Bitcoin closed at $12050, or for Grayscale Investments' Bitcoin Trust (GBTC), the close was at $12.05. As you can see on the chart, the proprietary Variable Changing Price Momentum Indicator (VC PMI) told us to look for the extreme levels of the average price to be activated. The average price was $12.86. The fact that the market came down to close below $12.86, activated the Buy 1 (B1) level at $12.30 and the Buy 2 (B2) level of $11.94. The market came down and made a low of $11.90 on October 10, and then reverted back up to close at $12.08, which activated a buy signal. This is a directional signal with a 95% probability that the price will revert and reach $12.30, and may also reach the extreme level above of the average price of $12.86. Those are the first two targets we have identified using the VC PMI.
The VC PMI automated algorithm has identified a buy signal on a close above $11.94. That close came in at 12.08. The stop for this trade is a close below $11.94 using the 15-minute bar. Our first target is $12.30. When the price accomplishes the first target, if you have multiple positions, it is a good place to take some profits and reduce your position. If the market closes a second time above $12.30, it will activate the target above of $12.86, which is the average price for the week.
The VC PMI Automated Algorithm
We use the proprietary Variable Changing Price Momentum Indicator (VC PMI) to analyze the precious metals markets and several indices. The primary driver of the VC PMI is the principle of reversion to the mean ("Mean Reversion Models of Financial Markets," "The Power of Mean Reversion in Factor- Based Investing"), which is combined with a range of analytical tools, including fundamental logic, wave counts, Fibonacci ratios, Gann principles, supply and demand levels, pivot points, moving averages and momentum indicators. The science of Vedic mathematics is used to combine these elements into a comprehensive, accurate and highly predictive trading system.
Mean reversion trading seeks to capitalize on extreme changes in the price of a particular security or commodity, based on the assumption that it will revert to its previous state. This theory can be applied to both buying and selling, as it allows a trader to profit on unexpected upswings and buy low when an abnormal low occurs. By identifying the average price (the mean) or price equilibrium based on yesterday's supply and demand factors, we can extrapolate the extreme above this average price and the extreme below it. When prices trade at these extreme levels, it's between 90% (Sell 1 or Buy 1 level) and 95% (Sell 2 or Buy 2 level) probable that prices will revert to the mean by the end of the trading session. I use this system to analyze the gold and silver markets.
Strengths And Weaknesses
The main strength of the VC PMI is the ability to identify a specific structure which price level traders can execute with a high degree of accuracy. The program is flexible enough to adjust to market volatility and alerts you when such changes take place, so one can adjust strategies accordingly. Such changes include when the market breaks out of a consolidation phase or a trend accelerates. Such volatility usually happens when the market has produced a signal at the S2 or B2 level and the market closes above or below these extreme levels.
The day trading program then confirms that a higher fractal in price has been identified and the market will move significantly higher, although the same principle applies if the market falls significantly. The price closing above the S2 level indicates that the buying demand is greater than the supply. This means that the market has found support for the next price fractal. Conversely, the price closing below the B2 level indicates that the selling pressure has met demand greater than supply at the extreme below the mean, and prices should revert back to the mean.
The basic concept of the VC PMI is that the program trades the extremes of supply and demand based on the average price daily, weekly and monthly.
The strongest relationship we find in the algorithm is when the daily price is harmonically in alignment with the weekly and monthly indicators. We call this "harmonic timing." Such an indication produces the highest probability (90%) that the price will revert from these levels to its daily, weekly or monthly average.
To learn more about how the VC PMI works and receive weekly reports on the E-mini, gold and silver, check out our Marketplace service, Mean Reversion Trading.
Disclosure: I am/we are long GBTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.