept this first. They are selling positions to traders and offer leverage to magnify the traders profits. There is approx. 15-30x the value in derivatives as there are in the market cap of the asset at any time. But why does the price move the way it does? Lets dig in: For this basic example we will take the bullish oscillation. The exact opposite occurs in a bearish oscillation. Order books alternate between oscillations at a micro and macro level, like a fractal. 1. As traders open long positions and spot buyers buy, the price appreciates through limit orders on the order book or market buying. For every bullish oscillation longs drive the price up, then the exchange will step in and recover at least 50% of the oscillation with a bearish oscillation, and so on. They do this by manipulating the order book with their own spot sell orders, together with order book short orders and utilizing the leverage traders short positions. This is the process whereby price charts are "drawn" to a strategic distribution. The overall strategy of the exchange is to increase price, with as little "open interest" as possible. Why? because if a long position with leverage remains "open" it will pay profits infinitely at leverage multiplier as price goes up forever, and the exchanges have to minimize this exposure to infinite profit. Hence there is a constant pendulum of bullish oscillations through longs, and then a liquidation hunt where the exchange hunts these positions down to claim that "liquidity" in the form of triggering stop losses, or full liquidations. Lets look at the basic oscillation in the bullish movement and the primary strategy used by the exchange to mitigate their exposure to open interest. (The basic bullish oscillation - See figure 1 below) 1. As longs buy positions the price appreciates. At a level deemed sufficient based on algorithmic calculation using countless algorithmic strategies (I will dig into these in a future post), the exchange will "flush" and drop the price approx half way from the start of the oscillation. We call this the Fibonacci 0.5 or the median. The longs that survive the flush, are considered "open interest" and will have the oppertunity to realize profit, or risk being flushed later in a larger oscillation. This executes as a staggered chart. (See figure 2 below) 2. As the bullish oscillation continues, more longs survive, at which point a macro oscillation is triggered, the game now turns to the exchanges ability to try and flush as many of these open positions as possible. Theoretically there are 50% open positions of the total positions that drove the price to this level. 3. The micro oscillation ends, and the exchange will now use the order book to try and hunt the remaining liquidity. They will use various techniques to manipulate the traders into thinking the oscillation is over and commiting to further longs, adding to their positions, moving their stop losses, but ultimately the same rules will apply. The exchange will “flush” approx 0.5 of the total move, just at a larger oscillation structure. (See figure 3 Vector candle) 4. Once complete, the exchange will now typically use a vector candle, a large and fast moving candle to recover the price to where it started the flush. Claiming a higher high if desired. This is done to limit the amount of new longs from taking positions. Remember the slower the climb, the more open interest is accumulated, and the more risk there is to the exchange. The bearish movements are the exact opposite, and play out much the same. These are the basic theoretical strategies at play on an exchange order book traded asset chart. Obviously this is theory and in reality market conditions, spot buying and selling and macro factors influence the price momentum and distribution, but it will almost certainly prevail once the noise died down. Remember, this is a business, and exchanges are maximizing their profits by manipulating traders into positions, and then hunting this liquidity. More theory to come.