Mastering Market Shifts with the Altcoin Outperformance Anomaly Signal
One particularly valuable pattern is when altcoins outperform Bitcoin—an anomaly that can signal pivotal moments in both bull and bear markets. However, it’s an altogether different story when Alts outperform BTC in dollar terms, in completely opposite directions. Meaning BTCUSD % change is negative, and Altcoins are % change is positive.
This signal can help traders spot crucial market changes where correlation is broken to the extreme.
What is the Altcoin Outperformance Anomaly?
The Altcoin Outperformance Anomaly occurs when altcoins (measured by the TOTAL3 index, representing the market cap of altcoins excluding Bitcoin and Ethereum) show strength in the face of a Bitcoin downturn. This divergence is significant because it indicates that traders are moving away from Bitcoin and into altcoins, signalling a potential shift in market sentiment.
The Pine Script-based indicator that triggers when:
- Bitcoin (BTCUSD) closes with a red candle, indicating a price decline.
- Altcoins (TOTAL3) close with a green candle, indicating altcoins are gaining strength.
- The percentage decline in Bitcoin is greater than 0.8% compared to the percentage rise in altcoins.
When all these conditions are met, a yellow plus sign appears on the chart, signaling a possible shift in momentum.
Interpretation of This Signal
To provide insights in both bearish and bullish environments:
1. In Downturns: Detecting Consolidation and Bottoming Process
During market downturns, when Bitcoin is declining and altcoins start showing strength, it could signal the beginning of a consolidation phase. This anomaly often hints at a possible bottoming process for the broader crypto market. By catching this signal early, traders can prepare for the next move up and position themselves to benefit from a potential recovery in altcoins.
2. In Bull-Runs: Identifying Shorting and Selling Opportunities
Conversely, during a bull market, this signal can identify moments where altcoins are overbought compared to Bitcoin. In these situations, the signal becomes useful for scalp shorting or taking profits as altcoins reach temporary peaks while Bitcoin weakens. It’s a great tool for managing risk and locking in gains during a heated altcoin rally.
3. Confirmation
The signal works well in conjunction with others such as RSI for top confirmation and volume signals for bottom confirmation.
How the Signal Works
Let’s walk through how this signal functions step-by-step:
1. Bitcoin’s Red Candle Detection
We first identify if Bitcoin (BTCUSD) is experiencing a red candle—this occurs when Bitcoin’s closing price is lower than its opening price, signalling a decline for the day.
2. TOTAL3’s Green Candle Detection
Next, we look at TOTAL3, the total market capitalization of altcoins excluding Bitcoin and Ethereum. If the close price of TOTAL3 is higher than its open price, we have a green candle, indicating that altcoins are gaining strength despite Bitcoin’s weakness.
3. Percentage Change Calculations
To ensure the price movement is significant, we calculate the percentage change for both Bitcoin and TOTAL3 relative to the prior candle.
4. Confirming the Difference
We then check if the percentage difference between Bitcoin’s decline and TOTAL3’s rise exceeds 0.8%. This indicates that the market is in a meaningful state of divergence, with altcoins outperforming Bitcoin.
If all these conditions are met, the script plots a yellow plus sign on the chart to highlight the anomaly.
Implementing the Altcoin Outperformance Anomaly Signal in Pine Script
Here’s the complete Pine Script code for this signal on TradingView:
//@version=5
indicator("Alt Outperformance Anomaly Signal", overlay=true)
// Define the altcoin index and Bitcoin symbols
altIndex = "CRYPTOCAP:TOTAL3"
btcSymbol = "BINANCE:BTCUSD"
// Request data for Bitcoin and altcoin index (close and open prices)
btcClose = request.security(btcSymbol, timeframe.period, close)
btcOpen = request.security(btcSymbol, timeframe.period, open)
altClose = request.security(altIndex, timeframe.period, close)
altOpen = request.security(altIndex, timeframe.period, open)
// Calculate percentage returns for Bitcoin and the altcoin index
btcRet = (btcClose / btcClose[1] - 1) * 100
altRet = (altClose / altClose[1] - 1) * 100
// Check if BTCUSD is on a red candle (close < open)
isBtcRedCandle = btcClose < btcOpen
// Check if TOTAL3 is on a green candle (close > open)
isAltGreenCandle = altClose > altOpen
// Check if the percentage difference between TOTAL3 and BTCUSD is greater than 0.5%
diff = altRet - btcRet
isDiffGreaterThanThreshold = diff > 0.8
// Define the conditions for the anomaly signal
condition = isBtcRedCandle and isAltGreenCandle and isDiffGreaterThanThreshold
// Plot a yellow plus sign when the condition is true
plotshape(condition, location=location.abovebar, style=shape.cross, size=size.small, color=color.yellow)Conclusion
The Altcoin Outperformance Anomaly Signal is a powerful tactical tool that can provide insights into key moments of market divergence between Bitcoin and altcoins. By leveraging this signal, traders can better navigate both bearish consolidations and bullish excesses, helping them identify profitable opportunities to enter or exit trades.
By combining this signal with broader technical analysis and market fundamentals, you can enhance your trading strategy and position yourself for success in a volatile crypto market. Whether you’re looking to time market bottoms or scalp short-term tops, the Altcoin Outperformance Anomaly Signal can be a valuable addition to your trading toolkit.
Happy trading!
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